DBRS Assigns Provisional Ratings to Dutch Property Finance 2020-1 B.V.

DBRS Ratings Limited (DBRS Morningstar) assigned provisional ratings to the notes expected to be issued by Dutch Property Finance 2020-1 B.V. (the Issuer) as follows:

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

The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the Netherlands. The issued notes will be used to fund the purchase of Dutch mortgages receivables originated or acquired by RNHB. Proceeds of the Class G notes will be used to fund the general reserve fund.

RNHB is a buy-to-let and mid-market real estate lending business in the Netherlands. RNHB was formed in 2008 when Rijnlandse Hypotheekbank and Nederlandse Hypotheekbank were merged by their then-parent company, FGH Bank N.V., which in turn was owned by Rabobank. In December 2016, RNHB and its loans were acquired by a constortium of (1) funds managed by CarVal Investors LLC (CarVal) and (2) Arrow Global Group Plc (Arrow, AGG), with CarVal holding the majority interest. The mortgage portfolio will be serviced by Vesting Finance Servicing B.V. with Intertrust Administrative Services B.V. appointed as a replacement servicer facilitator.

As of 30 September 2019, the provisional portfolio consisted of 935 loans with a total portfolio balance (net of construction deposits) of approximately EUR 293.0 million. The weighted-average (WA) seasoning of the portfolio is 4.1 years with a WA remaining term of 3.4 years. The WA current loan-to-value is comparatively low for a Dutch portfolio at 65.0%. The majority of the loans included in the portfolio are fixed with future resets (85.3%) while the notes pay a floating rate of interest. To address this interest rate mismatch, the transaction is structured with a fixed-to-float interest rate swap that swaps the fixed interest rate received from the assets for a three-month Euribor. Approximately 1.2% of the portfolio comprises loans where the borrowers are in arrears (excluding less than one month in arrears).

Until January 2025, the seller has the ability to grant, and the Issuer the obligation to purchase, further advances—subject to the adherence of asset conditions and available principal funds. The transaction documents specify criteria that must be complied with during this period in order for the further advances to be sold to the Issuer. DBRS Morningstar stressed the portfolio in accordance with the asset conditions to assess the portfolio’s worst-case scenario.

Credit enhancement for the Class A notes is calculated as 21.4% and is provided by the subordination of the Class B notes to the Class F notes and the general reserve fund. Credit enhancement for the Class B notes is calculated as 15.7% and is provided by the subordination of the Class C notes to the Class F notes and the general reserve fund. Credit enhancement for the Class C notes is calculated as 11.5% and is provided by the subordination of the Class D notes to the Class F notes and the general reserve fund. Credit enhancement for the Class D notes is calculated as 6.2% and is provided by the subordination of the Class E notes, Class F notes, and the general reserve fund. Credit enhancement for the Class E notes is calculated as 5.0% and is provided by the subordination of the Class F notes and the general reserve fund.

The transaction benefits from a nonamortising cash reserve that is available to support the Class A to Class E notes. The cash reserve will be fully funded at close at 2.0% of the initial balance of the Class A to the Class F notes. Additionally, the notes will be provided with liquidity support from principal receipts, which can be used to cover interest shortfalls on the most-senior class of notes, provided a credit is applied to the principal deficiency ledgers, in reverse sequential order.

The Issuer has entered into a fixed to floating interest rate swap with NatWest Markets plc (rated BBB (high) with a Positive trend by DBRS Morningstar) to mitigate the fixed interest rate risk from the mortgage loans and the three-month Euribor payable on the notes. The swap documents reflect DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

The Issuer Account Bank and Paying Agent is Elavon Financial Services DAC. The DBRS Morningstar private rating of the Issuer Account Bank is consistent with the threshold for the Account Bank outlined in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, given the ratings assigned to the notes.

The rating of the Class A notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date; the ratings of the Class B notes to the Class E notes address the timely payment of interest once they are the most-senior class and the ultimate payment of principal on or before the legal final maturity date. DBRS Morningstar 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 Morningstar calculated portfolio default rates (PDRs), loss given default (LGD), and expected loss (EL) outputs on the mortgage loan portfolio.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the notes according to the terms of the transaction documents. The transaction cash flows were analysed using PDRs and LGD outputs provided by the European RMBS Insight Model. 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 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 “European RMBS Insight Methodology”, “European RMBS Insight: Dutch Addendum”, and “Rating European Consumer and Commercial Asset-Backed Securitisations”.

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

An asset and a cash flow analysis were both conducted. Due to the inclusion of further advances in the transaction, the analysis is based on the worst-case asset conditions set forth in the transaction legal documents.

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 CarVal Investors LLC, RNHB B.V., HSBC Bank plc, and their agents.

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

DBRS Morningstar was not supplied with third party assessments.

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 rated financial instrument. These are the first DBRS ratings on this financial instrument.

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 the rating, DBRS considered in addition to its base case, further stress scenarios for its main rating parametes PDRs and LGD in its cash flow analysis. The additional stresses assume a 25% and 50% increase in both the PDRs and LGD assumptions for each series of notes.

The following scenarios constitute the parameters used to determing the ratings (the Base Case):

-- In respect of the Class A notes, the PDR and LGD at the AAA (sf) stress scenario of 37.7% and 43.8%, respectively;
-- In respect of the Class B notes, the PDR and LGD at the AA (sf) stress scenario of 31.6% and 39.3%, respectively;
-- In respect of the Class C notes, the PDR and LGD at the A (low) (sf) stress scenario of 24.8% and 27.8%, respectively;
-- In respect of the Class D notes, the PDR and LGD at the BBB (low) (sf) stress scenario of 19.1% and 15.9%, respectively;
-- In respect of the Class E notes, the PDR and LGD at the BB (high) (sf) stress scenario of 14.8% and 13.3%, respectively.

DBRS Morningstar concludes the following impact on the Class A notes:
-- 25% increase of the PDR, ceteris paribus would not lead to a downgrade to AA (high) (sf);
-- 50% increase of the PDR, ceteris paribus would lead to a downgrade to AA (sf);
-- 25% increase of the LGD, ceteris paribus would not lead to a downgrade to AA (high) (sf);
-- 50% increase of the LGD, ceteris paribus would lead to a downgrade to AA (sf);
-- 25% increase of the PDR and 25% increase of the LGD, ceteris paribus would lead to a downgrade to AA (low) (sf);
-- 50% increase of the PDR and 25% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf);
-- 25% increase of the PDR and 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (high) (sf);
-- 50% increase of the PDR and 50% increase of the LGD, ceteris paribus would lead to a downgrade to A (low) (sf).

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

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

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

DBRS Morningstar concludes the following impact on the Class E notes:
-- 25% increase of the PDR, ceteris paribus would lead to a downgrade to BB (sf);
-- 50% increase of the PDR, ceteris paribus would lead to a downgrade to BB (low) (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 PDR and 25% increase of the LGD, ceteris paribus would lead to a downgrade to BB (low) (sf);
-- 50% increase of the PDR and 25% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf);
-- 25% increase of the PDR and 50% increase of the LGD, ceteris paribus would lead to a downgrade to B (high) (sf);
-- 50% increase of the PDR and 50% increase of the LGD, ceteris paribus would lead to a downgrade to 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: Rehanna Sameja, Senior Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 8 January 2020

DBRS Ratings Limited
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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
-- Rating European and Commercial Asset-Backed Securitisations
-- 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].