DBRS Confirms Rating on Nostrum Mortgages No. 2

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

The rating addresses the timely payment of interest and ultimate repayment of principal on or before the legal final maturity date.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults and losses, as of the February 2018 payment date.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the Class A notes to cover the expected losses at the AA (sf) rating level.

Nostrum Mortgages No. 2 is a securitisation of Portuguese residential mortgage loans originated and serviced by Caixa Geral de Depósitos S.A.

PORTFOLIO PERFORMANCE
As of February 2018, two- to three-month arrears represented 0.2% of the outstanding portfolio balance, stable since February 2017. The 90+ delinquency ratio was 0.4%, down from 0.6% in February 2017. The cumulative default ratio was 4.0% and the cumulative loss ratio was 2.4%.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-level analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 12.8% and 31.5%, respectively, from 14.1% and 31.2%.

CREDIT ENHANCEMENT
As of the February 2018 payment date, credit enhancement to the Class A notes was 39.1%, up from 36.1% in February 2017. Credit enhancement to the Class A notes consists of subordination of the Class B notes and the Cash Reserve Fund.

The transaction benefits from a Reserve Fund currently at its target level of EUR 80.2 million, which covers senior fees and any interest shortfall or principal loss on the Class A notes via the Principal Deficiency Ledger. The transaction also benefits from a Liquidity Reserve Fund currently at its target level of EUR 27.5 million. The Liquidity Reserve Fund covers senior fees and any interest shortfall on the Class A notes in the event of non-payment by the Servicer, which causes a Liquidity Shortfall.

Banco Santander SA acts as the account bank for the transaction. The account bank reference rating of ‘A’, being one notch below the DBRS public Long-Term Critical Obligations Rating (COR) of Banco Santander SA of A (high), is consistent 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 SA acts as the swap counterparty for the transaction. DBRS's public (COR) of Banco Santander SA at A (high) is above the First Rating Threshold as described in DBRS's "Derivative Criteria for European Structured Finance Transactions" methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “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.

A review of the transaction legal documents was not conducted as the legal 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. 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include investor reports provided by Deutsche Bank AG, London Branch, and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial rating, 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.

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

The last rating action on this transaction took place on 7 April 2017, when DBRS confirmed its rating on the Class A notes at AA (sf).

The lead analyst responsibilities for this transaction have been transferred to Clare Wootton.

Information regarding DBRS ratings, including definitions, policies and methodologies is available at 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):

-- 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 loans for the Issuer are 12.8% and 31.5%, respectively.
-- 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 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 fall to BBB (high) (sf), assuming no change in the PD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to fall to BBB (high) (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 A (high) (sf)
-- 50% increase in PD, expected rating of BBB (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 BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

For further information on DBRS historic 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: Clare Wootton, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 4 May 2012

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

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.