DBRS Assigns Provisional Ratings to Delft 2017 B.V.

DBRS Ratings Limited (DBRS) has today assigned the following provisional ratings to the securitisation notes to be issued by Delft 2017 B.V. (Delft 2017 or the Issuer):
-- Class A notes rated AAA (sf)
-- Class B notes rated AA (sf)
-- Class C notes rated A (sf)
-- Class D notes rated BBB (sf)
-- Class E notes rated BB (low) (sf)

The Class A notes are provisionally rated for timely payment of interest and ultimate payment of principal. The Class B notes, Class C notes, Class D notes and Class E notes are provisionally rated for ultimate payment of interest, subject to the net weighted-average coupon cap (Net WAC Cap), and ultimate payment of principal.

Delft 2017 is a proposed securitisation of a portfolio of first-lien mortgage loans located in the Netherlands, originated by ELQ Portefeuille I B.V. between 2006 and 2008. All of the mortgage loans in the Delft 2017 collateral pool are to be purchased from the EMF-NL 2008-1 B.V. (EMF 2008), which is expected to be called on the next interest payment date, which falls on 17 January 2017. The loans are non-conforming, with significant levels of borrowers with adverse credit history, self-certified income and/or borrowers without employment at origination. Akin to other mortgage portfolios in the Netherlands, the collateral pool comprises interest-only loans (99.75%) with high loan-to-value ratios (LTV); the weighted-average current LTV is 97.66%.

The transaction’s capital structure provides 37.23% of credit enhancement to the Class A notes in the form of subordination of the Class B notes (12.20% in size of the total issuance), the Class C notes (4.75% in size of the total issuance), the Class D notes (4.75% in size of the total issuance), the Class E notes (5.80% in size of the total issuance), the Class Z notes (9.00% in size of the total issuance) and a non-liquidity reserve fund (NLRF), which is to be 0.73% in size of the aggregate collateral balance at closing. The Class B, C, D and E notes are proposed to have 25.03%, 20.28%, 15.53% and 9.73% of credit enhancement at closing, respectively. The Class Z notes are not rated.

The transaction structure is supported by an amortising reserve fund, which will be 2% of the aggregate balance of the collateral at closing. This reserve fund will be divided into a liquidity reserve fund (LRF) and the NLRF. Liquidity support to pay shortfalls in payment of senior fees and Class A interest payments is to be provided by the LRF. The LRF will be equal to 2% of the outstanding Class A notes’ balance, subject to a floor of 1% of the initial Class A notes’ balance. The remaining balance of the reserve fund will form the NLRF. When all of the Class A notes are redeemed in full, the target amount for the LRF will reduce to zero, and any amount remaining in the LRF will add to the NLRF. Further liquidity for the rated notes will be provided by the NLRF and principal receipts from the mortgage loans, which can be used to pay interest shortfalls on the rated notes, subject to principal deficiency ledger (PDL) conditions. The amount in the NLRF will also be used to reduce the debit balances of the PDLs and thus provides credit support to the rated notes.

The terms and conditions on the notes allows for deferral of interest on the Class B, Class C, Class D and Class E notes if available revenue funds are insufficient to cover such payments. As such, the events of default definition does not encompass the situation where timely payment of interest is not achieved on an interest payment date during the life of the notes. Interest on the Class B, Class C, Class D and Class E notes is subject to a Net WAC Cap defined as the gross weighted average coupon that is due but not necessarily paid on the mortgage portfolio, net of senior fees, divided by the outstanding rated note balance as a percentage of the outstanding mortgage portfolio balance. DBRS’s provisional ratings do not address payments of the Net WAC Cap additional amounts, which are the amounts accrued and become payable junior in the revenue and principal waterfalls if the coupon due on a series of notes exceeds the applicable Net WAC Cap. Net WAC Cap additional amounts will accrue interest at the lower of the Net WAC Cap or the applicable coupon. The interest payable on the notes will step up on the payment date falling three years after the first interest payment date. DBRS has taken into consideration the increased interest payable via its cash flow analysis. On or after the optional redemption date (which falls on the interest payment date in January 2020), the Issuer may redeem all the notes in full. Notes will be redeemed at an amount equal to the outstanding balance together with accrued (and unpaid) interest, outstanding fees and any Net WAC Cap additional.

The mortgage portfolio aggregates EUR 157.73 million (as of 31 October 2016) with an aggregate original balance of EUR 159.18 million. The portfolio benefits from approximately nine years of seasoning during which time borrowers have benefited from decreasing interest rates since 2008. The loans are floating-rate loans where the interest rate payable is indexed to one-month EURIBOR, with the exception of two loans that are still in an initial fixed-rate period prior to switching to track one-month EURIBOR. The coupon on the rated notes is linked to three-month EURIBOR; hence, there is a basis risk that is unhedged in the transaction. DBRS has used interest rate stresses for the two indices per its “Unified Interest Rate Model for European Securitisations” to test the effect of the unhedged basis risk on the cash flows of the transaction. DBRS considers the risk of negative interest rates on the mortgage receivables to be mitigated as the servicer undertakes to floor the interest payable on the loans at zero percent.

