Press Release

DBRS Confirms Rating on Essence V B.V. Following an Amendment

RMBS
February 09, 2016

DBRS Ratings Limited (DBRS) has today confirmed its rating of AAA (sf) on the Class A Notes issued by Essence V B.V. The rating confirmation follows an additional replenishment of the mortgage portfolio funded via an increase of Class A and Class B Notes.

Essence V B.V. (Issuer) is a securitisation of a portfolio of first ranking and sequentially lower ranking Dutch prime residential mortgage loans originated or acquired by NIBC Bank N.V. (NIBC) and its subsidiaries. The mortgage portfolio will be serviced by NIBC with Stater Nederland B.V. (Stater) and Quion Hypotheekbemiddeling B.V. and Quion Services B.V. (together Quion) assuming the role of sub-servicers.

The purchase of the initial mortgage portfolio was funded via the issuance of the Class A and B Notes, with the Class C Notes used to establish the reserve fund and liquidity reserve. Following the amendment, the Class A Notes were increased to €999,600,000, and the Class B Notes increased to €78,750,000 through a change in the minimum denomination of the notes from €100,000 to €150,000. The increase to the Class A and B Notes funded a one-time additional replenishment of mortgages exceeding the rolling 20% p.a. threshold during the revolving period.

Post amendment, the credit enhancement will remain unchanged, with the Class A Notes benefiting from 7.80% of credit enhancement provided via subordination of the Class B Notes (7.30%) and the reserve fund (0.50%). The amortising liquidity reserve is available to cover shortfalls in the payment of senior fees and Class A interest. To the extent applicable, amortised amounts will form part of the revenue waterfall. The increase in the reserve fund and liquidity reserve are funded via an increase in the amount of the Class C Notes to €2,800,000.

As of December 2015, the mortgage portfolio has a current balance of €1,068,322,544, excluding saving participations and construction deposits, and is seasoned at 89.6 months. The mortgage portfolio comprises mortgage loans to individuals and is secured by residential properties located in the Netherlands. The weighted-average current loan to market value of the portfolio is 83.66%.

The mortgage loans consist of both Nationale Hypotheek Garantie (NHG) (62.46%) and non-NHG loans (37.54%). DBRS views this as a credit positive, as typically NHG loans tend to show lower default rates (owing to the eligibility conditions of the NHG scheme) and also lower losses, as loans are guaranteed if the underwriting of the loan follows NHG requirements. The mortgage portfolio also has a relatively higher proportion of amortising loans (33.51%) compared to what is typically observed in Dutch RMBS transactions. Amortising loans have the benefit that as principal is repaid by the borrower, even if the loan defaulted, the defaulted amount would be less than 100% of the initial principal balance, and therefore, all things being equal, loss given default would be lower than an interest-only (IO) loan.

The portfolio has IO Mortgage Loans (40.62%) as well as other types of mortgage loans where the repayment vehicle may not in all cases provide for the repayment in full of principal such as Investment Mortgage Loans (1.40%). IO loans are typically considered riskier to repayment loans, as they are typically a choice of borrowers who may have a reduced financial capacity to service the loan and therefore would prefer smaller mortgage instalments. Additionally, while servicers normally advise such borrowers to plan for the principal repayment by setting aside money on a regular basis, the borrower is under no obligation to do so.

The weighted-average coupon of the mortgage portfolio is currently 4.05%. Dutch borrowers tend to favour longer-term, fixed-rate products, where mortgage interest rates tend be relatively higher than floating-rate loans. The current fixed-rate proportion in the portfolio is 94.87%. The interest payable on the rated Class A Notes is fixed at 1.10% subject to the fixed step-up rate of 2.20%.

There are a number of different sources of set-off risk in the Dutch mortgage market, and although representations have been provided that borrower payments should be made without set-off, Dutch law does not give absolute comfort that set-off would be avoided. There are potential mitigants in place, which reduce the set-off risk within the transaction.

