DBRS Morningstar Assigns AAA (sf) Rating to Essence VIII B.V.

DBRS Ratings Limited (DBRS Morningstar) assigned a AAA (sf) rating to the Class A Notes issued by Essence VIII B.V. (the Issuer). The transaction, which closed on 23 October 2020, is collateralised by a portfolio of Dutch buy-to-let (BTL) mortgage loans sold by Hypinvest B.V. and NIBC Direct Hypotheken B.V. in the Netherlands.

The Issuer issued two tranches of mortgage-backed securities (i.e., the Class A and Class B notes) to finance the purchase of Dutch BTL mortgage loans secured over properties located in the Netherlands. Additionally, the Issuer issued Class C Notes that funded the liquidity reserve and the reserve account.

The rating addresses the timely payment of interest and the Issuer’s obligation to repay principal on the Class A Notes by the Legal Final Maturity Date in October 2058. DBRS Morningstar does not rate the Class B or the Class C notes. The coupon on the Class A notes will be 0.75% until the payment date of October 2027, and 0.94% afterwards.

Credit support to the Class A Notes is expected to be sized at 8.98% and is provided by subordination and an amortising Cash Reserve. The Reserve Fund is expected to be funded at 0.5% of the Class A and Class B notes’ initial balance.

Further liquidity support for the Class A Notes is provided through a Liquidity Reserve, along with a priority of payments allowing principal to be borrowed to support revenue items with a corresponding debit to the appropriate principal deficiency ledger. The Liquidity Reserve is expected to be sized at an amount of EUR 2.3 million, representing 0.4% of the initial balance of the Class A Notes.

As of 31 August 2020, the provisional portfolio consisted of 5,115 loans extended to 2,554 borrowers with an aggregate principal balance of EUR 636.9 million. The weighted-average (WA) seasoning of the portfolio was 1.9 years with a WA residual maturity of 24.35 years. The WA current loan-to-value of the portfolio was 59.4%. All the mortgage loans in the portfolio are classified as BTL loans and are secured by first-lien or first-lien and further ranking mortgages. All of the mortgage loans in the provisional portfolio are fixed-rate loans with future resets, with 71.8% of them following an interest-only repayment. The WA interest rate of the mortgage loans is 3.42% and as of the cut-off date, all mortgage loans were performing.

Until October 2027, 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.

The Issuer account bank is Coöperatieve Rabobank U.A. Based on the account bank’s private ratings and the replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its rating primarily on the following analytical considerations:
-- The transaction’s capital structure, including the form and sufficiency of available credit enhancement and liquidity provisions.
-- 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 the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS Morningstar’s “European RMBS Insight Methodology” and “European RMBS Insight: Dutch Addendum" methodologies.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the Terms and Conditions of the notes. The transaction structure was analysed using Intex Dealmaker.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

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 structured finance transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, additional stresses 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 released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the ratings of DBRS Morningstar-rated RMBS in Europe. For more details please see https://www.dbrsmorningstar.com/research/360599.

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.

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 methodologies applicable to the rating are the “European RMBS Insight Methodology” (2 April 2020) and the “European RMBS Insight: Dutch Addendum” (13 March 2020).

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 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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include historical performance (static and dynamic arrear levels and prepayments rates) as at 1 June 2020 and loan-level data as at 31 August 2020, provided by NIBC.

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 this rating 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar 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, the PD and LGD at the AAA (sf) stress scenario of 27.59% and 29.00%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar concludes the following impact on the Class A Notes:
-- 25% increase of the PD, ceteris paribus, would lead to a rating AAA (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a rating downgrade to AA (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a rating downgrade to AA (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a rating downgrade to A (high) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a rating downgrade to A (high) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a rating downgrade to A (high) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a rating downgrade to A(high) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a rating downgrade to A (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: Rehanna Sameja, Senior Vice President, Credit Ratings
Rating Committee Chair: David Lautier, Senior Vice President, Credit Ratings
Initial Rating Date: 28 October 2020

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

-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v. 4.3.1.0, 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.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- 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.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/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: 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].