DBRS Morningstar Confirms Ratings on Essence VI B.V. and Essence VII B.V.

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) ratings on two series of Class A Notes (the Notes) issued by Essence VI B.V. and Essence VII B.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 May 2065 and May 2057, for 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 2021 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on a potential portfolio migration based on replenishment criteria;
-- 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.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Both 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 subservicers.

Both transactions are still in their seven-year revolving periods, scheduled to terminate on the payment dates in May 2023 and May 2024, respectively. The end of the revolving period coincides with a step-up in the coupon as well as the first optional redemption date.

PORTFOLIO PERFORMANCE
The portfolio in each transaction has generally low delinquency levels. As of the April 2021 payment date, loans two to three month in arrears represented 0.2% and 0.1% of the outstanding portfolio balance for Essence VI and Essence VII, respectively. As of the April 2021 payment date, the 90+ delinquency ratio was 0.1% and 0.3% for Essence VI and Essence VII, respectively.

Payment holidays granted in the context of the coronavirus pandemic were limited on both portfolios. As of the April 2021 payment date, payment holidays were down to 0.4% and 0.0% of the outstanding portfolio balance from 0.9% and 1.5% at last annual review for Essence VI and Essence VII, respectively.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated its base case PD and LGD assumptions to 8.8% and 22.0% from 9.3% and 27.0%, respectively, for Essence VI and to 9.5% and 12.5% from 8.5% and 15.6%, respectively, for Essence VII.

The base case PD and LGD assumptions are based on the potential migration of the current portfolio to the limits prescribed by the replenishment criteria.

CREDIT ENHANCEMENT
In both transactions, the credit enhancement to the Notes consists of subordination of the Class B Notes and the reserve fund.

As of the April 2021 payment date, the credit enhancement to the Notes increased to 14.4% from 13.4% at last annual review for Essence VI. Amortisation of the Notes is allowed in both transactions if the Replenishment Available Amount is not applied toward the purchase of new receivables on a payment date or is reserved for the purchase of new receivables on two consecutive payment dates. In this case, the proceeds are applied toward the redemption of the Class A and Class B Notes in a sequential order. This has been the case for Essence VI since the January 2021 payment date.

For Essence VII, the credit enhancement to the Notes was 14.0% as of the April 2020 payment date, stable since closing.

Each transaction benefits from a (1) reserve fund, which covers senior fees, interest shortfall, and principal losses on the Notes and a (2) 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 loss percentages are lower than 3% and 2%, respectively. This is the case in both transactions. The liquidity reserve is also amortising.

For Essence VI, the reserve fund and liquidity reserve are both at their target levels of EUR 6.1 million and EUR 3.2 million, respectively. For 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.

BNP Paribas SA, Netherlands Branch (BNPNL) and ABN AMRO Bank N.V. (ABN AMRO) act as the account banks for Essence VI and Essence VII, respectively. Based on the DBRS Morningstar private ratings of BNPNL and the account bank reference rating of ABN AMRO 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 continue to 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 these transactions, DBRS Morningstar assessed the liquidity coverage of the available reserves for stressed senior costs and interest on the Notes.

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 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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 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 the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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 these transactions are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transactions, the analysis continues to consider potential portfolio migration based on 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.

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 investor reports provided by NIBC and loan-level data provided by 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 ratings, 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.

The last rating actions on Essence VI and Essence VII took place on 15 May 2020, when DBRS Morningstar confirmed the rating on the Notes at AAA (sf) in each transaction.

The lead analyst responsibilities for these transactions have been transferred to Shalva Beshia.

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 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 worst-case pool of loans are 8.8% and 22.0% for Essence VI, respectively, and 9.5% and 12.5% for Essence VII, respectively.
-- 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 VI, if the LGD increases by 50%, the rating of the Notes would be expected to fall to AA (high) (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 (low) (sf). For example, for Essence VII, 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 VI Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (low) (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 (low) (sf)

Essence VII 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)

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date for Essence VI: 17 May 2016
Initial Rating Date for Essence VII: 22 May 2017

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

-- Master European Structured Finance Surveillance Methodology (8 February 2021), https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology.
-- European RMBS Insight Methodology (2 April 2020), https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: Dutch Addendum (4 May 2021) and European RMBS Insight Model v.5.1.0.1, https://www.dbrsmorningstar.com/research/377934/european-rmbs-insight-dutch-addendum.
-- 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.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021), https://www.dbrsmorningstar.com/research/376314/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].