The transaction has a revolving period, subject to the adherence of replenishment conditions, ending in December 2019. The criteria, which must be complied with during the substitution and replenishment periods, remain unchanged. DBRS stressed the portfolio in accordance with the replenishment and substitution conditions to assess the ‘worst case’ that the portfolio characteristics can migrate to. There are also rolling limits of 5% and 20% per annum for substitution and replenishment, respectively. Failure to comply with the portfolio conditions will result in termination of the revolving period.

The rating is based upon review by DBRS of the following analytical considerations:

-- The transaction’s cash flow structure and form and sufficiency of available credit enhancement. Credit enhancement for the Class A Notes is provided in the form of subordination via the Class B Notes and the amortising Reserve Fund (subject to collateral performance conditions). At closing, DBRS calculates the credit enhancement level at 7.80%. Credit enhancement is also provided to the extent available via amortised amounts of the liquidity reserve. Excess spread may also be available; however, the availability of excess spread is determined by the performance of the portfolio.

-- Liquidity coverage is provided through the aforementioned amortising reserve fund and liquidity reserve. The liquidity reserve is available to pay senior fees and interest on the Class A Notes in the event of an interest shortfall. Following the end of the revolving period, excess spread where available will be utilised to pay the Class A Notes after the replenishment of the reserve fund.

-- The credit quality of the expected mortgage loans that the Class A Notes are secured against and the ability of the servicer to perform collection activities on the collateral. The transaction has a revolving period ending in December 2019. The Probability of Default (PD) and Loss Given Default (LGD) are based on an assessment of the ‘worst case’ that the portfolio characteristics can migrate to during the revolving period. DBRS achieved this through stressing the loan-by-loan data provided in accordance with the conditions defined in the transaction documents.

-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the transaction documents. The transaction cash flows were modelled using portfolio default rates and loss given default outputs provided by the DBRS European RMBS Credit Model. Interest payable on the rated notes is fixed, with 94.87% of the portfolio balance linked to a fixed rate of interest and the remaining portion linked to a floating standard variable rate. The Issuer Account Bank has the right to charge negative interest rates provided ten days’ notice has been given. The cash flow assumptions were stressed to assess this risk of negative interest rates on the Issuer Account Bank.

-- The legal structure and presence of legal opinions addressing the amendment and the consistency with the DBRS ‘Legal Criteria for European Structured Finance Transactions’.

-- The Issuer transaction account is held with Société Générale S.A., Amsterdam Branch and is privately rated by DBRS. The account bank is appropriately rated per DBRS criteria to mitigate the risk of counterparty default or insolvency.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable is ‘Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda’.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Because of the inclusion of a revolving period in the transaction, the collateral was initially modelled based on the worst-case replenishment criteria set forth in the transaction legal documents. These assumptions have not changed, and consequently, the expected default and loss assumption applied to the cash flow analysis were not updated.
Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at http://www.dbrs.com/about/methodologies

For a more detailed discussion of the 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 NIBC and its subsidiaries.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

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 20 November 2015 when the ratings were confirmed following the annual review.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

The PD of 26.95% and LGD of 32.95%, corresponding to the AAA rating scenario, were stressed assuming a 25% and 50% increase on the base case PD and LGD.

DBRS Concludes the following impact on the rated notes:

-- A hypothetical increase of the PD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would lead a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would lead a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to 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: Asim Zaman
Initial Rating Date: 27 November 2014
Initial Rating Committee Chair: Quincy Tang

Lead Analyst: Asim Zaman
Lead Surveillance Analyst: Andrew Lynch
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
1 Minster Court, 10th Floor Mincing Lane, London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

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

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

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at http://www.dbrs.com/research/278375.

Ratings

Essence V B.V.
  • Date Issued:Feb 9, 2016
  • Rating Action:Confirmed
  • Ratings:AAA (sf)
  • Trend:--
  • Rating Recovery:
  • Issued:UKU
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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