DBRS Morningstar Finalises Provisional Ratings on Tulip Mortgage Funding 2020-1 B.V.

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by Tulip Mortgage Funding 2020-1 B.V. (TMF 2020-1 or the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)

The rating assigned to the Class A Notes addresses the timely payment of interest and the ultimate payment of principal by the legal maturity date. The rating assigned to the Class B Notes addresses the timely payment of interest once most senior and the ultimate payment of principal by the legal maturity date. The rating assigned to the Class C Notes addresses the ultimate payment of interest and ultimate repayment of principal by the legal maturity date. An increased margin on all the rated notes is payable from the step-up date falling in October 2024. DBRS Morningstar does not rate the subordinated step-up margin or the Class Z1, Class Z2, Class X, or Class R notes.

TMF 2020-1 is a bankruptcy-remote special-purpose vehicle incorporated in the Netherlands. The Issuer issued four collateralised tranches (the Class A to Class Z1 notes) to finance the purchase of Dutch residential mortgage loans secured over first-lien, owner-occupied properties located in the Netherlands. Additionally, TMF 2020-1 issued the noncollateralised Class Z2 notes to fully fund the reserve fund to 1.6% of the outstanding balance of the Class A, Class B, Class C, and Class Z1 notes on the closing date with a floor of 80% of the initial amount.

The reserve fund is amortising in line with the notes and is further split into a senior reserve (Target 1), which offers liquidity support to the Class A and Class B notes and a junior reserve (Target 2) amount that offers credit support. The reserve fund is topped up to Target 1 after payment of interest on the Class B Notes, offering senior note liquidity support. Replenishment of the reserve fund up to Target 2 follows after payment of the Class C principal deficiency ledger (PDL). Once the Class A and Class B notes have been redeemed in full, the reserve fund Target 1 is set to zero, and once the rated notes have been redeemed in full, the Target 2 ledger will also be reduced to zero. Any excess amounts of the reserve fund will be part of the available revenue funds.

Credit support is provided in the form of subordination of the notes and a reserve fund. Credit enhancement is 9.9% for the Class A Notes, 7.1% for the Class B Notes, and 5.0% for the Class C Notes.

Tulpenhuis 1 B.V. (the Seller) services and originates the mortgages with Tulp Hypotheken B.V. appointed as subservicer. Tulp Hypotheken has appointed Starter Nederland B.V. and Hypocasso B.V. as delegated subservicers for servicing and special servicing, respectively.

DBRS Morningstar was provided with information on a mortgage portfolio as of 30 October 2020. The portfolio consists of 1,292 loans extended to 610 borrowers with an aggregate principal balance of EUR 224.6 million. The mortgage loans in the asset portfolio are all classified as owner-occupied and are secured by a first-ranking mortgage right. The portfolio contains 15.8% interest-only loans, and 83.4% of the loans were granted to employed borrowers. 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 (61.6%) reset after 20 years, with the next-most-common reset frequency being 30 years (30.7%). As of 30 October 2020, all mortgage loans were performing.

The notes pay a floating interest rate indexed to three-month Euribor plus a margin. To mitigate the interest rate risk that arises because of this mismatch, the Issuer has entered into a swap agreement with BNP Paribas (the swap counterparty). The swap counterparty pays the Issuer the swap notional amount, defined as the performing fixed-rate loans in the portfolio, multiplied by three-month Euribor. The Issuer pays the swap counterparty an amount equal to the swap notional amount multiplied by the swap rate plus the prepayment penalties. The current weighted-average portfolio swap rate is at 0.6%. DBRS Morningstar rates BNP Paribas SA with a Long-Term Critical Obligations Rating (COR) of AA (high) and a Short-Term COR of R-1 (high) with Stable trends. The swap documents reflect DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

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 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 1.12% above the swap rate.

The structure includes a PDL comprising four subledgers (Class A PDL to Class Z1 PDL) that provision 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 subledgers 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., which has a DBRS Morningstar Long-Term Critical Obligations Rating of AA with a Stable trend. 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.

DBRS Morningstar based its ratings on a review of the following analytical considerations:

-- The transaction’s capital structure 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 (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 Morningstar’s “European RMBS Insight: Dutch Addendum” methodology.
-- 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.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as a downgrade, and replacement language in the transaction documents.
-- DBRS Morningstar’s sovereign rating on the Kingdom of the Netherlands at AAA with a Stable trend 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.

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 payment holidays and delinquencies may increase 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. For this transaction, DBRS Morningstar assumed that there was a moderate decline in residential property prices.

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 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 DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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 methodology applicable to the rating is “European RMBS Insight: Dutch Addendum” (13 March 2020).

DBRS Morningstar has applied the principal methodology 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 at: http://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 these ratings include TwentyfourAM and HSBC Bank plc.

DBRS Morningstar was provided with loan-level data as of 30 October 2020 and historical performance data (delinquency data). The delinquency data covers from December 2019 to August 2020. In addition, DBRS Morningstar received historical performance data (dynamic delinquencies, defaults and static defaults, and loss data) on Dutch proxy portfolios. Dynamic proxy delinquency and default data covers from January 2014 to June 2020 and static proxy defaults and losses have been received for the period from 2014 to 2019.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

DBRS Morningstar was supplied with one or more third-party assessments. DBRS Morningstar applied additional cash flow stresses in its 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.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 ratings (the Base Case):

-- In respect of the Class A Notes, a PD of 19.2% and LGD of 38.3%, corresponding to the AAA (sf) 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 14.7% and LGD of 31.7%, corresponding to the AA (low) (sf) 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 10.8% and LGD of 27.2%, corresponding to the A (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, 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, expected rating of AA (low) (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 (low) (sf)

Class B Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD, 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 (high) (sf)

Class C Notes risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD, 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 BB (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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 26 October 2020

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: http://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.
-- 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.
-- 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 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 (30 September 2020),
https://www.dbrsmorningstar.com/research/367603/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: http://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].