DBRS Assigns Rating to Essence VI B.V.

DBRS Ratings Limited (DBRS) has today assigned a rating to the following notes issued by Essence VI B.V.:

-- AAA (sf) to EUR 547,200,000 Class A notes

Essence VI 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., Quion Hypotheekbegeleiding B.V., and Quion Services B.V. (together Quion) assuming the role of sub-servicers.

As of March 2016, the mortgage portfolio has a current balance of EUR 628.30 million and is seasoned at 19 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 (WA CLTMV) of the portfolio is 94.8%.

The mortgage loans consist of both Nationale Hypotheek Garantie (NHG) (49.75%) and non-NHG loans (50.25%). DBRS views this as a credit positive as typically NHG loans tend to show both lower default rates (owing to the eligibility conditions of the NHG scheme) and 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 (70.4%) compared with 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 loss given default would, all things being equal, be lower than an Interest-Only (IO) loan.

The portfolio has IO Mortgage Loans (27.03%), 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 (0.16%). IO loans are typically considered riskier than repayment loans as they are typically chosen by 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 2.97%. 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 97.29%. The interest payable on the rated Class A notes is fixed at 0.50% subject to the fixed step-up rate of 1.00%.

The purchase of the mortgage portfolio is 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. It should be noted that soft credit enhancement is available through the liquidity reserve, as to the extent available, amortised amounts will form part of the revenue waterfall.

There are two main sources of potential liquidity. Firstly, there is an amortising reserve fund, and secondly there is an amortising liquidity reserve available to cover senior fees and interest on the Class A notes. In the event of interest shortfalls the reserve fund is used before the liquidity reserve. Excess spread, if available, can be used to amortise the Class A notes following the first optional redemption date.

The transaction has a revolving period of seven years - subject to the adherence of replenishment conditions - ending in May 2023. The transaction documents specify criteria which must be complied with during the substitution and replenishment periods, failure of which will cause the revolving period to end. DBRS has stressed the portfolio in accordance with the replenishment and substitution conditions to assess the ‘worst case’ the portfolio characteristics can migrate to. There are also rolling limits of 5% and 20% per annum for substitution and replenishment respectively.

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 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 13.41%. 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 which the Class A notes are secured against and the ability of the servicer to perform collection activities on the collateral. The transaction has a seven-year revolving period subject to the adherence of replenishment conditions. The Default Probability and Loss Given Default is based on an assessment of the ‘worst case’ 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 default model. Interest payable on the rated notes is fixed, with 94.89% of the portfolio balance linked to a fixed rate of interest and the remaining portion linked to a floating Standard Variable Rate (SVR). 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.

-- BNP Paribas, Netherlands (BNPP), acts as the issuer account bank for the transaction. The DBRS private rating of BNPP 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

-- The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for European Structured Finance Transactions.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is:
Master European Residential Mortgage-Backed Securities Rating Methodology and the Jurisdictional Addenda (January 2016).

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

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 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

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

To assess the impact of potential changes in the transactions’ parameters on the ratings, DBRS considered, in addition to its base case, further stress scenarios for its main rating parameters Probability of Default (PD) and Loss Given Default (LGD) in its cash flow analysis. The two additional stresses assume a 25% and 50% increase in both the PD and LGD assumptions for each series of notes.

The following scenario constitutes the parameters used to determine the ratings (the Base Case):

-- For the AAA (sf) rating category, PD of 39.38% and the LGD of 37.99%.

DBRS concludes that for the Class A notes (amongst other possible changes PD/LGD and impact of such changes to the ratings):

-- A hypothetical increase of the PD by 25% would lead to downgrade of the rating to AA (sf).
-- A hypothetical increase of the PD by 50% would lead to downgrade of the rating to A (high) (sf).
-- A hypothetical increase of the LGD by 25% would lead to downgrade of the rating to AA (sf).
-- A hypothetical increase of the LGD by 50% would lead to downgrade of the rating to A (high) (sf).
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to A (high) (sf).
-- A hypothetical increase of the PD by 25% and LGD by 50% would lead to downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase of the PD by 50% and LGD by 25% would lead to downgrade of the rating to BBB (high) (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to BBB (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, Assistant Vice President
Initial Rating Date: 17 May 2016
Initial Rating Committee Chair: Diana Turner, Senior Vice President

Lead Surveillance Analyst: Andrew Lynch, Senior Financial Analyst

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

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