Similar to other European countries, Ireland's policy response to the COVID-19 pandemic has centered on public health. As a consequence of the measures to stem the virus, we forecast that the country will face a contraction in GDP as well as increased unemployment (see "Sovereign Risk Indicators," published April 24, 2020). In turn, we expect this to lead to stress within Irish residential mortgage-backed securities (RMBS) transactions, the extent of which will likely depend on the underlying collateral.

All lenders and servicers of the Irish RMBS transactions we rate are currently offering payment holidays of up to six months to support borrowers. The amount ranges from around 5%-12% of the pool balance for prime asset pools, to over 20% for some reperforming pools.

The European Banking Authority's deadline for payment holiday applications is June 30, and this is expected to be followed in Ireland. While we expect that the majority of applications have been requested and processed, there may be a final wave of applications leading up to the June deadline, causing additional liquidity constraints for transactions. The resolution of these payment holidays will likely involve repayment of the additional accrued amount distributed over the remaining outstanding term, or a term extension intended to enable borrowers to resume repaying in full. However, the extent that these measures will alleviate borrower distress, and how well they will prevent delinquencies or defaults, remains unclear.

Given the nature of the underlying collateral, Irish reperforming RMBS transactions are particularly vulnerable to performance deterioration, and we expect these transactions to show higher sensitivity to rising unemployment than comparable transactions securitizing prime assets. These transactions include borrowers who have displayed payment distress in the previous five years, implying they have a more limited ability to cope with further financial stress. In addition, for a number of these transactions, there was already evidence of weak performance before the COVID-19 pandemic, which we expect to weaken further because of the current economic contraction

With a higher level of expected defaults, these transactions will also be more sensitive to the timing and receipt of recovery proceeds to redeem the notes. Overall, we expect recovery timing in Ireland to lengthen due to a combination of the government-mandated moratoriums on repossession, along with various practical barriers to enforcing and liquidating security imposed by the lockdown. Court closures are likely to create a backlog that will endure after the lockdowns end. Despite these expectations, excess spread and other deal-specific structural features detailed below should provide additional protection to the notes if recovery timelines increase.

Scenario Analysis

On May 1, 2020, we updated our guidance for rating Irish RMBS to reflect increased 'B' expected-case foreclosure frequency assumptions for the archetypal pool for Ireland following our review of the prevailing macroeconomic and market conditions.

For this report, we have performed a scenario analysis to examine the impact of an additional low, medium, and high shock on Irish reperforming RMBS. This covers a series of hypothetical stress scenarios, each following four stages of compounded stress, grouped by the following themes:

• Phase 1: Liquidity shock;
• Phase 2: Increase in defaults;
• Phase 3: Delays in repossessions; and
• Phase 4: House-price declines.

Key findings:

• Our analysis shows that rating migration would generally be greater further down the capital structure (see figures 1, 2, and 3). The 'B' rated tranches are most vulnerable to rating changes, suffering downgrades even with a low level of compounded stress, considering the weakening performance trends before COVID-19 and increases in arrears.
• By contrast, 'AAA' to 'BBB' tranche ratings are expected to remain largely stable, with low investment-grade ratings ('A' and 'BBB') showing rating migration of one to three notches, primarily in the most severe scenarios, which have considerable levels of compounded stress.
• Under delinquency stresses, structural features such as the presence of external liquidity, deferrable notes, and the ability to use principal to pay interest, support the ratings on the junior notes.
• Timing of the stress components, deal deleveraging, and absolute levels of excess spread will ultimately affect any changes to our ratings.

Figure 1

Figure 2

Figure 3

For notes that do not pass our 'B' cash flow stresses (referred to as 'B-' or lower in the figures above) we would apply our "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published Oct. 1, 2012, to assess if either a 'B-' rating or a rating in the 'CCC' category would be appropriate. For the purposes of this analysis, our results only highlight where our 'B' cash flow stresses do not pass.

Scenario Calibration

We present the aggregated impact from COVID-19 using four reperforming RMBS transactions rated by S&P Global Ratings. We tested their performance using a low, medium, and high scenario, each with four separate phases.

Structural Features Provide Various Degrees Of Protection

All of the Irish reperforming transactions we rate contain various structural features that will help cover short- to medium-term liquidity stress caused by the payment holidays. In addition, some contain features that can create additional protections from downgrade or default for some notes, while increasing downgrade or default risk for others.

As mentioned previously, the ultimate impact or rating migration will depend on the stress timing, deal deleveraging, and absolute levels of excess spread up to that point.

Irish reperforming transactions' structural features:

Reserve funds and liquidity reserve funds:   The transactions we have analyzed include reserve funds or liquidity reserve funds. These can be used to pay interest with slight variances in the mechanics for each deal.

Deferrable notes:   All of the transactions include deferrable notes, which allow interest payments to be delayed if there is a liquidity shortfall. This feature doesn't apply to the 'AAA' rated senior notes, or in most cases, the most senior note outstanding at any point in time.

Using principal to pay interest:   This feature is also referred to as principal borrowing or principal additional amounts. It works by using collected principal that would otherwise be distributed to noteholders to cure any temporary interest shortfalls. This feature is in place for all transactions.

Provisioning mechanisms:   Certain transactions provision for arrears rather than losses, which helps support the ratings by trapping excess spread earlier, before a loss.

Absolute levels of excess spread:   The absolute level of excess spread will affect ratings migration. Deals generating a greater amount of excess cash flow are able to clear balances on principal deficiency ledgers and top up depleted reserve funds.

Scenario Analysis Assumptions

This analysis looks at asset-level performance assumptions and cash flow stresses only. It does not factor in the impact of changes in counterparty or sovereign ratings. It also does not factor in the potential for unmitigated operational risks, such as servicer default.

We have run standard assumptions for delinquencies unrelated to payment holidays, interest rates, and default timing curves.

Prime Irish RMBS Not As Vulnerable

In our view, the collateral securing the prime Irish RMBS transactions we rate will not be as vulnerable to COVID-19 related stresses as the reperforming pools. At closing, these transactions did not include loans to borrowers who had displayed recent payment distress. The proportion of payment holidays granted within these pools has also been lower (around 5%-12%), and we expect that fewer of the borrowers will ultimately experience payment difficulty and default. Furthermore, these transactions are protected by their current credit enhancement levels along with various external liquidity reserves, general reserves, and excess spread, which should enable them to withstand liquidity constraints and performance deterioration if needed.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research:

• Government Job Support Will Stem European Housing Market Price Falls, May 15, 2020
• Residential Mortgage Market Outlooks Updated For 13 European Jurisdictions Following Revised Economic Forecasts, May 1, 2020
• Sovereign Risk Indicators, April 24, 2020
• COVID-19 May Be A Litmus Test For European RMBS Calls, April 15, 2020
• Europe Braces For A Deeper Recession In 2020, April 20, 2020
• European ABS And RMBS: Assessing The Credit Effects Of COVID-19, March 30, 2020
• U.K. RMBS 2.0 Origination And Structural Evolution Combine To Reduce Credit And Reinvestment Risk, Jan. 7, 2019