DBRS Morningstar Assigns Provisional Ratings to Cartesian Residential Mortgages 6 S.A.

DBRS Ratings GmbH (DBRS Morningstar) assigned the following provisional ratings to the notes to be issued by Cartesian Residential Mortgages 6 S.A. (Cartesian 6 or the Issuer):

-- Class A Notes rated AAA (sf)
-- Class B Notes rated AA (sf)
-- Class C Notes rated A (high) (sf)

The transaction is a securitisation collateralised by a portfolio of prime Dutch residential mortgage loans granted by Venn Hypotheken B.V. (the Originator) in the Netherlands. All of the loans in the portfolio are secured by a first-ranking mortgage right.

The provisional rating assigned to the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date in November 2056. The provisional rating assigned to the Class B Notes addresses the timely payment of interest when most senior and the ultimate payment of principal on or before the final maturity date. The provisional rating assigned to the Class C Notes addresses the ultimate payment of interest and principal on or before the final maturity date. An increased margin on the Class A, B, and C Notes (the Rated Notes) is payable from the step-up date falling in November 2025. Such additional interest amounts are payable at a subordinated level in the revenue waterfall and are not rated by DBRS Morningstar.

The proceeds of the Class A to Class D Notes will be used to fund the purchase of a portfolio of prime Dutch residential mortgage loans secured over properties in the Netherlands. Additionally, Cartesian 6 will issue the Class S Notes to fund the reserve fund, which will provide credit enhancement of 1.6% at closing. The reserve fund is available to cover senior costs, expenses, and interest shortfall on the Rated Notes. If there is a further interest shortfall on the senior-most notes, it will be covered with the use of principal receipts.

The initial credit enhancement on the Class A, Class B, Class C, and Class D Notes is sized at 10.2%, 7.2%, 5.0%, and 1.6%, respectively. This credit enhancement is provided in the form of overcollateralisation by the portfolio and a partially amortising reserve fund.

DBRS Morningstar was provided with information on a provisional mortgage portfolio consisting of loans that are currently in the Originator’s portfolio and an offers pipeline as of 1 April 2021. Like Cartesian Residential Mortgages 4 S.A., Cartesian 6 will have prefunding period. At closing, DBRS Morningstar will also receive detailed information on the entire universe of the loans in the offers pipeline that the seller may be sell to the Issuer during the prefunding period.

The currently funded loan portfolio consists of 1,893 loan parts (equivalent to 630 loans) with an aggregate principal balance of EUR 243.9 million. Part of the currently funded pool consists of loan offers accepted by the borrowers but still awaiting first payment; this proportion consists of 128 loan parts (equivalent to 43 loans) with an aggregate principal balance of EUR 18.0 million.

The aggregate balance of the current offers pipeline stands at EUR 130.5 million and consists of 884 loan parts (equivalent to 312 loans).

The Issuer will use part of the proceeds from the notes to purchase new mortgage loans from the offers pipeline before the first notes payment date. The total amount of mortgage loans that the Issuer can purchase during the prefunding period is expected to range from EUR 118 million to EUR 123 million, which would be the balance of the prefunded account. At closing, the Issuer will deposit part of the proceeds from the issuance of the notes into the prefunded account.

The mortgage loans in the asset portfolio are all classified as owner occupied and are secured by a first-ranking mortgage right. The entire portfolio consists of fixed-rate mortgage loans with different reset intervals, ranging from 12 months to 30 years. Most of the loans reset after 10, 20, or 30 years. Furthermore, 38.6% of the combined portfolio consists of interest-only loan parts and 8.4% of the loans were granted to self-employed borrowers. All mortgage loans were performing as of the cut-off date.

The notes pay a floating interest rate indexed to three-month Euribor plus a margin. To mitigate the interest rate risk that arises due to this mismatch, the Issuer will enter into a swap agreement with BNP Paribas SA (the Swap Counterparty; Long Term Critical Obligations Rating (COR) of AA (high) with a Stable trend by DBRS Morningstar). The Issuer will pay the Swap Counterparty an amount equal to the swap notional amount multiplied by the swap rate plus the prepayment penalties received by the Issuer. The Swap Counterparty will pay the Issuer the swap notional amount multiplied by three-month Euribor.

If the portfolio’s constant prepayment rate (CPR) falls outside a particular CPR range, the Issuer may have to make a subordinated payment on the swap as a NAMS rebalancing payment. This payment is deferable and junior in the capital structure, but senior to the Class D principal deficiency ledger (PDL).

