DBRS Morningstar Assigns Provisional Ratings to Dutch Property Finance 2021-2 B.V.

DBRS Ratings GmbH (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Dutch Property Finance 2021-2 B.V. (the Issuer):

-- Class A notes at AAA (sf)
-- Class B notes at AA (high) (sf)
-- Class C notes at A (sf)
-- Class D notes at BBB (sf)

The Class E, F, X and R notes also expected to be issued in the transaction are not rated by DBRS Morningstar.

The provisional rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal by the legal final maturity date in April 2059. The provisional ratings on the Class B, Class C, and Class D notes address the timely payment of interest when most senior and the ultimate payment of principal by the legal final maturity in April 2059.

The Issuer is a bankruptcy-remote special-purpose vehicle incorporated in the Netherlands. The Issuer will use the issued notes to fund the purchase of Dutch mortgage receivables originated or acquired by RNHB B.V. (RNHB or the Seller). The Issuer will use proceeds from the Class F notes to fund the general reserve fund.

The Seller is a buy-to-let and midmarket real estate lending business in the Netherlands. RNHB was formed in 2008 when Rijnlandse Hypotheekbank and Nederlandse Hypotheekbank were merged by their then-parent company, FGH Bank N.V., which in turn was owned by Rabobank. In December 2016, the RNHB business and loan portfolio were acquired by a consortium of (1) funds managed by CarVal Investors L.P. (CarVal) and (2) Arrow Global Group Plc, with CarVal holding the majority interest. The mortgage portfolio will be serviced by Vesting Finance Servicing B.V. with Intertrust Administrative Services B.V. appointed as a replacement servicer facilitator.

Furthermore, RNHB has acquired portfolios, including acquired trident portfolio, in June 2021. The portfolio was previously originated by Achmea B.V. through its specialised real estate lending arm, Syntrus Achmea Real Estate & Finance.

RATING RATIONALE
As of 30 June 2021, the provisional portfolio consisted of 1,403 loans with a total portfolio balance (net of construction deposits) of approximately EUR 475.5 million. The weighted-average (WA) seasoning of the portfolio is 3.2 years with a WA remaining term of 6.1 years. The WA current loan-to-value ratio is comparatively low for a Dutch portfolio at 60.2%. Nearly all of the loans in the portfolio are fixed with future resets (96.3%) while the notes pay a floating rate of interest. To address this interest rate mismatch, the transaction is structured with a fixed-to-float interest rate swap that swaps the fixed interest rate received from the assets for three-month Euribor. There are no loans where the borrowers are in arrears for longer than three months.

Until the first optional redemption date in April 2026, the Seller has the ability to grant, and the Issuer the obligation to purchase, further advances subject to their adherence to asset conditions and available principal funds. The transaction documents specify criteria that must be complied with during this period 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.

DBRS Morningstar calculated credit enhancement for the Class A notes at 18.0%, provided by the subordination of the Class B to Class E notes and the general reserve fund. Credit enhancement for the Class B notes will be 13.9%, provided by the subordination of the Class C to Class E notes and the general reserve fund. Credit enhancement for the Class C notes will be 9.5%, provided by the subordination of the Class D to Class E notes and the general reserve fund. Credit enhancement for the Class D notes will be 5.0%, provided by the subordination of the Class E notes and the general reserve fund.

The transaction benefits from a nonamortising cash reserve that is available to support the Class A to Class D notes. The cash reserve will be fully funded at closing through issuance of the Class F notes and will be 2.0% of the initial balance of the Class A to Class E notes. Additionally, the notes will be provided with liquidity support from principal receipts, which can be used to cover interest shortfalls on the most-senior class of notes, provided that a credit is applied to the principal deficiency ledgers in reverse-sequential order.

The Issuer has entered into a fixed-to-floating balanced-guaranteed swap with NatWest Markets N.V. (rated BBB (high) with a Positive trend by DBRS Morningstar) to mitigate the fixed interest rate risk from the mortgage loans and the three-month Euribor payable on the notes. The notional of the swap is linked to the performing balance (less than 180 days in arrears) of the assets. The Issuer will pay a fixed swap rate and receives three-month Euribor in return. The Seller also covenants that, on an average basis, the fixed-rate mortgage reset rate will, at minimum, equal the swap rate plus 2.75%. The swap documents reflect DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

The Issuer Account Bank and Paying Agent is Elavon Financial Services DAC. The DBRS Morningstar private rating on the Issuer Account Bank is consistent with the threshold for the Account Bank as outlined in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, given the ratings assigned to the notes.

DBRS Morningstar based its ratings primarily on the following:
-- The transaction capital structure, form, and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage loan portfolio and the ability of the servicer to perform collection activities. DBRS Morningstar calculated portfolio default rates (PDs), loss given default (LGD), and expected loss (EL) outputs on the mortgage loan portfolio.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the notes according to the terms of the transaction documents. DBRS Morningstar analysed the transaction cash flows using PDs and LGD outputs provided by DBRS Morningstar’s European RMBS Insight Model. DBRS Morningstar analysed transaction cash flows using Intex DealMaker.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the notes.
-- 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 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 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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-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 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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” (3 June 2021), “European RMBS Insight: Dutch Addendum” (4 May 2021) and “European CMBS Rating and Surveillance Methodology” (26 February 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/381451/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include CarVal Investors L.P., RNHB, HSBC Bank plc, and their agents. DBRS Morningstar was provided with loan-level data as of 30 June 2021 and historical performance data (delinquencies one to three months, delinquencies three+ months, constant default, and prepayment rates) from August 2011 to June 2021.

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

DBRS Morningstar was not 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 expected-to-be-issued financial instruments. 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 ratings, 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 PDR of 34.4% and LGD of 40.8%, 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 PDR of 31.76% and LGD of 37.9%, corresponding to the AA (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C Notes, a PDR of 26.6% and LGD of 27.7%, corresponding to the A (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D Notes, a PDR of 20.6% and LGD of 15.8%, corresponding to the BBB (sf) rating scenario, was stressed assuming a 25% and 50% increase in 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 downgrade to AA (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (high) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (high) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (high) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (sf).

DBRS Morningstar concludes the following impact on the Class B notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to A (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to A (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (high) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (sf).

DBRS Morningstar concludes the following impact on the Class C notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to BBB (high) (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (sf).

DBRS Morningstar concludes the following impact on the Class D notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to BBB (low) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (low) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (high) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BB (low) (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. 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: Ronja Dahmen, Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 3 September 2021

DBRS Ratings GmbH
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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 (3 June 2021) and European RMBS Insight Model v.5.2.0.0.
https://www.dbrsmorningstar.com/research/379557/european-rmbs-insight-methodology.
-- European RMBS Insight: Dutch Addendum (4 May 2021),
https://www.dbrsmorningstar.com/research/377934/european-rmbs-insight-dutch-addendum
-- European CMBS Rating and Surveillance Methodology (26 February 2021),
https://www.dbrsmorningstar.com/research/374399/european-cmbs-rating-and-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/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: 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].