DBRS Morningstar Finalises Provisional Ratings on Tulip Mortgage Funding 2019-1 B.V.

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following notes issued by Tulip Mortgage Funding 2019-1 B.V. (TMF 2019-1 or the Issuer):

-- Class A notes at AAA (sf)
-- Class B notes at AA (sf)
-- Class C notes at A (sf)

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 2056. The ratings on the Class B and Class C notes address the ultimate payment of interest and repayment of principal by the legal final maturity date. Once the Class A notes are fully redeemed, the Class B notes will be rated for timely payment of interest. An increased margin on all the rated notes is payable from the step-up date in October 2024. DBRS Morningstar does not rate the subordinated step-up margin. DBRS Morningstar does not rate the Class Z1, Z2, X or R notes. DBRS Morningstar assigned the Class C notes a final rating of A (sf), which is different from the provisional rating of A (low) (sf) because of lower final spreads on the notes, which has had a net positive impact.

The proceeds of the notes will be used to fund the purchase of Dutch residential mortgage loans secured by properties located in the Kingdom of the Netherlands (the Netherlands; rated AAA with a Stable trend by DBRS Morningstar). Additionally, TMF 2019-1 issued Class Z2 notes to fully fund the reserve fund to 1.75% of the collateralised notes. The reserve fund is available for senior fees and interest shortfalls 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 and Class C notes is sized at 9.8%, 7.5% and 5.0%, respectively. This credit enhancement is provided in the form of overcollateralisation by the portfolio and a partially amortising reserve fund.

DBRS Morningstar was provided with information on the provisional mortgage portfolio as of 30 September 2019, which stated that the portfolio consisted of 1,920 loans with an aggregate principal balance of EUR 391.6 million extended to 1,131 borrowers. The mortgage loans are originated by Tulpenhuis 1 B.V. with Tulp Hypotheken appointed as sub-servicer. Tulp Hypotheken has appointed Starter Nederland B.V. and Hypocasso B.V. as delegated sub-servicers for servicing and special servicing, respectively.

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 five years to 30 years; most of the loan parts (66.1%) reset after 20 years, with the next-most-common reset frequency being 30 years (27.2%). All mortgage loans are performing as of the cut-off date.

The notes pay a floating interest rate indexed to three-month Euribor plus a margin. To mitigate the interest rate risk that arises due to this mismatch, the Issuer will enter into a swap agreement with BNP Paribas SA (the swap counterparty; rated AA (low) with a Stable trend by DBRS Morningstar). 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 is currently at 1.2%.

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 Z1 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 swap rate at reset, the margin of the borrower and additional credit risk spread based on the loan-to-value. The borrower’s interest rate payable is floored at a minimum of 1% above the swap rate.

The structure includes a PDL comprising four sub-ledgers (Class A PDL to Class Z1 PDL) that provisions for realised losses as well as the use of any principal receipts applied to meet any shortfall in the payment of senior fees and interest on the senior-most class of notes outstanding. The losses will be allocated starting from Class Z1 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 Z1 PDL.

The Issuer account bank is ABN AMRO Bank N.V (rated A (high) with a Stable trend by DBRS Morningstar). Based on the DBRS Morningstar rating of the account bank, the downgrade provisions outlined in the transaction documents and structural mitigants, DBRS Morningstar considers the risk arising from exposure to the account bank to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The ratings are based on DBRS Morningstar’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 Morningstar calculated probability of default (PD), loss given default (LGD) and expected loss outputs on the mortgage portfolio, which are used as inputs into its cash flow tool. The mortgage portfolio was analysed in accordance with DBRS Morningstar’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 and Class C notes according to the terms of the transaction documents. The transaction structure was analysed using Intex DealMaker.
-- DBRS Morningstar’s sovereign ratings on the Netherlands of AAA and R-1(high) with Stable trends as of the date of this press release.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’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 the “European RMBS Insight Methodology” and the “European RMBS Insight: Dutch Addendum”.

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

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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include Tulpenhuis 1 B.V. and NatWest Markets Plc (the arranger).

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

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

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

DBRS Morningstar 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 Morningstar ratings on this financial instrument.

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

Information regarding DBRS Morningstar 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 Morningstar considered the following stress scenarios, as compared to the parameters used to determine the ratings (the Base Case).

DBRS Morningstar 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, respectively, for each tranche are as follows:

-- Class A at AAA (sf): 18.7% and 37.7%
-- Class B at AA (sf): 15.5% and 32.2%
-- Class C at A (sf): 11.9% and 27.8%

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

Class A Notes Risk Sensitivity:

-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (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 A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

Class B Notes Risk Sensitivity:

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

Class C Notes Risk Sensitivity:

-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (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 BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

For further information on DBRS Morningstar 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 U.S. regulations only.

Lead Analyst: Rehanna Sameja, Senior Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 25 October 2019

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered in England and Wales: 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
-- Derivative Criteria for European Structured 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

A description of how DBRS Morningstar 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 [email protected].