Rating action

Scope Ratings GmbH (Scope) has today reviewed the performance of Shamrock 2021-1 DAC considering the investor reporting until October 2022. The rating actions are as follows:

Class A (XS2267897234): EUR 233.8m: affirmed at AAA_SF

Class B (XS2267897580): EUR 29.9m: upgraded to AAA_SF, from AA+_SF

Class C (XS2267897747): EUR 24.5m: upgraded to AA-_SF, from A+_SF

Class D (XS2267898042): EUR 17.2m: affirmed at BBB_SF

Class E (XS2267898125): EUR 13.1m: affirmed at BB_SF

Class F (XS2267898398): EUR 5.7m: affirmed at B+_SF

Class G (XS2267898471): EUR 10.4m: affirmed at B-_SF

Scope did not assign ratings to the subordinated classes RFN, Z1, Z2 and X, which combined count for EUR 26.2m of notional.

Transaction overview

Shamrock Residential 2021-1 DAC is a true-sale securitisation of an Irish residential mortgage loan pool, serviced by Start Mortgages DAC and Pepper Finance Corporation (Ireland) DAC. The securitised portfolio contains a mix of delinquent, current and historically restructured, as well as current and never restructured loans. These mortgage loans are mainly first-lien secured on residential properties located in Ireland. The transaction benefits from a moderate weighted average current loan-to-value ratio of the mortgage loans below 80%.

The transaction closed on 04 February 2021.

Rating rationale

The ratings reflect the legal and financial structure of the transaction; the quality of the underlying collateral; the experience and incentives of Start and Pepper as the servicers in the transaction; and the exposure to the transaction’s key counterparties.

The ratings are mainly supported by the increased credit enhancement from prepayments, moderate current loan-to-values, and non-amortising cash reserve funds. The credit quality of the rated notes is mainly constrained by a relatively high expected lifetime portfolio default rate, Ireland’s volatile property market, and limited excess spread.

The transaction is exposed to the following key counterparties: Start and Pepper as the servicers, Elavon Financial Services DAC (Elavon) as the account bank and paying agent, and BNP Paribas as the interest rate cap provider. Counterparty risk is mitigated by the credit quality of the counterparties, as well as structural mechanisms such as replacement rating triggers as well as the limited time exposure. Scope assessed the credit quality of BNP Paribas and Elavon based on public information.

Key rating drivers

Credit enhancement (positive). The Class A to G notes benefit from sound levels of credit enhancement provided by overcollateralisation and reserve funds. The sequential amortisation will support the rated notes and result in rising protection levels (Current credit enhancement levels as outlined in the October 2022 reporting: Class A 36.2%, up from 31.0% at closing; Class B 27.9%, up from 23.9% at closing; Class C 21.1%, up from 18.0% at closing; Class D 16.3%, up from 13.9% at closing, Class E 12.7%, up from 10.7% at closing; Class F 11.1%, up from 9.4% at closing; Class G 8.2%, up from 6.7% at closing)¹

Moderate current loan-to-value ratio (positive). The moderate current loan-to-value incentivises borrowers to pay, mitigating (re)default risks. The portfolio’s current loan-to-value reflects the property market recovery in Ireland and gradual deleveraging; it is close to that of peer transactions issued in Ireland.²

Strong liquidity (positive). Liquidity shortfalls are extremely unlikely for Class A, as it is supported by a liquidity reserve covering 24 months of senior fees and Class A interests. In addition, principal proceeds can be diverted to cover Class A interest shortfall risk, in accordance with the transaction’s waterfalls (principal-to-interest via a revenue shortfall mechanism as well as yield supplement overcollateralisation). Liquidity support for Class B to G is weaker as they will rely on a subordinated liquidity reserve fund, which however increases with the amortisation of Class A. The revenue shortfall mechanism for the most senior tranche outstanding and an interest rate cap entered into with BNP Paribas further enhance the transaction’s liquidity.¹

