DBRS Assigns Rating to Rembrandt Dutch Mortgages B.V.

DBRS Ratings Limited (DBRS) assigned a rating on the Senior Variable Funding Notes (VFNs) issued by Rembrandt Dutch Mortgages B.V. (the Issuer) based on the following targeted facility amount:

-- EUR 180,000,000 Senior VFNs rated AA (high) (sf)

The transaction is a secured funding facility provided by Natixis S.A., London Branch (Natixis) to the Issuer, a special-purpose vehicle (SPV) incorporated under the laws of the Netherlands. For two years from the closing date, subject to stop purchase events, the Issuer can purchase mortgage loans funded through the issuance of the rated Senior VFNs and unrated Junior VFNs. The VFNs are collateralised by Dutch prime residential mortgage loans originated by Fenerantis B.V (Fenerantis) through the brand name Merius. Fenerantis is part of the Credit Management and Investor Solutions B.V. (CMIS Group). The mortgage portfolio will also be serviced by Fenarantis through Adaxio B.V.

Fenerantis is a new originator (originating since Q4 2016) and consequently there is limited historical performance data. DBRS has assessed the historical performance of comparable Dutch mortgages and benchmarked the underwriting criteria, eligibility criteria and the portfolio covenants. The Issuer is required to pass portfolio tests on a monthly basis and prior to the issuance of Senior VFNs. Most notably the Issuer will not be permitted to draw on the facility if the portfolio covenants or performance triggers are breached. DBRS calculated portfolio default rates, loss given default and expected losses on a simulated portfolio modelled to the portfolio covenants and mortgage loan eligibility criteria.

The portfolio covenants specify current loan-to-value (CLTV) ratios lower than observed levels for Dutch mortgage loans. Borrowers in the Netherlands seek to maximise leverage to take advantage of tax incentives. The portfolio covenants require that no more than 65% of the portfolio (by outstanding balance) has a CLTV above 90% and no more than 30% of the portfolio has a CLTV above 100%. The weighted-average CLTV must not exceed 90%. The portfolio covenants state no loans will be granted to borrowers with a negative Bureau Krediet Registratie (BKR) code. A borrower is given a negative BKR code following two to four months of delinquencies, dependent upon credit type. To remove a negative BKR a borrower must have a minimum of five years of clear performance on all credits. The portfolio covenants specify that a maximum of 10% of the loans can be granted to self-employed borrowers.

Additionally, unlike typical Dutch transactions, loans with associated repayment vehicles, such as insurance, investment or savings products, will not be included in the transaction. Mortgage loans will repay on an annuity, linear or interest-only basis. CMIS is not a deposit-taking institution; therefore, the risk of borrowers exercising set-off rights is mitigated. In addition the maximum concentration of interest-only loans is lower than typical Dutch RMBS transactions, at 45%. On a loan-by-loan basis, no more than 50% of the market value of the property securing the loan can be lent on an interest-only basis.

The portfolio can contain a maximum of 5% bridge loans. Bridge loans will have a maximum term of 24 months and represent a first charge over the property being purchased, and a second charge over the original property. Bridge loans are advanced following proof of a completed property sale. The maximum bridge loan available is 98% of the sale price of the original property less the prior charge outstanding. The mortgage loan eligibility criteria also allow for second liens to be included in the portfolio. There is no concentration limit included in the portfolio conditions. Second liens are only granted where Fenerantis is also the first lien holder. All liens associated with a property will be sold to the SPV. In addition, the mortgage loans must comply with the loan-to-value conditions. Construction loans can comprise up to 7.5% of the portfolio. Properties securing construction loans do not benefit from an updated valuation and there is a risk properties remain uncompleted. DBRS reduced the simulated valuation amount for 7.5% of the portfolio. Undrawn balances remain in the collection disbursement account ready to be released with the production of the appropriate evidence. The disbursement account will be held by a standalone Dutch foundation and a pledge will be provided in favour of the Issuer.

The Dutch mortgage market is dominated by fixed interest rate loans with periodic resets. Fixed-rate loans with short term resets are generally considered riskier as a borrower is susceptible to potential payments shock in a rising rate environment. The percentage of loans with a fixed period of less than ten years (excluding bridging loans) is capped at 5%. The distribution of loans with a reset period greater than ten years has been applied in the simulated pool in accordance with observed originations. The portfolio covenants state the interest rate must be maintained at a minimum of 2.2% during the commitment period.

The coupon payable on the Senior VFN is linked to a mid swaps rate plus a margin. At each point in time a drawing is made under the Senior VFN, the mid swaps rate is the prevailing average of bid and ask swap rates, used as a benchmark for calculating the total interest rate cost of issuing a fixed-rate bond compared with three-month Euribor. The mid swap rate is capped at 0% for calculation of interest payable on the Senior VFNs. Any excess above 0% will be paid junior in the priority of payments to the repayment of the Senior VFNs. These subordinated payments are not rated.

