DBRS Finalises Provisional Ratings of EDML 2018-2 B.V.

DBRS Ratings Limited (DBRS) finalised its provisional ratings of the notes issued by EDML 2018-2 B.V (the Issuer) as follows:

-- Class A notes rated AAA (sf)
-- Class B notes rated AA (sf)
-- Class C notes rated A (sf)
-- Class D Notes rated BBB (sf)
-- Class E Notes rated BB (high) (sf)

The Class F notes are not rated.

The final rating of the Class E notes differs from the provisional rating previously assigned by DBRS, due to lower note margins compared to those expected at the time of the provisional ratings.

The Issuer is a bankruptcy-remote special-purpose vehicle (SPV) incorporated in the Netherlands. The notes proceeds were used to fund the purchase of Dutch residential mortgage loans originated by Elan Woninghypotheken B.V. (Elan) and secured over residential properties located in the Netherlands. Elan started originating Dutch residential mortgage loans in June 2015 under the umbrella licence of Quion. The portfolio consists of Dutch residential mortgage loans without a National Hypotheek Garantie (NHG), originated under the Hypotrust mortgage label through a mortgage product designed with unique underwriting criteria (Elan mortgage). Quion will be the Servicer in the transaction and has conducted the mortgage underwriting to the product underwriting standards. Goldman Sachs provided the warehouse financing as the Elan lender.

As of 31 August 2018, the final funded mortgage portfolio consisted of 1,848 loan parts (equivalent to 893 loans) with an aggregated current balance of EUR 252.1 million. Approximately 90.5% of the final funded portfolio was originated in 2018, and hence the weighted-average seasoning of the portfolio is short at 0.4 years. DBRS was also provided with a separate unfunded mortgage portfolio that consists of additional loans for which prospective borrowers have received a binding offer from the seller but have not yet accepted it. The aggregated current balance of the unfunded portfolio is equal to EUR 99.9 million and consists of 651 loan parts (equivalent to 283 loans). The Issuer will use part of the proceeds from the notes to purchase new mortgage loans (from the unfunded portfolio) before the first interest payment date of the notes. The total amount of unfunded loans that can be purchased is EUR 84,914,891 (which is the balance of the pre-funded account). The Issuer has deposited these proceeds from the issuance of the notes in the pre-funded account. DBRS received detailed information on each of the loans that will form part of the unfunded portfolio.

Credit enhancement for the Class A notes is calculated at 9.1% and is provided by the subordination of the Class B notes to the Class F notes and the reserve fund. Credit enhancement for the Class B notes is calculated at 6.85% and is provided by the subordination of the Class C notes to the Class F notes and the reserve fund. Credit enhancement for the Class C notes is calculated at 4.85% and is provided by the subordination of the Class D notes to the Class F notes and the reserve fund. Credit enhancement for the Class D notes is calculated at 3.35% and is provided by the subordination of the Class E notes to the Class F notes and the reserve fund. Credit enhancement for the Class E notes is calculated at 2.35% and is provided by the subordination of the Class F notes only and the reserve fund.

The transaction benefits from a reserve fund that is available to support the Class A to Class E notes. The reserve fund will be fully funded at closing at 0.35% of the initial balance of the Class A to F notes. The reserve fund can be used to pay senior costs and interest on the rated notes and will not amortise. Liquidity for the Class A and the Class B notes will be further supported by the drawings under the cash advance facility agreement. Once the Class A and the Class B are redeemed in full, the cash advance facility will no longer be available.

99.8% of the funded portfolio are fixed-rate mortgage loans with different reset intervals, ranging from 12 months to 30 years. Most of the loans reset after 10, 15, 20 or 30 years. The notes pay a floating-rate interest rate indexed to three-month Euribor plus a margin. To mitigate the interest rate risk that arises because of this mismatch, the Issuer will enter into a senior swap agreement with ING Bank N.V. (the swap counterparty). The Issuer will pay the swap counterparty an amount equal to the swap notional amount multiplied by the swap rate which will be 1.1108% at closing plus the prepayment penalties received by the Issuer. The swap counterparty will pay the Issuer the swap notional amount multiplied by the greater of (1) three-month Euribor and (2) the swap floor.

Once the loan reaches the reset period, the borrowers will be offered a mortgage rate that takes into account the seller’s interest rate policy. The interest rate policy considers the Issuer’s weighted-average cost of capital, operating costs and reasonable estimate of its cost of credit. According to the transaction documents, the interest rate offered to the borrower at the time of reset will be equal to the Mortgage Receivable Swap Rate (MRSR) for the fixed-rate mortgage loan at the time of reset plus 0.9% per annum subject to the compliance of the terms and conditions of the mortgage loans, the applicable laws and regulations and the Dutch Code of Conduct. Goldman Sachs International will submit the MRSR to the seller. DBRS has taken this assumption in its cash flow analysis.

The structure includes a PDL comprising six sub-ledgers (Class A PDL to Class F PDL) that provisions for realised losses as well as the use of any principal receipts applied to meet any shortfall in payment of senior fees and interest on the most senior class of notes outstanding. The losses will be allocated starting from Class F PDL and then to sub-ledgers of each class of notes in reverse sequential order.

The Issuer Account Bank is BNG Bank N.V. Based on the DBRS private rating of the account bank, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

The rating assigned to the Class A notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date. The ratings assigned to the Class B to Class E notes address the ultimate payment of interest and principal while junior but timely payment of interest when it is the senior-most tranche. DBRS based its ratings primarily on the following:

-- The transaction capital structure, form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS calculated the probability of default (PD), loss given default (LGD) and expected loss for the 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 analysed using PD and LGD outputs determined according to DBRS’s “European RMBS Insight Methodology and Dutch Addendum”. Transaction cash flows were analysed using INTEX DealMaker.
-- 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 legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “European RMBS Insight Methodology and Dutch Addendum”.

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.

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 these ratings include Quion and Goldman Sachs International.

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

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

This is the first rating action since the Initial Rating Date. The last rating action on this transaction took place on the 15th November 2018, when provisional ratings were assigned to the rated notes.

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 the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

In respect of the Class A notes, the PD and LGD at the AAA (sf) stress scenario of 20.40% and 38.31%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class A notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to AA (high) (sf)
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to AA (low) (sf)
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (high) (sf)
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf)

In respect of the Class B notes, the PD and LGD at the AA (sf) stress scenario of 17.22% and 34.26%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class B notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to A (high) (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 A (high) (sf)
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (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 (high) (sf)

In respect of the Class C notes, the PD and LGD at the A (sf) stress scenario of 13.53% and 30.42%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class C notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to BBB (sf)
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to BB (high) (sf)
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to BBB (low) (sf)
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (high) (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (sf)

In respect of the Class D notes, the PD and LGD at the BBB (sf) stress scenario of 9.39% and 26.43%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class D notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to BB (sf)
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to B (high) (sf)
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (sf)
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf)

In respect of the Class E notes, the PD and LGD at the BB (low) (sf) stress scenario of 5.52% and 22.94%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS concludes the following impact on the Class E notes:
-- 25% increase of the PD, ceteris paribus would lead to a downgrade to BB (low) (sf)
-- 50% increase of the PD, ceteris paribus would lead to a downgrade to B(high) (sf)
-- 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (sf)
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (sf)
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to B (sf)
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf)
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf)
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus would lead to a downgrade to below B (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: Belén Bulnes, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 15 November 2018

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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
-- Derivative Criteria for European Structure Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Structured Finance Transactions
-- European RMBS Insight Methodology and 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.

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