Once the loan reaches the end of 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 market swap rate (hedging costs) on the reset date, a variable margin, and an additional credit risk spread based on the loan-to-value ratio. Following a revised interest rate policy letter during the Cartesian Residential Mortgages 5 S.A. transaction, the absolute floor on the mortgage rate of 1% was removed, but the minimum margin of 1% over the market swap rate persisted.

The structure includes a PDL comprising four subledgers (Class A PDL to Class D PDL) that provision for realised losses as well as the use of any principal receipts applied to meet any shortfall in payment of senior fees and interest on the most senior class of notes outstanding. The losses will be allocated starting from Class D PDL and then to the 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 D PDL.

The Issuer account bank is Citibank Europe plc, Luxembourg Branch. Based on the DBRS Morningstar public rating on the account bank, the downgrade provisions outlined in the transaction documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Rated Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Based on DBRS Morningstar’s Long Term COR of AA (high) on BNP Paribas SA, the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to BNP Paribas SA to be consistent with the ratings assigned to the Rated Notes, as described in DBRS Morningstar's “Derivative Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction capital structure and form 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 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”.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Rated Notes according to the terms of the transaction documents. DBRS Morningstar analysed the transaction structure using Intex DealMaker.
-- DBRS Morningstar’s sovereign rating on the Kingdom of the Netherlands at AAA/R-1 (high) with Stable trends 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 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 payment holidays and delinquencies may arise in the coming months for many residential mortgage-backed security (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 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 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.

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.

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 methodologies applicable to the ratings are “European RMBS Insight Methodology” (2 April 2020) and the “European RMBS Insight: Dutch Addendum” (4 May 2021).

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.

DBRS Morningstar has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal 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 loan-level data as of 1 April 2021 provided by ARA Venn. DBRS Morningstar was also provided with historical performance data (delinquencies one to three months, delinquencies three to six months, as well as delinquencies six months + and prepayment data) from April 2016 to January 2021 and investor reports for Cartesian Residential Mortgages 4 S.A. and Cartesian Residential Mortgages 5 S.A. covering November 2019 to January 2021 from Intertrust.

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 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 these financial instruments.

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, a PD of 18.8% and LGD of 38.1%, 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 15.6% and LGD of 32.4%, corresponding to the AA (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 12.8% and LGD of 28.4%, corresponding to the A (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Risk sensitivity when the PD is stressed by 25.0%:
-- The Class A Notes rating is AA (high) (sf)
-- The Class B Notes rating is AA (low) (high) (sf)
-- The Class C Notes rating is A (low) (sf)

Risk sensitivity when the PD is stressed by 50.0%:
-- The Class A Notes rating is AA (sf)
-- The Class B Notes rating is A (high) (sf)
-- The Class C Notes rating is BBB (high) (sf)

Risk sensitivity when the LGD is stressed by 25.0%:
-- The Class A Notes rating is AA (high) (sf)
-- The Class B Notes rating is AA (low) (sf)
-- The Class C Notes rating is A (low) (sf)

Risk sensitivity when the LGD is stressed by 50.0%:
-- The Class A Notes rating is AA (sf)
-- The Class B Notes rating is A (high) (sf)
-- The Class C Notes rating is BBB (high) (sf)

Risk sensitivity when the PD and LGD are stressed by 25.0%:
-- The Class A Notes rating is AA (sf)
-- The Class B Notes rating is A (high) (sf)
-- The Class C Notes rating is BBB (high) (sf)

Risk sensitivity when the PD is stressed by 50.0% and LGD is stressed by 25.0%:
-- The Class A Notes rating is A (high) (sf)
-- The Class B Notes rating is A (low) (sf)
-- The Class C Notes rating is BBB (low) (sf)

Risk sensitivity when the PD is stressed by 25.0% and LGD is stressed by 50.0%:
-- The Class A Notes rating is A (high) (sf)
-- The Class B Notes rating is A (low) (sf)
-- The Class C Notes rating is BBB (sf)

Risk sensitivity when the PD is stressed by 50.0% and LGD is stressed by 50.0%:
-- The Class A Notes rating is A (high) (sf)
-- The Class B Notes rating is BBB (high) (sf)
-- The Class C Notes rating is 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. 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: Hrishikesh Oturkar, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 21 May 2021

DBRS Ratings GmbH
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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 v5.1.0.1., https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology.
-- European RMBS Insight: Dutch Addendum (4 May 2021), https://www.dbrsmorningstar.com/research/377934/european-rmbs-insight-dutch-addendum.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021),
https://www.dbrsmorningstar.com/research/376314/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 (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].