DBRS Morningstar Confirms Ratings of Three Essence Transactions

DBRS Ratings Limited (DBRS Morningstar) confirmed its AAA (sf) ratings on the three series of Class A Notes (the Notes) issued by Essence V B.V., Essence VI B.V., and Essence VII B.V. (Essence V, Essence VI, and Essence VII, respectively).

The ratings on the Notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity dates, on the payment dates in December 2063, May 2065, and May 2057, for Essence V, Essence VI, and Essence VII, respectively.

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the April 2020 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables for Essence V, and on a worst-case portfolio for Essence VI and Essence VII;
-- Current available credit enhancement to the Notes to cover the expected losses at the AAA (sf) rating level;
-- No revolving period early termination events have occurred in the case of Essence VI and Essence VII.

The three transactions are securitisations of Dutch prime residential mortgages originated by NIBC Bank N.V. (NIBC) and its subsidiaries. The portfolios are serviced by NIBC, with Stater Nederland B.V., Quion Hypotheekbemiddeling B.V., Quion Hypotheekbegeleiding B.V., and Quion Services B.V. acting as sub-servicers.

In the case of Essence V, the five-year revolving period ended on the payment date in December 2019. Essence VI and Essence VII are still in their seven-year revolving periods, scheduled to terminate on the payment dates in May 2023 and May 2024, respectively. For the Essence VI and Essence VII transactions, the end of the revolving period coincides with a step-up in the coupon (as well as the first optional redemption date). According to a recent amendment executed in November 2019, in the case of Essence V, the step-up coupon date (as well as the first optional redemption date) will fall on the payment date in April 2021.

PORTFOLIO PERFORMANCE
The portfolio of each transaction has generally low delinquency levels. Essence VII exhibits the highest level in all arrears buckets. As of the April 2020 payment date, two to three month arrears represented 0.1% of the outstanding portfolio balance in each transaction. As of April 2020, the 90+ delinquency ratio was 0.1% for Essence V and VI and 0.2% for Essence VII.

The trend in the two to three months arrears and 90+ days arrears has been stable since closing for the three portfolios. DBRS Morningstar noted a recent spike in the one to two months arrears in the Essence VI and Essence VII portfolios, however this bucket remains low below 0.8% in both cases.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
In the case of Essence V, DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions to 5.8% and 10.1% from 10.9% and 8.8%, respectively, to reflect the static amortising portfolio following the end of the revolving period on the December 2019 payment date and adjustments due to the coronavirus environment.

In the case of Essence VI and Essence VII, which are in their revolving period, DBRS Morningstar increased its base case PD and LGD assumptions to 9.3% and 27.0% from 8.7% and 23.7%, respectively, in the case of Essence VI, and to 8.5% and 15.6% from 8.0% and 14.7%, respectively, in the case of Essence VII. The increase in the case of Essence VI and Essence VII reflects adjustments due to the coronavirus environment.

The base case PD and LGD assumptions are the key rating drivers in each of the transactions.

CREDIT ENHANCEMENT
In the three transactions, the credit enhancement to the Notes consists of subordination of the junior Notes and the reserve fund.

As of the April 2020 payment date, the credit enhancement to Notes in the case of Essence V was 8.7%, up from 7.8% at the DBRS Morningstar initial rating.

As of the April 2020 payment date, the credit enhancement to Notes in the case of Essence VI and Essence VII remained at 14.1% and 14.7%, respectively, since the last restructure of the transactions in January 2017 and August 2017, respectively.

Each transaction benefits from a reserve fund, which covers senior fees, interest shortfall, and principal losses on the Notes and a liquidity reserve, which covers senior fees and interest on the Notes. The reserve fund in each transaction is amortising provided that the 90+ delinquency ratio and the cumulative realised losses percentage are below 3% and 2%, respectively. This is the case in the three transactions. The liquidity reserve is also amortising.

In the case of Essence V, the reserve fund and liquidity reserve are both at their target levels of EUR 5.0 million and EUR 2.7 million, respectively. In the case of Essence VI, the reserve fund and liquidity reserve are both at their target levels of EUR 6.3 million and EUR 3.3 million, respectively. In the case of Essence VII, the reserve fund and liquidity reserve are both at their target levels of EUR 4.5 million and EUR 2.3 million, respectively.

Société Générale S.A., Amsterdam Branch; BNP Paribas SA, Netherlands Branch; and ABN AMRO Bank N.V. act as the account bank for Essence V, Essence VI, and Essence VII, respectively. Based on the DBRS Morningstar private ratings of Société Générale S.A., Amsterdam Branch and BNP Paribas SA, Netherlands Branch and the account bank reference rating of ABN AMRO Bank N.V. at AA (low), which is one notch below the DBRS Morningstar public Long-Term Critical Obligations Rating of AA, the downgrade provisions outlined in the each transaction documents, and other mitigating factors inherent in each transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank in each transaction to be consistent with the rating assigned to the Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structures in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many RMBS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 time frame. For details see the following commentaries: https://www.dbrsmorningstar.com/research/359679/global-macroeconomic-scenarios-implications-for-credit-ratings and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information on DBRS Morningstar considerations for European RMBS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360599

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the Essence VI and Essence VII transactions, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating actions.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports provided by NIBC Bank NV (NIBC) and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial rating on Essence V, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

At the time of the initial ratings on Essence VI and Essence VII, 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 purpose 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.

The last rating actions on Essence V, Essence VI, and Essence VII took place on 17 May 2019, when DBRS Morningstar confirmed the rating of the Notes in each transaction.

The lead analyst responsibilities for these transactions have been transferred to Natalia Coman.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the “Base Case”):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool 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 loans are 5.8% and 10.1%, respectively, for Essence V.
-- The base case PD and LGD of the worst-case pool of loans are 9.3% and 27.0%, respectively, for Essence VI, and 8.5% and 15.6%, respectively, for Essence VII.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, for Essence V, if the LGD increases by 50%, the rating of the Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Notes would be expected to fall to AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Notes would be expected to fall to A (high) (sf).

Essence V Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Essence VI Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, 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 BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (sf)

Essence VII Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
https://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: Natalia Coman, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President

Initial Rating Date for Essence V: 27 November 2014
Initial Rating Date for Essence VI: 17 May 2016
Initial Rating Date for Essence VII: 22 May 2017

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Tel. +44 (0) 20 7855 6600

Registered and incorporated under the laws of England and Wales: Company No. 7139960.

The rating methodologies used in the analysis of these transactions can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (22 April 2020) https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v 4.2.1.1 https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: Dutch Addendum (13 March 2020) https://www.dbrsmorningstar.com/research/357926/european-rmbs-insight-dutch-addendum.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019) https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019) https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020) https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020) https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

This press release was amended on 3 June 2020 to add the publication date to a methodology reference.