Morningstar DBRS Confirms Credit Rating on Essence VII B.V. Following Restructure

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

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 in May 2062 (amended from May 2057 previously).

CREDIT RATING RATIONALE
The credit rating action follows an annual review on the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses.
-- Portfolio default rate (PD), loss given default (LGD), and expected loss assumptions on a potential portfolio migration based on the additional purchase conditions.
-- The current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) credit rating level.
-- A structural amendment (the Amendment) to the transaction executed on 2 May 2024 and effective as of the interest payment date on 10 May 2024 (the restructure date).

The transaction is a revolving securitisation of Dutch prime residential mortgages originated by NIBC Bank N.V. (NIBC) and its subsidiaries. NIBC services the portfolio while Stater Nederland B.V., Quion Hypotheekbemiddeling B.V., Quion Hypotheekbegeleiding B.V., and Quion Services B.V. act as subservicers.

The portfolio currently comprises mostly fixed-rate mortgage loans secured solely by owner-occupied properties; however, the nature of the portfolio can potentially change over time due to purchases of additional receivables or substitutions which are permitted under specific conditions until the first optional redemption date (FORD). A small portion of construction mortgages is permitted in the portfolio, with the undrawn part of the mortgage funded by an equivalent amount of cash held at the Issuer account bank.

The transaction was originally structured with a seven-year revolving period, which was scheduled to terminate on the payment date in May 2024. As part of the Amendment, the revolving period has been extended until the May 2027 payment date.

AMENDMENTS
-- Increase of the principal amount outstanding of the Class A and Class C Notes to EUR 1.094 million and EUR 11.40 million, respectively. The proceeds of the Class A Notes issuance have been used to purchase an additional portfolio of mortgage loans, while the proceeds of the Class C Notes issuance have been credited to the reserve account and liquidity reserve account.
-- Extension of the revolving period by three additional years, to May 2027 from May 2024, and extension of the FORD accordingly.
-- Reduction of the post step-up interest rate for the Class A, Class B, and Class C Notes to 0.55%, 1.40%, and 2.60%, respectively, from 0.60%, 3.60%, and 4.50%, respectively.
-- Extension of the final legal maturity to May 2062 from May 2057.
-- Mortgage loan criteria amended to increase the maximum allowed maturity date of the mortgage loans to May 2060 from May 2055 and to reduce the minimum interest rate at the individual loan level to 1% from 1.5%.
-- Substitution and replenishment criteria amended to: increase the maximum exposure to mortgage loans with a construction deposit to 2% from 1.5%; decrease the portion of loans with a balance lower than EUR 400,000 to 75% from 85% of the outstanding portfolio balance; decrease the minimum weighted-average number of months elapsed since origination to 60 months from 75 months; decrease the maximum percentage of advisor-verified mortgage loans to 30% from 75%; increase the maximum amount of each mortgage loan or the aggregate amount of all the mortgage loans secured on the same property to EUR 2.0 million from EUR 1.0 million; add the condition that the proportion of loans with a balance lower than EUR 1.0 million shall not be lower than 95% of the outstanding portfolio balance; and add the minimum weighted-average interest rate as one of the conditions where the relevant limit may be breached, as long as it is maintained or improved through substitution or replenishment.

PORTFOLIO PERFORMANCE
Delinquency levels have been low since closing. As of March 2024, two- to three-month arrears represented 0.1% of the outstanding portfolio balance and the 90+-day delinquency ratio was 0.2%. The cumulative foreclosure amount is low at 0.1%.

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) rating level to 6.0% and 11.6%, 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
Following the restructure date, credit enhancement to the Class A Notes will decrease to 10.5%, down from 14.0% at the time of Morningstar DBRS' initial rating. Credit enhancement consists of subordination of the Class B Notes and the cash reserve.

Amortisation of the notes during the revolving period 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.

The transaction benefits from a reserve fund, which covers senior fees, interest shortfall, and principal losses on the Class A Notes, as well as a liquidity reserve, which covers senior fees and interest on the Class A Notes. The reserve fund is permitted to amortise, provided that the 90+-day delinquency ratio and the cumulative realised loss percentages are lower than 3% and 2%, respectively.

The cash reserve and liquidity reserve have both been funded to their new target levels of EUR 6.1 million and EUR 3.3 million, respectively, as of the restructure date.

ABN AMRO Bank N.V. (ABN AMRO) acts as the account bank for the transaction. Based on Morningstar DBRS' account bank reference rating of AA (low) on ABN AMRO (which is one notch below its public Long Term Critical Obligations Rating of AA), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent to the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank 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. The associated financial obligations are the interest and principal amounts due on the Class A Notes.

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 First Optional Redemption Date (as defined in and) in accordance with the applicable transaction documents.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

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 (S) Factors
Morningstar DBRS considers the Nationale Hypotheek Garantie (NHG) guarantee, which backs 28.8% of the upsized pool, to be a relevant social factor (Social Impact of Product and Services) as outlined in the "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings". Morningstar DBRS assumed reduced loss severity for loans backed by an NHG guarantee as outlined in its "European RMBS Insight: Dutch Addendum" methodology. This is credit positive but does not materially affect the credit rating. Please see https://dbrs.morningstar.com/research/366268 for more details.

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 methodologies applicable to the credit rating are the European RMBS Insight Methodology (25 March 2024), https://dbrs.morningstar.com/research/430103, the Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051, and the European RMBS Insight: Dutch Addendum (11 March 2024), https://dbrs.morningstar.com/research/429169.

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

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

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.

Morningstar DBRS has conducted a review of the transaction's legal documents provided in the context of the Amendment. A review of any other 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 reports and loan-level data 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 12 May 2023, when Morningstar DBRS confirmed its AAA (sf) credit rating on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Daniel Rakhamimov.

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 review of the current assets. Adverse changes to asset performance may cause stresses to base-case assumptions and therefore have a negative effect on the credit rating.
-- The base-case PD and LGD of the current pool of loans for the Issuer at the B (sf) credit rating level are 6.0% and 11.6%, respectively.

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 AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (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: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit Rating Date: 22 May 2017

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.

-- European RMBS Insight Methodology (25 March 2024) and European Asset RMBS Insight Model version 7.0.1.0, https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: Dutch Addendum (11 March 2024), https://dbrs.morningstar.com/research/429169
-- Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- 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].