DBRS Confirms Rating of Nostrum Mortgages No. 2

DBRS Ratings Limited (DBRS) has today confirmed its AA (sf) rating on the Class A notes issued by Nostrum Mortgages No. 2 (the Issuer).

The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal payable on or before the Final Legal Maturity Date.

The confirmation of the rating of the Class A notes is based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies and defaults.
-- Updated portfolio default rate (PD), loss given default (LGD) and expected loss assumptions for the remaining collateral pool.
-- Current available credit enhancement for the Class A notes to cover the expected losses at the AA (sf) rating level.
-- An amendment to the transaction executed on 27 April 2016, adding a Liquidity Reserve.

Nostrum Mortgages No. 2 is a securitisation of Portuguese residential mortgages originated and serviced by Caixa Geral de Depósitos S.A. (the Servicer). The transaction closed in November 2009 and DBRS assigned a rating to the Class A notes in May 2012.

As of 4 February 2016, the 90+ delinquency ratio as a percentage of the performing balance of the portfolio was 0.79%. The cumulative Written-off Mortgage Assets as a percentage of the original portfolio balance at transaction closing increased during the year to 3.28%, still below DBRS’s base case default rate of 18.31%. DBRS has updated PD and LGD assumptions on the remaining collateral pool. At the AA (sf) level, the PD assumption is increased to 44.83% from 40.27%. The LGD, as a result of reduced loan-to-value ratio through the transaction’s deleveraging, is reduced to 35.93% from 38.71%.

Credit enhancement for the Class A notes consists of the subordination of the Class B notes and the Cash Reserve Fund initially funded via the issuance of the Class C notes. The Cash Reserve Fund is at its target amount level of EUR 80.18 million. The credit enhancement to the Class A notes is currently 33.81%, up from 30.90% in February 2015.

On 27 April 2016, the Issuer amended the transaction documents and added a Liquidity Reserve to the Transaction to mitigate the potential payment disruption risks from the Servicer. The Liquidity Reserve will cover for the interest payments on the Class A notes and the senior expenses in the Transaction in a Servicer Non-payment event that causes a Liquidity Shortfall.

An initial Liquidity Reserve amount of €36,000,000.00 has been deposited in the Liquidity Reserve Account at the Liquidity Reserve Account Bank, Banco Santander, S.A. (Banco Santander).

The subsequent Liquidity Reserve Account Required Balance will be the greater of;
(a) The lesser of:
1) 1.2% of outstanding Class A notes balance
2) EUR 36 million;
(b) The aggregate amount of items (a) to (e) of the Pre-Enforcement Interest Payment Priorities over the current and the previous Interest Payment Dates.

The Liquidity Reserve Account Required Amount will be funded whenever the Servicer’s DBRS long-term rating is not at least at BBB.

Banco Santander is the Account Bank to the transaction. The DBRS public rating of Banco Santander (A/R-1 (low) Stb and Critical Obligations Rating of A (high)/R-1 (middle) Stb) complies with the Minimum Institution Rating given the rating assigned to the Class A notes, as described in DBRS’s ”Legal Criteria for European Structured Finance Transactions” methodology.

Banco Santander is also the Swap Counterparty to the transaction. The swap documentation contains rating triggers related to collateralisation, replacement or the inclusion of an appropriately rated guarantor, which is consistent with DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the “Master European Structured Finance Surveillance Methodology”. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

DBRS reviewed the amendment documents related to the Liquidity Reserve. A review of the rest of the transaction legal documents was not conducted, as the documents have remained unchanged since the most recent rating action.

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 investor reports provided by Deutsche Bank AG, Portuguese Branch (the Agent Bank), the amendment documents provided by Caixa - Banco de Investimento, SA, and the loan-by-loan data from the European DataWarehouse GmbH.

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 1 May 2015 when DBRS confirmed the rating of the Class A notes at AA (sf). The lead responsibilities for this transaction have been transferred to Kevin Ma.

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 PD and 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 18.31% and 20.55%, respectively. The corresponding levels at the AA (sf) rating level are 44.83% and 35.93%.

-- 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 Class A notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both PD and LGD increase by 50%, the rating of the Class A notes would be expected to decrease to A (low) (sf).

Class A notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (low) (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 (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: Keith Gorman
Initial Rating Date: 4 May 2012
Initial Rating Committee Chair: Claire Mezzanotte

Lead Surveillance Analyst: Kevin Ma
Rating Committee Chair: Quincy Tang

DBRS Ratings Limited
20 Fenchurch Street,
31st Floor,
London EC3M 3BY 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
-- Master European Structured Finance Surveillance Methodology
-- Derivative Criteria for European Structured Finance Transactions
-- 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

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