DBRS Assigns Provisional Ratings to Cartesian Residential Mortgages Blue S.A., Places Classes C, D and E UR-Pos.

DBRS Ratings Limited (DBRS) assigned the following provisional ratings to notes to be issued by Cartesian Residential Mortgages Blue S.A. (the Issuer or Cartesian Blue):

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

Additionally, the Class C, Class D and Class E Notes were placed Under Review with Positive Implications (UR-Pos.).

The UR-Pos. rating actions reflect the publication of DBRS’s “European RMBS Insight: Dutch Addendum – Request for Comment” (the Updated Methodology) on 6 March 2019.

The Updated Methodology presents the criteria with which Dutch residential mortgage-backed securities (RMBS) ratings and, where relevant, Dutch covered bond ratings are assigned. DBRS updated its house price indexation and market value decline rates to reflect data through Q3 2018.

This update is considered to be material as the assumptions changed are deemed to be key assumption and the resulting positive rating changes may be significant.

Following the end of the Request for Comment period and release of the final version of the Updated Methodology, DBRS expects to resolve the current UR-Pos. status on all affected ratings.

The provisional ratings to the Class A and Class B Notes address timely payment of interest and ultimate payment of principal on or before the final maturity date. The Class C Notes’ provisional rating addresses the timely payment of interest when they are the most senior notes after redemption of the Class A Notes and Class B Notes only and the ultimate payment of principal. The provisional ratings to the Class D and Class E Notes address the ultimate payment of interest and principal. An increased margin on the rated notes is payable from the step-up date falling in April 2024. Such additional interest amounts are payable at a subordinated level in the revenue waterfall and not rated by DBRS.

The proceeds of the notes will be used to fund the purchase of Dutch residential mortgage loans secured over properties located in the Netherlands. The majority of the loans in Cartesian Blue are currently securitised under Cartesian Residential Mortgages 1 S.A. (Cartesian 1). The notes outstanding under Cartesian 1 will have the first optional redemption date in April 2019 and these outstanding notes will be redeemed via the fresh issuance under Cartesian Blue. The mortgage loans in the asset portfolio are all classified as owner-occupied and secured by a first-ranking or a first- and subsequently-ranking mortgage right.

The mortgages were originated by three special-purpose vehicles: Quion 10 B.V., Ember Hypotheken 1 B.V. and Ember Hypotheken 2 B.V., the originators of the mortgage portfolio under Cartesian Blue.

Almost all of the mortgage receivables were sold by GE Artesia Bank to a sponsor group led by Venn Partners LLP in December 2013 and the purchaser of the portfolio, Ember VRM S.a.r.l. (Ember VRM or the seller), sold the majority of the mortgage receivables to Cartesian 1. Ember VRM will continue to be the seller for Cartesian Blue.

The loans have been serviced by Quion Services B.V. (Quion) since 2014. Quion is expected to continue as the delegate servicer in this transaction as per the servicing agreement in Cartesian Blue with Ember VRM, the seller.

The mortgage portfolio is just over 14 years’ seasoned on a weighted-average (WA) basis. The historical performance of the mortgage portfolio is largely comparable with mortgage portfolios under RMBS-rated transactions in the Netherlands in terms of loans in arrears. Approximately 0.6% of the loans in the mortgage portfolio are currently in arrears for one month or less. DBRS considers these to be technical arrears, which are not a material credit issue. Since 2014, the reported cumulative losses under Cartesian 1 were 0.37% and 0.14% cumulative net loss. The prepayment rate has been above 10% on average for the last four years. The WA original loan to value (WAOLTV) of the mortgage portfolio is 95.2% with 69.4% of the loans having an OLTV greater than 80%. The WA current LTV (CLTV; indexed) stands at 86.6% with approximately 61.0% of the loans with CLTVs (indexed) above 80%. Of the loans in the mortgage portfolio, 98% are paying on an interest-only basis, which indicates a rise in house prices affecting the CLTV (indexed) favourably. DBRS indexed the valuations of the properties to Q3 2016 per its “European RMBS Insight: Dutch Addendum”. When indexed to a more-recent September 2018 date, the properties show a WACLTV (indexed) of 66.8%, which is primarily attributed to a rise in Dutch house prices. The proportion of loans with LTVs greater than 80% is lower at 31.8%.

Credit support to the notes is provided in the form of subordination. Credit enhancement is 11.7% for the Class A Notes, 9.7% for the Class B Notes, 7.05% for the Class C Notes, 4.5% for the Class D Notes and 2.75% for the Class E Notes. The issuance structure includes several reserve funds: the senior reserve fund supporting the Class A and Class B Notes, a Class C reserve fund, a Class D reserve fund and a Class E reserve fund. Each reserve supports the interest payment on the respective notes in the event of a shortfall in revenue available funds. The reserve funds do not protect the notes against losses. Principal receipts can be used to support any shortfall in the payment of interest on the Class A and Class B Notes.

