Press Release

DBRS Morningstar Assigns Provisional Ratings to Dutch Property Finance 2023-1 B.V.

RMBS

January 18, 2023

DBRS Ratings GmbH (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Dutch Property Finance 2023-1 B.V. (the Issuer):

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

DBRS Morningstar does not rate the Class E, Class F, Class X, or Class R notes also expected to be issued in this transaction.

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 March 2062. 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 October 2060.

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 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 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 (GRF).

The seller is a buy-to-let and midmarket real estate lending business in the Netherlands, and was incorporated on 16 September 2016. However, the history of the mortgage lending business that the seller now owns dates back to 1890 when Nederlandse Hypotheekbank was founded. In 2008, Rijnlandse Hypotheekbank and Nederlandse Hypotheekbank (both owned by Rabobank) formally merged to form the RNHB business within FGH Bank N.V. (FGH). In December 2016, the RNHB business and loan portfolio were acquired by a consortium of (1) funds managed by AB CarVal Investors L.P. (CarVal) and (2) Arrow Global Group Plc, with CarVal holding the majority interest. Vesting Finance Servicing B.V. will service the mortgage portfolio and Intertrust Administrative Services B.V. will act as a replacement servicer facilitator.

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

RATING RATIONALE
As of 31 October 2022, the provisional portfolio consisted of 2,581 loans with a total portfolio balance of approximately EUR 744.8 million. The weighted-average (WA) seasoning of the portfolio is 3.4 years with a WA remaining term of 5.1 years. The WA current loan-to-value ratio (LTV) is comparatively low for a Dutch portfolio at 60.5%. The majority of the loans (97.9%) in the portfolio are fixed with future resets 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 for which the borrowers are in arrears for longer than three months.

Until the first optional redemption date in January 2028, the seller has the ability to grant and the Issuer has 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 met during this period for further advances to be sold to the Issuer. DBRS Morningstar considered these conditions when assessing the possibility of the portfolio LTV increasing as a result of further advances.

DBRS Morningstar calculated credit enhancement for the Class A notes at 17.25%, provided by the subordination of the Class B to Class E notes and the GRF. Credit enhancement for the Class B notes will be 11.25%, provided by the subordination of the Class C to Class E notes and the GRF. Credit enhancement for the Class C notes will be 8.0%, provided by the subordination of the Class D to Class E notes and the GRF. Credit enhancement for the Class D notes will be 5.0%, provided by the subordination of the Class E notes and the GRF.

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 the Issuer can use 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 will enter into a fixed-to-floating balanced-guaranteed swap with NatWest Markets N.V. (rated A (low) 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 receive 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 2.25%. 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 (Elavon). DBRS Morningstar’s private rating on Elavon 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 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 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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-rating.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the ratings are “European RMBS Insight Methodology” (28 March 2022), 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, and “European CMBS Rating and Surveillance Methodology” (14 December 2022), https://www.dbrsmorningstar.com/research/407379/european-cmbs-rating-and-surveillance-methodology.

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 CarVal, RNHB, HSBC Bank plc, and their agents. DBRS Morningstar was provided with loan-level data as of 31 October 2022 and historical performance data (delinquencies one to three months, delinquencies three-plus months, constant default, and prepayment rates) from August 2011 to October 2022.

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 PD of 30.1% and LGD of 39.4%, corresponding to the AAA (sf) rating scenario, were stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B notes, a PD of 24.9% and LGD of 30.9%, corresponding to the AA (low) (sf) rating scenario, were stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C notes, a PD of 20.0% and LGD of 22.7%, corresponding to the A (low) (sf) rating scenario, were stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D notes, a PD of 16.6% and LGD of 15.8%, corresponding to the BBB (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 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); and
-- 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 (low) (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (high) (sf);
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (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 A (low) (sf); and
-- 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 BBB (high) (sf);
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to BBB (sf);
-- 25% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (high) (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 (low) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (sf); and
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to BBB (low) (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 BB (high) (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); and
-- 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: Lina Mukhitdinova, Senior Analyst
Rating Committee Chair: Ketan Thaker, Head of European RMBS and Covered Bonds
Initial Rating Date: 18 January 2023

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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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