DBRS Finalises Provisional Ratings of Delft 2019 B.V.

DBRS Ratings Limited (DBRS) finalised the provisional ratings on the following notes issued by Delft 2019 B.V. (Delft 2019):

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)
-- Class G at CCC (sf)

Additionally, the Class B to G notes were all maintained Under Review with Positive Implications (UR-Pos.).

The UR-Pos. rating actions reflect the publication of the “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 ratings and, where relevant, Dutch covered bonds ratings are assigned. DBRS updated its house price indexation and market value decline rates to reflect data through the third quarter of 2018.

This update is deemed to be material as the assumptions changed are deemed to be key assumptions, and for Delft 2019 the positive rating changes may be up to two notches.

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 the affected ratings.

The rating assigned to the Class A notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in October 2042. The rating assigned to the Class B addresses the timely payment of interest, when they are the most senior notes after redemption of the Class A notes only, and the ultimate repayment of principal. The ratings assigned to the Class C, D, E, F and G notes address the ultimate payment of interest and repayment of principal by the legal final maturity date. DBRS does not rate the Class Z notes or residual certificates.

Delft 2019 is a new transaction formed by securitising the collateral previously in EMF-NL 2008-2 B.V. (EMF 2008), a seasoned, Dutch, non-conforming transaction comprising mortgage loans originated by ELQ Portefeuille 1 B.V. (ELQ) and Quion 50 B.V. (Quion), which were subsidiaries of Lehman Brothers through ELQ Hypotheken N.V. and no longer originate loans. EMF 2008 was called on its last interest payment date on 17 April 2019. Adaxio B.V. will service the mortgage portfolio during the life of the transaction with Intertrust Administrative Services B.V. acting as the replacement servicer facilitator. The servicing of loans originated by Quion will be delegated to Quion Hypotheekbemiddeling B.V. until 1 July 2020 after which all servicing will be performed by Adaxio B.V.

As of 31 March 2019, the portfolio balance was EUR 138,709,575. The portfolio includes mortgage loans with non-conforming characteristics such as self-certified borrower income (60.8% by loan balance), negative Bureau Krediet Registratie (BKR) listings of borrower credit history (31.8%) and borrowers classified as unemployed, self-employed and pensioners (43.7%). The loans are mostly floating rate (87.0%), repay on an interest-only (99.9%) basis and have a weighted-average coupon of 2.9%. The weighted-average indexed current loan-to-value (CLTV) ratio of the portfolio is 81.9%, with 16.8% of loans exceeding a 100% CLTV ratio.

The rated notes benefit from credit enhancement provided by subordination and – excluding the Class G notes – the non-liquidity reserve, which can clear any principal deficiency ledger (PDL) debits in the revenue priority of payments. Initially, the Class A notes will have 27.6% of credit enhancement. The liquidity reserve is additionally available to cover interest shortfalls on the Class A notes.

The general reserve will be funded from the issuance of the Class R notes and can be applied to cover shortfalls in senior fees, pay interest on Classes A to F and clear PDL balances on the sub-ledgers of Classes A to F. The general reserve has a balance equal to 2% of the initial balance of the Class A to Z notes minus the required balance of the liquidity reserve. The liquidity reserve is available to support senior fees and interest shortfalls on the Class A notes, following the application of revenue and the general reserve. While the Class A notes are outstanding, the liquidity reserve will have a required balance equal to 2% of the outstanding balance of the Class A notes, subject to a floor of 1% of the initial balance of the Class A notes. As this liquidity reserve amortises, the excess amounts will become part of the revenue available funds and allow the general reserve to increase in size.

Principal funds can be diverted to pay shortfalls in senior fees and unpaid interest due on the Class A to F notes, which remain after applying revenue collections and exhausting both reserve funds. Principal receipts can only be used to pay interest shortfalls if the corresponding note has a PDL balance less than 10% of its outstanding balance. This does not apply to the senior-most note where principal can always be used to cover interest shortfalls.

If principal funds are diverted to pay revenue liabilities, including replenishing the liquidity reserve, the amount will subsequently be debited to the PDL. The PDL comprises eight sub-ledgers that will track principal used to pay interest, as well as realised losses, in a reverse-sequential order that begins with the Class Z sub-ledger.

On the interest payment date in April 2022, the coupon due on the notes will step up and the notes may be optionally called. The notes must be redeemed at par plus pay any accrued interest.

Monthly mortgage receipts are deposited into bankruptcy remote Stichting collection foundation accounts at ABN AMRO Bank N.V (ABN AMRO), mostly via direct debit. The funds credited to the collection accounts are swept monthly into the account bank. Commingling risk is considered mitigated by the use of a Stichting and the regular sweep of funds. The collection account bank is subject to a DBRS investment-grade downgrade trigger. ABN AMRO is also the account bank for the transaction. DBRS’s account bank reference rating, one notch below its Critical Obligations Rating of AA (low), is consistent with the minimum institution rating given the ratings assigned to the Class A notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

In its cash flow assessment, DBRS applied two 8-year default timing curves (front-ended and back-ended), prepayment curves (low, medium and high assumptions) and interest rate stresses as per the DBRS “Interest Rate Stresses for European Structured Finance Transactions” methodology. The cash flows were analysed using Intex DealMaker.

DBRS based its ratings primarily on the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage loan portfolio and the ability of the parties to perform servicing and collection activities.
-- DBRS calculated the portfolio default rate (PD), loss given default (LGD) and expected loss assumptions on the mortgage loan portfolio.
-- The transaction’s ability to withstand stressed cash flows assumptions and repay investors according to the terms of the transaction documents.
-- The consistency of the transaction’s legal structure with the DBRS “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the issuer.
-- The relevant counterparties, as rated by DBRS, are appropriately in line with DBRS legal criteria to mitigate the risk of counterparty default or insolvency.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the ratings are the “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 the ratings include Morgan Stanley & co. International plc.

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 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.

The ratings concern a newly 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 these ratings, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating – the “base case”:

-- DBRS expected a base case PD and LGD for the portfolio 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 receivables are 17.7% and 31.7%, respectively.

For example, if the LGD increases by 50%, the rating of the Class A notes would be expected to decrease to A (high) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A notes would be expected to decrease to A (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to decrease to BBB (low) (sf), ceteris paribus.

Class A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of A (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 (low) (sf)

Class B notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

Class C notes risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)

Class D risk sensitivity:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD, expected rating of BB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)

Class E notes risk sensitivity:
-- 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in LGD, expected rating of B (sf)
-- 25% increase in PD, expected rating of B (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD, expected rating of B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CCC (sf)

Class F notes risk sensitivity:
-- 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD, expected rating of CCC (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 25% increase in PD and 50% increase in LGD, not rated
-- 50% increase in PD, expected rating of CCC (sf)
-- 50% increase in PD and 25% increase in LGD, not rated
-- 50% increase in PD and 50% increase in LGD, not rated

Class G notes risk sensitivity:
-- 25% increase in LGD, not rated
-- 50% increase in LGD, not rated
-- 25% increase in PD, not rated
-- 25% increase in PD and 25% increase in LGD, not rated
-- 25% increase in PD and 50% increase in LGD, not rated
-- 50% increase in PD, not rated
-- 50% increase in PD and 25% increase in LGD, not rated
-- 50% increase in PD and 50% increase in LGD, not rated

This rating is Under Review with Positive Implications designation. 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: Matt Albin, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 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
-- 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.