Within the mortgage portfolio, 50.4% of the loans currently pay a fixed rate of interest with reset at frequent intervals ranging from 12 months to 240 months. In comparison, the notes pay a rate of interest linked to three-month Euribor, which resets on a quarterly basis. The Issuer is thus exposed to a fixed-floating interest rate risk and the degree of such exposure can change when the fixed-rate loans are reset onto a different interest rate on the reset date.

The Issuer’s fixed-floating risk exposure is hedged through a swap that references the aggregate current balance of the fixed-rate-paying loans in the portfolio and pays the Issuer the three-month Euribor rate payable on the notes. The Issuer will pay the swap rate on each such fixed-rate loan in return. On a reset date, the reset interest rate will be driven by the applicable swap rate plus a minimum margin (between 2.3% and 4.0%) plus an LTV-based margin. DBRS assumed a fixed-rate reset interest rate of 2.31% (a swap rate of [] plus the lower end of the minimum margin of 2.3%) on the reset dates with a fixed-rate reset period of ten years.

DBRS's Long-Term Critical Obligations Rating of “A” on NatWest Markets plc is consistent with the First Rating Threshold as described in DBRS's "Derivative Criteria for European Structured Finance Transactions" methodology.

The ratings are based on DBRS’s review of the following analytical considerations:
-- Transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS calculated probability of default (PD), loss given default (LGD) and expected loss (EL) outputs on the mortgage portfolio, which are used as inputs into the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS’s “European RMBS Insight Methodology and the European RMBS Insight: Dutch Addendum".
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, Class D and Class E Notes according to the terms of the transaction documents. The transaction structure was analysed using Intex Dealmaker.
-- DBRS’s sovereign rating on the Kingdom of the Netherlands at AAA/R-1(high) with Stable trends as of the date of this press release.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and the 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 the European RMBS Insight: Dutch Addendum”.

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

DBRS is undertaking a review and will remove the rating from this status as soon as it is appropriate.

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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for these ratings include Venn Partners LLP.

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

At the time of the initial rating, 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 these 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.

These ratings concern a to be issued financial instrument. These are the first DBRS ratings 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 the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

-- In respect of the Class A Notes, a PD of 26.2% and LGD of 32.7%, corresponding to the AAA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 26.2% and LGD of 32.7%, corresponding to the AA rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C Notes, a PD of 22.8% and LGD of 28.5%, corresponding to the A (low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D Notes, a PD of 17.2% and LGD of 23.8%, corresponding to the BBB (low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class E Notes, a PD of 10.3% and LGD of 18.9%, corresponding to the BB (low) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS concludes the following impact on the rated notes:

Class A Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes at AA (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).

Class B Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to downgrade of the Class B Notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to AA (low)(sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to AA (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class B Notes to AA (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (low) (sf).

Class C Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to A (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to A (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class C Notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class C Notes to BBB (sf).

Class D Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BBB (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BBB (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BBB (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class D Notes to BBB (low)(sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BBB (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class D Notes to BB (sf).

Class E Notes:
-- A hypothetical increase of the base case PD by 25%, ceteris paribus, would lead downgrade of the Class E Notes to BB (high) (sf).
-- A hypothetical increase of the base case PD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to BB (low) (sf).
-- A hypothetical increase of the base case LGD by 25%, ceteris paribus, would lead to downgrade of the Class E Notes to BB (high) (sf).
-- A hypothetical increase of the base case LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class E Notes to BB (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E Notes to BB (low) (sf).
-- A hypothetical increase of the base case PD by 25% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to below B (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class E Notes to below B (high) (sf).
-- A hypothetical increase of the base case PD by 50% and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class E Notes to below B (sf).

Some of the ratings listed below are UR-Pos. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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: Kali Sirugudi, Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 29 March 2019

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Registered and incorporated under the laws of England and Wales: Company No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- European RMBS Insight Methodology
-- European RMBS Insight: Dutch Addendum
-- Legal Criteria for European Structured Finance Transactions
-- Interest Rate Stresses for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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.

This press release was amended on 1 April 2019 to modify the language in the rating table to "Under Review with Positive Implications" from "Provisional - Under Review Positive" for the Class C, Class D and Class E Notes and reflect the fact that the principal methodology used and applicable is “European RMBS Insight Methodology and the European RMBS Insight: Dutch Addendum.