The Senior VFNs benefit from a minimum credit enhancement of 10%, provided via subordination of the Junior VFNs. The Senior VFNs will benefit from additional credit support until the Issuer has purchased EUR 50,000,000 of mortgages, as EUR 5,000,000 of mortgage loans must be purchased via the proceeds of the Junior VFN before proceeds from the Senior VFN can be used. Any amount undrawn on the facility at the end of the commitment period will be automatically cancelled. During the commitment period the transaction will distribute available funds through separate interest and principal priority of payments. The Issuer administrator will record as debits to the principal deficiency ledger (PDL) the outstanding balance of realised losses and principal amounts used to provide liquidity support up to the outstanding balance of the Senior VFN during the commitment period. The PDL will be credited using available revenue funds. Following a stop purchase event or the scheduled maturity date, available funds are distributed through a combined priority of payments, allowing for accelerated redemption of the Senior VFNs.

The Senior VFNs also benefit from a reserve fund with a target amount equal to 1% of the outstanding balance of the mortgage portfolio. During the commitment period and prior to a stop-purchase event the reserve fund is available to cover shortfalls in payment of senior fees, interest due on the Senior VFN (subject to the mid swaps rate cap) and to credit any debits to the PDL. Amortised amounts of the reserve fund will form part of the available funds.

Fenerantis B.V. is the named servicer for the mortgage portfolio and will delegate servicing to Adaxio B.V. All payments are made into the collection account maintained by the collection foundation, which is a bankruptcy-remote Stichting. The collection account is held with ABN AMRO Bank N.V. (ABN AMRO). Funds standing to the credit of the collection account are transferred to the issuer account bank on a daily basis. The collection account will be pledged to the Security Trustee.

The Issuer account bank is maintained with ABN AMRO. As of the date of assignment of the rating, DBRS’s Long-Term and Short-Term Critical Obligations Ratings (COR) were AA and R-1 (high), respectively. The ratings of ABN AMRO are sufficient to uphold the rating assigned to the Senior VFNs and the downgrade provisions are in accordance with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The Issuer account bank will maintain all amounts received with respect to the mortgage loans, the liquidity reserve fund and the amounts equal to the construction deposits. The interest received on the Issuer account bank is the European Central Bank Deposit Rate (currently -0.40%). The Issuer is exposed to negative interest rate risk on the funds held with the Issuer account bank. DBRS has assessed this risk in its cash flow analysis.

The rating assigned to the Senior VFNs addressed timely payment of interest and ultimate payment of principal on or before the legal final maturity date. The ratings are based upon a review by DBRS of the following analytical considerations:
-- Transaction capital structure, and form and sufficiency of available credit enhancement and liquidity provisions.
-- The expected credit quality of the collateral, given the criteria specified in the transaction documents. DBRS calculated portfolio default rates (PDRs), loss given default (LGD) and expected loss outputs based on a simulated mortgage loan portfolio.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the rated notes according to the terms of the transaction documents. The transaction cash flows were modelled using PDRs and LGD outputs provided by DBRS’s European RMBS Insight Model. Transaction cash flows were modelled using INTEX DealMaker.
-- DBRS’s qualitative assessment of CMIS’s capabilities with regard to originations, underwriting and servicing.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the Terms and Conditions of the notes.
-- The transaction’s consistency of the legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of the appropriate legal opinions.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the rating are: “European RMBS Insight Methodology” and “European RMBS Insight: Dutch Addendum”.

DBRS has applied the principal methodology consistently.

An asset and a cashflow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

Other methodologies referenced in this transaction are listed at the end of this press release.

These 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 data and information used for this rating includes Natixis S.A. and its agents.

DBRS did 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 data and information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating involves an originator for which historical data is limited. DBRS has assessed the historical performance of comparable Dutch mortgages and benchmarked the underwriting criteria, eligibility criteria and the portfolio covenants.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

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, is available on www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered in addition to its Base Case, further stress scenarios for its main rating parameters PDRs and LGD in its cash flow analysis. The additional stresses assume a 25% and 50% increase in both the PDRs and LGD assumptions for each series of notes.

The following scenarios constitute the parameters used to determining the ratings (the Base Case):

-- In respect of the Senior VFNs, the PDR and LGD at the AA (high) (sf) stress scenario of 27.60% and 42.08%, respectively.

DBRS concludes the following impact on the Senior VFNs:

-- 25% increase of the PD, ceteris paribus would lead to a downgrade to AA (low) (sf).
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to A (sf).
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf).
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf).
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf).
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (high) (sf).
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (sf).

For further information on DBRS historical default rates published by the European Securities and Markets Authority (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 and US regulations only.

Lead Analyst: Asim Zaman, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 6 September 2017

DBRS Ratings Limited
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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
-- Unified Interest Rate Model for European Securitisations
-- European RMBS Insight Methodology
-- European RMBS Insight: Dutch Addendum

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