KBRA Affirms Kinbane 2022-RPL 1 DAC Ratings

KBRA Europe (KBRA) affirms its ratings on Kinbane 2022-RPL 1 DAC and simultaneously removes the ratings for Class B, Class C, and Class D from Watch Developing and the ratings for Class E and Class F from Watch Downgrade. KBRA’s analysis indicate that the credit enhancements for the notes are sufficient to support the affirmed ratings.

The Watch Placement were initiated on 15 February 2024 following notification that the Administrator, Pepper Finance Corporation (Ireland) DAC (Pepper), had identified an error in its mortgage repayment process. The error related to monthly mortgage repayments, as set by the Administrator, not increasing according to changes in the European Central Bank (ECB) Rate for certain mortgages held by the issuer. The notification included an estimate that, as of 31 December 2023, the aggregate unbilled amount totalled €3.3 million which has since been updated to approximately €4.0 million as of May 2024. Since the initial Watch Placement, KBRA has held update calls with Pepper on the progress of their identification and remediation of this error. Pepper has now updated the number of affected loans since its initial notification to 1,211 loans (25.5% of the portfolio by balance). Pepper have completed the remediation of 991 loans so far with the remaining 220 loans in the process of being remedied. Pepper expects to conclude the remediation process over the next four to six weeks. KBRA expects the actual aggregate notional loss amount to the Issuer to be higher than the unbilled amount estimated by Pepper to date because a number of loans still need to be remediated.

A majority of the affected borrowers have shown resilience to the increase in the interest rates where remediation has been completed. Pepper continue to offer a range of options to the impacted borrowers before the correct monthly repayment terms are billed. The overall impact of the remediations thus far has led to higher monthly receipts in May and June 2024. KBRA continues to hold dialogue with Pepper until the remediation process is completed on the affected loans.

Notwithstanding the improved interest receipts from the portfolio, the interest payments on Class D, Class E and Class F have been deferred due to insufficient funds as of the last interest payment date (25 July 2024). Previously deferred interest payments to Class B have since been recovered, excluding the Net WAC Additional Amounts. KBRA continues to consider additional information from its dialogue with the Administrator, updated assessment of asset and liability performance, and the magnitude of deferrals and the potential for permanent impairment.

As of the end of Q4 2023, Pepper services over €23 billion of assets in Ireland, including approximately €18 billion of residential mortgages. Over €10 billion of the residential mortgages serviced are in securitized portfolios. Pepper thus service over 11% of the Irish residential mortgages outstanding.

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