Two private equity firms, Lone Star Funds and Mars Capital, are marketing a total €750 million in bonds backed by non-performing and re-performing Irish residential mortgages.
ERLS 2017-NPL1 DAC
Lone Star's European Residential Loan Securitisation 2017-NPL1 DAC (designated activity company) will issue five classes of notes backed by €419.8 million in non-performing loans. Moody’s Investors Service has assigned an A1 rating to the senior tranche, which comprises 43.5% of collateral pool of 1,228 distressed loans. The mortgages (both owner-occupied and “buy to let”) were originated by for the former Bank of Scotland (Ireland) and acquired in 2015 in a distressed portfolio sale to U.S.-based Lone Star funds.
Moody’s did not assign a higher rating in part because of a large portion of the collateral has yet to be acquired or is in the process of foreclosure. Over 71% of the loans are in jeopardy or in some stage of foreclosure, while another 10.3% of the loans are tied to homes already in lender possession awaiting re-sale.
Another 18.6% of the loans have been modified or in the process of modification under Ireland’s Mortgage Arrears Resolution Process (MARP) government program.
Most of the expected cash flow from the deal is expected from asset recoveries. Foreclosure actions in Ireland, however, first require lenders to comply with Irish Central Bank regulations that assess borrower eligibility with the MARP program. Only borrowers who fail to cooperate or have been certified to have unsustainable mortgages may face repossession.
The deal will have a hefty cash reserve fund sized at 4.5% of the final balance of the Class A notes, enough to cover bondholder interest payments on Class A notes for 23 months (one-month Euribor plus a 0.5% strike cap rate) as well up to 53 months for the B notes (rated Baa3), according to Moody’s.
Loan servicing is being provided by Hudson Advisors Ireland, an experienced distressed-loan portfolio manager, according to Moody’s.
This is Lone Star’s second Irish NPLs securitization. In November it completed the €564 million ERLS 2016-1 transaction. Nearly a third of the collateral for that deal was performing and re-performing loans originated by former Irish Nationwide Building Society.
And in March, Lone Star completed the €651 million ERLS 2017-1 , which was backed entirely by performing and re-performing Irish loans originated by Bank of Scotland (Ireland), Start Mortgages and NUA Mortgages.
Since 2015, the private equity fund has acquired more than €5 billion in troubled assets stemming from the housing industry fallout in Ireland. Nearly 64% were taken in as non-performing assets, per ratings reports.
Grand Canal Securities 1 DAC
Meanwhile, UK-based Mars Capital – a “vulture fund” unit of Oaktree Capital – is marketing a €332 million securitization of Irish re-performing loans originated by the defunct Irish Nationwide Building Society.
Both Moody’s and S&P Global expect to assign triple-A rating to the senior tranche of the deal, dubbed Grand Canal Securities 1 DAC.
The class A notes benefit from 26.75% credit enhancement.
The 2,739 prime and non-conforming loans in the pool are well-seasoned (9.86 years), secured by residential and semi-commercial properties, and extended to 2,232 prime and non-conforming borrowers of whom none are more than 30 days past due. The loans were originated by the Irish Nationwide Building Society and the now-defunct Springboard Mortgages.
While no loans are 90 days or more in arrears, according to the presale reports, analysts raised concerns about the high-volume of re-mortgaged loan workouts (47.7%) and first-time homebuyer loans (35.42%) in the pool. In addition, 8.91% of the loans are “split” loans where a portion of the debt is deferred and paid off as a bullet loan accruing no interest, reported S&P.
Mars Capital in 2014 acquired the loans from the Irish Bank Resolution Corp. – established to unwind the assets of the former Irish Nationwide – as well as subprime loans from Permanent TSB, which took over subprime loans originated by the Springboard.
Mars’ deals were part of a €1.8 billion liquidation by Irish banking authorities of over 12,702 mortgages in 2014. Those buyers included Mars’ parent company Oaktree as well as Lone Star Funds and Bank of Ireland