DBRS Finalises Provisional Ratings on Cartesian Residential Mortgages 4 S.A.

DBRS Ratings GmbH (DBRS) finalised its provisional ratings on the notes issued by Cartesian Residential Mortgages 4 S.A. (Cartesian 4 or the Issuer):

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

The Issuer is a securitisation collateralised by a portfolio of prime Dutch residential mortgage loans granted by Venn Hypotheken B.V. (Venn Hypo or the Originator) in the Netherlands. All of the loans in the portfolio are secured by a first-ranking mortgage.

The ratings assigned to the Class A and Class B Notes address the timely payment of interest and ultimate payment of principal on or before the final maturity date. The ratings assigned to the Class C and Class D Notes address the ultimate payment of interest and principal. An increased margin on the rated notes is payable from the step-up date in November 2024. Such additional interest amounts are payable at a subordinated level in the revenue waterfall and are not rated by DBRS.

The proceeds of the Class A to Class E Notes were used to fund the purchase of prime Dutch residential mortgage loans secured over properties located in the Netherlands. Additionally, Cartesian 4 issued Class S notes to fund the reserve fund that will build up 2% credit enhancement. The reserve fund is available to cover initial costs, expenses and interest shortfall on the rated notes. If there is further interest shortfall on the senior-most notes, it will be covered from the use of principal receipts.

The initial credit enhancement on the Class A, Class B, Class C and Class D notes is sized at 11.0%, 8.75%, 6.5% and 5.0%, respectively. This credit enhancement is provided in the form of overcollateralisation by the portfolio and a partially amortising reserve fund.

DBRS was provided with information on the closing mortgage portfolio consisting of loans that are currently in the Originator’s portfolio and separately an offers pipeline portfolio as of 30 June 2019. Subject to conditions, a proportion of the latter set of loans may be sold by the seller to the Issuer during the prefunding period.

The closing portfolio consists of 2,293 loan parts (equivalent to 919 loans) with an aggregate principal balance of EUR 335.5 million extended to 919 borrowers. The aggregated balance of the current offers pipeline stands at EUR 88.3 million and consists of 716 loan parts (equivalent to 315 loans) extended to 315 borrowers.

The Issuer used EUR 335.5 million of the notes’ proceeds to purchase the closing portfolio. The Issuer will use the remaining EUR 44.5 million of the notes’ proceeds to purchase new mortgage loans (from the offers pipeline) before the first notes’ payment date. At closing, the Issuer deposited EUR 44.5 million from the issuance of the notes into the prefunded account.

The mortgage loans in the asset portfolio are all classified as owner-occupied and are secured by a first-ranking mortgage right. The entire portfolio consists of fixed-rate mortgage loans with different reset intervals, ranging from 12 months to 30 years; most of the loans reset after ten, 20 or 30 years. Furthermore, 33.9% of the portfolio consists of interest-only loan parts, and 13.8% of the loans were granted to self-employed borrowers. All mortgage loans are performing as of the cut-off date of 30 June 2019.

The notes pay a floating-rate interest rate indexed to three-month Euribor plus a margin. To mitigate the interest rate risk that arises due to this mismatch, the Issuer has entered into a swap agreement with BNP Paribas SA (the swap counterparty; rated AA (low) with a Stable trend by DBRS). The Issuer will pay the swap counterparty an amount equal to the swap notional amount multiplied by the swap rate plus the prepayment penalties received by the Issuer. The swap counterparty will pay the Issuer the swap notional amount multiplied by the three-month Euribor. The weighted-average portfolio swap rate is currently at 1.234%.

If the portfolio’s constant prepayment rate falls outside the 3% to 15% range, the Issuer may have to make a subordinated payment on the swap, as a NAMS rebalancing payment. This payment is deferrable and junior in the capital structure but senior to the Class E principal deficiency ledger (PDL).

Once the loan reaches the reset period, the borrowers will be offered a mortgage rate that takes into account the interest rate policy. The interest rate policy considers the market swap rate (hedging costs) at reset, margin of the borrower and additional credit risk spread based on the loan-to-value ratio. The borrower’s final interest rate has an absolute minimum floor of 1%.

The structure includes a PDL comprising five sub-ledgers (Class A PDL to Class E 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 E PDL and then to sub-ledgers of each class of notes in reverse sequential order. The junior payment on the swap could lower the rate of cures on the Class E PDL.

The Issuer account bank is Citibank Europe plc, Luxembourg branch. 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 ratings are based on DBRS’s review of the following analytical considerations:

-- The 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: Dutch Addendum”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C and Class D 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 consistency of the transaction’s legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and presence of legal opinions addressing the assignment of the assets to the Issuer.

Notes:
All figures are in euros unless otherwise noted.

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

DBRS has applied the principal methodologies 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: 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.

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 newly issued financial instrument. These are the first DBRS ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

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 20.2% and LGD of 38%, 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 18.3% and LGD of 34.9%, corresponding to the AA (high) 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 13.3% and LGD of 28.3%, corresponding to the A 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 9.8% and LGD of 25.1%, corresponding to the BBB (high) 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 (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 (low) (sf).
-- A hypothetical increase of the base case PD 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 LGD by 25%, 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 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class B Notes to A (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 B Notes to A (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 (low) (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 (low) (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 BBB (high) (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 (low) (sf).
-- A hypothetical increase of the base case PD 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 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 LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class C Notes to BBB (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 C Notes to BBB (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 C Notes to BBB (low) (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 (low) (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 BB (high) (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 (low) (sf).
-- A hypothetical increase of the base case PD 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 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 LGD by 50%, ceteris paribus, would lead to a downgrade of the ratings of the Class D Notes to BB (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 D Notes to BB (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 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).

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 GmbH are subject to EU and US regulations only.

Lead Analyst: Hrishikesh Oturkar, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 27 June 2019

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Geschäftsführer: Detlef Scholz
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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.