DBRS Morningstar Assigns Provisional Ratings to Bastion 2022-1 NHG B.V.

DBRS Ratings GmbH (DBRS Morningstar) assigned provisional ratings of AAA (sf) to both the Class A1 and Class A2 notes to be issued by Bastion 2022-1 NHG B.V. (the Issuer).

DBRS Morningstar does not rate the Class B or Class C notes also expected to be issued in this transaction.

The provisional rating on the Class A1 notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in May 2060. The provisional rating on the Class A2 notes addresses the ultimate payment of principal by the legal final maturity date.

The provisional ratings are based on information provided to DBRS Morningstar by the Issuer and its agents as of the date of this press release. These ratings will be finalised upon a review of the final version of the transaction documents and of the relevant opinions. If the information therein were substantially different, DBRS Morningstar may assign different final ratings to the notes.

The Issuer is expected to issue three tranches of mortgage-backed securities (namely, Class A1, Class A2, and Class B notes) to finance the purchase of Dutch residential mortgage loans secured over properties located in the Netherlands. Additionally, it is expected to issue Class C notes, which are non-collateralised and whose proceeds will be used to fund a reserve fund.

Credit support to the Class A1 notes is expected to be sized at [31.0]% and will be provided by the subordination of the Class A2 and Class B notes and the non-amortising reserve fund. Credit support to the Class A2 notes is expected to be sized at [10.5]% and will be provided by the subordination of the Class B notes and the non-amortising reserve fund. The reserve fund is expected to be funded at [1.0%] of the Class A1, Class A2, and Class B notes’ initial balance.

Further liquidity support for the Class A1 and Class A2 notes will be provided through a cash advance facility, 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 cash advance facility will amortise, with no performance conditions attached. It is expected to be sized at [1.5%] of the Class A1 and Class A2 notes’ outstanding balance with a floor of [1.0%] of the Class A notes’ initial balance. The cash advance facility is a 364-day renewable facility and if it is not renewed it will be drawn by the Issuer.

RATING RATIONALE
As of 31 October 2022, the provisional portfolio consisted of 5,146 loan parts granted to 2,508 borrowers with an aggregate principal balance of EUR 526.5 million. The weighted-average (WA) seasoning of the portfolio was 1.4 years with a WA residual maturity of 27.9 years. The WA loan-to-value of the portfolio was 83.3%. The mortgage loans in the asset portfolio are all classified as owner-occupied and are secured by a first-ranking mortgage right. The provisional portfolio contains 16.7% interest-only loans, and 3.5% of the loans were granted to self-employed borrowers. As of the cut-off date, all mortgage loans were performing.

All loans pay a fixed rate of interest with the most common reset frequencies being 20 and 30 years. In comparison, the Class A notes pay an interest rate linked to three-month Euribor, which resets on a quarterly basis. The Issuer’s interest rate risk exposure is hedged through a total return swap agreement with Coöperatieve Rabobank U.A. Based on its rating and on the collateral posting provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with its “Derivative Criteria for European Structured Finance Transactions” methodology.

Further advances are allowed only until May 2028 and are subject to certain annual quantitative limits. In addition, the sale of further advance receivables is subject to certain conditions, as well as the general pool eligibility criteria, which limits the deterioration of the pool quality. DBRS Morningstar has reviewed these conditions and has considered them in its analysis.

In case further advances are granted beyond these limits, MeDirect (the Seller) has undertaken to repurchase the relevant loans, paying a price that is at least equal to the outstanding principal and accrued interest. If the seller does not comply with this obligation, the Issuer has the option to sell the relevant loans at market value to other investors in the originator platform: in this case the Issuer may suffer a loss (market value shortfall amount), which will result in a debit to the principal deficiency ledger and can be covered via excess spread, if available, as per the transaction priority of payments. The maximum market value shortfall amount is defined in the transaction documents as [3.38%] of the initial pool balance: the loans can't be sold at a loss once the cumulative market value shortfall amount has exceeded this level.

BNG Bank N.V. is the Issuer account bank. 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 its “Legal Criteria for European Structured Finance Transactions” methodology.

HollandWoont (the Originator) serviced and originated the mortgages, with Quion Services B.V. acting as the subservicer.

DBRS Morningstar based its ratings primarily on the following:
-- The transaction capital structure, form, and sufficiency of available credit enhancements 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 PD 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 a downgrade and replacement language in the transaction documents.
-- 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General Considerations

Social (S) Factors
The portfolio is exposed to loans guaranteed by the Dutch mortgage scheme National Mortgage Guarantee (NHG). This scheme supports home ownership in the Netherlands by providing low interest rate loans for the purchase of properties up to EUR 355,000 (January 2022).

100% of the loan parts in the pool are NHG-guaranteed. DBRS Morningstar considered that the presence of NHG loans in the portfolio is a social factor as outlined within the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings”. DBRS Morningstar assumed reduced loss severities for loans backed by an NHG guarantee as outlined in its “European RMBS Insight: Dutch Addendum” methodology available at https://www.dbrsmorningstar.com/research/393357/european-rmbs-insight-dutch-addendum. This is credit positive and has relevant effect on the ratings.

There were no Environmental/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the ratings are “European RMBS Insight Methodology” (28 March 2022) and “European RMBS Insight: Dutch Addendum” (7 March 2022).

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/401817/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include ABN AMRO Bank N.V., Quion, and their agents. DBRS Morningstar was provided with loan-level data as of 31 October 2022 and historical performance data (one- to three-month delinquencies, three-plus months delinquencies, and prepayment rates) from October 2019 to September 2022 and pay-out ratios for NHG loans for the period from 2015 to 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 new 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.

Sensitivity Analysis: 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 A1 and A2 notes, a PD of 22.6% and LGD of 24.8% (which take into consideration the maximum market value shortfall amount), corresponding to the AAA (sf) rating scenario, were stressed assuming a 25% and 50% increase in the PD and LGD.

DBRS Morningstar concludes the following impact on the Class A1 notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf).

DBRS Morningstar concludes the following impact on the Class A2 notes:
-- 25% increase of the PD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AAA (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (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: 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: Lina Mukhitdinova, Senior Analyst
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 23 November 2022

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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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 (28 March 2022) and European RMBS Insight Model v.5.7.1.0.
https://www.dbrsmorningstar.com/research/394309/european-rmbs-insight-methodology
-- European RMBS Insight: Dutch Addendum (7 March 2022),
https://www.dbrsmorningstar.com/research/393357/european-rmbs-insight-dutch-addendum.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transaction
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022),
https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022),
https://www.dbrsmorningstar.com/research/396929/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].