Morningstar DBRS Confirms Credit Rating on Essence VI B.V.

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA (sf) credit rating on the Class A Notes issued by Essence VI B.V.

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date.

The confirmation follows review an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the April 2024 payment date;
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on a potential portfolio migration based on the additional purchase conditions;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) credit rating level; and
-- No early termination events to date.

The transaction is a securitisation of a portfolio of Dutch prime residential mortgage loans originated or acquired by NIBC Bank N.V. (NIBC) and its subsidiaries. NIBC acts as the servicer for the mortgage portfolio, while Stater Nederland B.V., Quion Hypotheekbemiddeling B.V., Quion Hypotheekbegeleiding B.V., and Quion Services B.V. act as subservicers.

The transaction initially closed in May 2016 and had major amendments in February 2017 and May 2023. The transaction is currently in a three-year revolving period ending in May 2026. The end of the revolving period coincides with a step-up in the coupon as well as the first optional redemption date. The legal final maturity date is at the May 2065 payment date.

PORTFOLIO PERFORMANCE
As of the April 2024 payment date, loans two to three months in arrears and the 90+ delinquency ratio represented 0.1% and 0.2% of the outstanding portfolio balance, respectively, compared with 0.1% and 0.1%, respectively, at the last review. As of the April 2024 payment date, cumulative foreclosures amounted to approximately EUR 1.2 million, or 0.1% of the total receivables purchased, since the initial closing date in May 2016.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions at the B (sf) credit rating level to 4.3% and 18.7%, respectively. The base case PD and LGD assumptions are based on a potential migration of the current portfolio as per the additional purchase conditions set out in the transaction documents.

CREDIT ENHANCEMENT
Credit enhancement to the Class A Notes consists of subordination of the Class B Notes and the cash reserve. As of the April 2024 payment date, the credit enhancement to the Class A Notes was 11.5%, unchanged since the last review.

Amortisation of the Class A Notes is permitted if the replenishment available amount is not applied towards 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 towards the sequential redemption of the Class A and Class B notes.

The transaction benefits from a reserve fund, which covers senior fees, interest shortfall, and principal losses on the Class A Notes and a liquidity reserve, which covers senior fees and interest on the Class A Notes. The reserve fund is permitted to amortise to a target balance equal to the higher of 0.5% of the outstanding Class A and Class B notes and 0.25% of the outstanding Class A and Class B notes balances as at the May 2023 amendment date provided that the 90+ delinquency ratio and the cumulative realised loss percentage are both lower than 2.0%. As of the April 2024 payment date, the 90+ delinquency ratio and the cumulative realised loss percentage were 0.2% and 0.0%, respectively.

As of the April 2024 payment date, the reserve fund and liquidity reserve are both at their target levels of EUR 4.5 million and EUR 2.4 million, respectively.

BNP Paribas SA, Netherlands Branch (BNP Paribas NL) acts as the account bank for the transaction. Based on the Morningstar DBRS private credit rating of BNP Paribas NL, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank in the transaction to be consistent with the credit rating assigned to the Class A Notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit rating on the Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS' credit rating on the Class A Notes also addresses the credit risk associated with the increased rate of interest applicable to the Class A Notes if the Class A Notes are not redeemed on the Optional Redemption Date (as defined in and) in accordance with the applicable transaction document(s).

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Social Factors
The portfolio is exposed to loans guaranteed by the Dutch mortgage guarantee scheme Nationale Hypotheek Garantie (NHG). This scheme supports homeownership in the Netherlands by providing low interest rate loans for the purchase of properties up to EUR 435,000 (as of January 2024).

The exposure to NHG loans is 56.6% of the actual portfolio and must be at least 30.0% of the portfolio under the amended substitution and replenishment conditions. Morningstar DBRS considered the presence of NHG loans in the portfolio to be a social factor as outlined within the "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings". Morningstar DBRS assumed reduced loss severities for loans backed by an NHG guarantee as outlined in its "European RMBS Insight: Dutch Addendum" methodology. This is credit positive and affects the credit rating.

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: "Master European Structured Finance Surveillance Methodology" (7 March 2024), https://dbrs.morningstar.com/research/429051.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, 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 credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include loan-level data provided by European DataWarehouse GmbH and investor reports provided by NIBC.

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

At the time of the initial credit rating, Morningstar DBRS was supplied with third-party assessments. However, this did not affect the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 9 May 2023, when Morningstar DBRS confirmed its credit rating of AAA (sf) on the Class A Notes following a restructure of the transaction.

The lead analyst responsibilities for this transaction have been transferred to Shalva Beshia.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Morningstar DBRS expected a lifetime base-case PD and LGD for the pool based on a potential migration of the current portfolio per the additional purchase conditions set out in the transaction documents. 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 at the B (sf) credit rating level are 4.3% and 18.7%, respectively.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base-case assumption.

Class A Notes Risk Sensitivity
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is 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: 17 May 2016

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 credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (7 March 2024),
https://dbrs.morningstar.com/research/429051
-- European RMBS Insight Methodology (25 March 2024) and European RMBS Insight Model v7.0.1.0,
https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Dutch Addendum (11 March 2024),
https://dbrs.morningstar.com/research/429169
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024),
https://dbrs.morningstar.com/research/429054
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

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