DBRS Downgrades the Ratings on Penates Funding N.V./S.A. -Compartment Penates-4

DBRS Ratings Limited (“DBRS”) has reviewed Penates Funding N.V/S.A. -Compartment Penates-4 (the “Issuer”) and downgraded the following ratings:
• Class A Notes from AAA (sf) to A (high) (sf)
• Class B Notes from ‘A’ (sf) to A (low) (sf)

The downgrade of the Class A and Class B Notes follows the downgrade of Belfius Bank by the DBRS Financial Institutions Group and amendments to the legal documentation executed on 4 April 2014. Belfius Bank serves as both account bank and (senior and junior) swap counterparty for the transaction. On 30 January 2014, the senior long-term debt rating and short-term debt rating of Belfius Bank were lowered from A (high)/R-1 (middle), respectively, to A (low)/R-1 (low). The amendments to the legal documentation result in the following changes:
• the DBRS Minimum Account Bank rating is lowered to BBB (high) from ‘A’;
• the DBRS First Rating Threshold under the senior swap documents is lowered to BBB (high) from ‘A’.

Given the current rating of Belfius Bank and as per the current DBRS Legal Criteria for Structured Finance Transactions and DBRS Derivative Criteria, the highest achievable rating for the Class A Notes is A (high) (sf). Additionally, as the junior swap documentation does not envisage any posting of collateral, replacement or guarantor with a suitable rating should the swap counterparty fall below A, DBRS views the risk of payment on the Class B Notes linked to the credit risk of swap counterparty. Therefore the rating of the Class B Notes is downgraded to A (low) (sf).

Penates Funding N.V/S.A. -Compartment Penates-4 is a securitisation of a portfolio of first ranking Belgian residential mortgages originated and serviced by Belfius Bank N.V./S.A. The transaction follows the standard structure under the Belgian Securitisation Law and closed in December 2011.
As per the February 2014 payment date, the 0-30 days and 31-60 days delinquency ratios were 0.40% and 0.09%, respectively. The current cumulative default ratio as a percentage of the original balance was very low at 0.39%.

The Class A Notes are supported by subordination of the Class B and Class C Notes, while the Class B Notes are supported by the Class C Notes. The current credit enhancement (as a percentage of the performing collateral balance) for the Class A Notes is 15.00% and has increased from 10.25% since the initial rating. The current credit enhancement for the Class B Notes is 7.00%, up from 5.00%. An amortising reserve fund of EUR 117.00 million was funded at transaction close to cover interest shortfalls on the Class A Notes and senior swap termination amounts. The balance of the reserve fund is equal to the initial and current target level of EUR 117.00 million.

Approximately 72% of the loans in the portfolio pay a fixed rate of interest, while the remaining loans pay a variable rate of interest linked to different indexes. Interest paid on the notes is linked to 3 month Euribor. The interest rate risk is hedged by two separate swaps: a senior swap and a junior swap. The senior swap hedges the basis risk on the balance of the Class A Notes outstanding and the junior swap on the outstanding balance of the Class B and the Class C Notes.

Notes:
All figures are in Euro unless otherwise noted.
The principal methodologies applicable are Legal Criteria for European Structured Finance Transactions and Derivative Criteria for European Structured Finance Transactions. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

This can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include investor reports provided by Belfius Bank N.V./S.A. and data from the European DataWarehouse. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on 26 February 2013, when DBRS confirmed the ratings to the Class A Notes at AAA (sf) and to the Class B Notes at ‘A’ (sf).

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
• DBRS expected a lifetime base case Probability of Default (PD) and Loss Given Default (LGD) for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
• The base case PD and LGD of the current pool of mortgages for the Issuer are 1.19% and 25.27%, respectively. At the A (high) (sf) rating level, the corresponding PD is 8.15% and the LGD is 37.09%. At the A (low) (sf) rating level, the corresponding PD is 7.08% and the LGD is 35.31%.
• The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A Notes would be expected to remain at A (high) (sf), assuming no change in the LGD. Furthermore, if both PD and LGD increase by 50%, the rating would be expected to remain at A (high) (sf).

Class A Notes Risk Sensitivity:
• 25% increase in LGD, expected rating of A (high) (sf)
• 50% increase in LGD, expected rating of A (high) (sf)
• 25% increase in PD, expected rating of A (high) (sf)
• 50% increase in PD, expected rating of A (high) (sf)
• 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
• 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
• 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
• 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Class B Notes Risk Sensitivity:
• 25% increase in LGD, expected rating of A (low) (sf)
• 50% increase in LGD, expected rating of A (low) (sf)
• 25% increase in PD, expected rating of A (low) (sf)
• 50% increase in PD, expected rating of A (low) (sf)
• 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
• 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
• 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
• 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Kali Sirugudi
Initial Rating Date: 20 November 2011
Initial Rating Committee Chair: Claire Mezzanotte

Last Rating Date: 26 February 2013

Lead Surveillance Analyst: Elisa Scalco
Rating Committee Chair: Claire Mezzanotte

DBRS Ratings Limited
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The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

Legal Criteria for European Structured Finance Transactions
Derivative Criteria for European Structured Finance Transactions
Master European Structured Finance Surveillance Methodology
Operational Risk Assessment for European Structured Finance Servicers
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
Unified Interest Rate Model for European Securitisations