High (re)default risk (negative). A high proportion of the loans were restructured in the past or are currently being restructured. Scope’s lifetime portfolio default rate distribution captures high expected defaults, indicated by the higher risks from reperforming loans as well as the uncertainty from those loans which are currently three months in arrears and may not become reperforming.³

Volatile property market (negative). Ireland’s property markets show relatively high price volatility, resulting in quite high property haircuts. Nevertheless, expected recoveries given default are quite high due to the relatively moderate leverage of the portfolio (recoveries of 75% and 45% for B and AAA respectively).⁴

Limited excess spread (negative). The transaction’s excess spread is low, which limits the usefulness of principal deficiency ledgers and makes the transaction rely more on reserve funds.⁵

None of the key rating drivers is ESG related.

Rating-change drivers

Upside: Better than expected asset performance may positively impact the ratings due to decreased (re)default risk and improved recovery proceeds.

Downside: Adverse unfolding of the current macroeconomic uncertainty in Ireland may lead to downgrades on the rated notes. The high level of inflation, rising interest rates and volatile energy prices may adversely impact the collateral pool performance, due to adverse effects for household affordability and employment.

Quantitative analysis and assumptions

Scope analysed the transaction’s structural features using a proprietary cash flow model. The cash flow model inputs also feature the key asset assumptions derived during the analysis of the transaction, including a stochastic distribution of portfolio defaults and rating-conditional recovery rates.

Scope calculated the expected loss of each tranche based on an inverse Gaussian default distribution for the assets, probability-weighting any loss. The cash flow tool also produced the expected weighted average life for the rated notes.

An expected portfolio default rate 21.5% and a coefficient of variation of 30.5% were applied over the portfolio’s expected weighted average life of 10 years. Scope derived the default rate assumption based on a transaction-specific regression analysis using internal sources, complemented by public data on Ireland’s prime mortgage performance. The portfolio’s expected weighted average includes Scope’s assumption of the extension of loan terms following restructuring.

Scope assumed rating-conditional recovery rates by using its fundamental recovery framework, which applies line-by-line haircuts to indexed property appraisals. Rating-conditional recovery rates for each class are: Class A and Class B 45%, Class C 52%, Class D 64%, Class E 70%, and Class F and G 75%. These haircuts mainly reflect market value losses under rating-specific stress scenarios, as well as a constant liquidation discount (i.e. a quick-sale discount).

Scope derived the default timing term structure by leveraging the portfolio amortisation schedule.

Sensitivity analysis

Scope tested the resilience of the credit rating against deviations in the main input parameters: the portfolio mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the credit rating to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the ratings would change if the portfolio’s expected default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

Class A: sensitivity to probability of default, 0 notches; sensitivity to recovery rates, 0 notches.

Class B: sensitivity to probability of default, 2 notches; sensitivity to recovery rates, 4 notches.

Class C: sensitivity to probability of default, 4 notches; sensitivity to recovery rates, 6 notches.

Class D: sensitivity to probability of default, 2 notches; sensitivity to recovery rates, 6 notches.

Class E: sensitivity to probability of default, 2 notches; sensitivity to recovery rates, 6 notches.

Class F: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 5 notches.

Class G: sensitivity to probability of default, 3 notches; sensitivity to recovery rates, 3 notches.

Rating driver references
1.Transaction documentation and investor reporting as of October 2022 (Confidential)
2. Loan-by-loan data tape of the securitised pool (Confidential)
3. Loan-by-loan historical payment records (Confidential)
4. Historical property disposal data (Confidential)
5. Scope’s Cash Flow Model (Confidential)

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow SF EL Model Version 1.1 incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for these Credit Ratings, (General Structured Finance Rating Methodology, 17 December 2021; Counterparty Risk Methodology, 14 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings is Scope Ratings’ Cash Flow SF EL Model Version 1.1, available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit at closing. The external due diligence assessment/asset audit was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Sebastian Dietzsch, Senior Director
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The final Credit Ratings were first released by Scope Ratings on 4 February 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
Scope Ratings provided the following Ancillary Service(s) to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Credit Estimate

Conditions of use / exclusion of liability
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