Upon closing, Adaxio B.V. (Adaxio) will be the named servicer and will be responsible for the oversight and monitoring of Stater Nederland B.V. as the delegated primary servicer. All special servicing activity will continue to be undertaken by Adaxio. DBRS assumes that all servicing responsibilities will be managed by Adaxio in the future; however, no specific timeframe for the takeover has been discussed. The servicing arrangement is considered to be consistent with Dutch servicing practices. Remaining consistent with the current arrangement, all mortgage collections will be deposited via direct debit to a bankruptcy remote “Stichting” collection foundation account held with ABN AMRO Bank N.V. (DBRS rated at AA (COR), A (high) debt & deposits rating), which acts as the collections account bank and the Issuer account bank. The minimum rating criteria, downgrade provisions and collections’ sweep timing leads DBRS to conclude that ABN AMRO Bank N.V. meets the criteria to act in such a capacity in line with DBRS’s “Legal Criteria for European Structured Finance Transactions.”

DBRS has applied two default timing curves (front-ended and back-ended), its prepayment curves (low, medium and high conditional prepayment rate (CPR) assumptions) and interest rate stresses as per the DBRS “Unified Interest Rate Model for European Securitisations” methodology. DBRS applied an additional 0% CPR stress. DBRS’s cash flow analysis found that the junior notes were highly sensitive in scenarios when a high CPR of 20% is assumed. Class C and Class E notes show principal shortfalls in the scenario with rising interest rates, front-loaded defaults and 20% CPR assumptions. Class D notes showed principal shortfalls in two scenarios where the assumptions included rising and declining interest rates, front-ended defaults and 20% CPR. The rating committee elected to discount the scenarios, as the prepayment risk is considered low in this transaction. DBRS has tested additional sensitivities and will continue to monitor the CPR levels as part of the ongoing surveillance process.

The legal structure and presence of legal opinions addressing the sale and assignment of the assets to the Issuer and the consistency with the DBRS “Legal Criteria for European Structured Finance Transactions.”

As a result of the analytical considerations, DBRS derived a Base Case probability of default (PD) of 19.95% and loss given default (LGD) of 38.65%, which resulted in an expected loss of 7.71% using the European RMBS Credit Model. DBRS cash flow model assumptions stress the timing of defaults and recoveries, prepayment speeds and interest rates. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and ratings of the notes. The cash flows were analysed using Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: the Master European Residential Mortgage-Backed Securities Rating Methodology and Dutch Addendum.

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

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

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

The sources of data and information used for this rating include Morgan Stanley & co. International plc, Intex Solutions, Bloomberg, EMF-NL-2008-1 Investor Reports, and KPMG.

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

DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

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

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

This rating concerns a newly to be issued financial instrument.

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

To assess the impact of potential changes in the transactions’ parameters on the ratings, DBRS considered, in addition to its base case, further stress scenarios for its main ratings parameters PD and LGD in its cash flow analysis. The two additional stresses assume a 25% and 50% increase in both the PD and LGD assumptions for each series of notes.

The following scenarios constitute the parameters used to determine the ratings (the Base Case):

-- In respect of the Class A notes and a rating category of AAA (sf), PD of 54.01% and LGD of 56.67%.
-- In respect of the Class B notes and a rating category of AA (sf), PD of 47.34% and LGD of 50.59%.
-- In respect of the Class C notes and a rating category of A (sf), PD of 42.57% and LGD of 47.48%.
-- In respect of the Class D notes and a rating category of BBB (sf), PD of 36.73% and LGD of 44.34%.
-- In respect of the Class E notes and a rating category of BB (low) (sf), PD of 26.64% and LGD of 40.01%.

DBRS concludes the following impact on the rated notes:

Class A:
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to AA (low) (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to BBB (sf).
-- A hypothetical increase in PD by 25% without any change in LGD would lead to downgrade of the rating to AA (high) (sf).
-- A hypothetical increase in PD by 50% without any change in LGD would lead to downgrade of the rating to AA (low) (sf).
-- A hypothetical increase in LGD by 25% without any change in PD would lead to downgrade of the rating to AA (high) (sf).
-- A hypothetical increase in LGD by 50% without any change in PD would lead to downgrade of the rating to AA (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50% would lead to downgrade of the rating to A (low) (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25% would lead to downgrade of the rating to A (low) (sf).

Class B:
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to BB (low) (sf).
-- A hypothetical increase in PD by 25% without any change in LGD would lead to downgrade of the rating to A (low) (sf).
-- A hypothetical increase in PD by 50% without any change in LGD would lead to downgrade of the rating to BBB (sf).
-- A hypothetical increase in LGD by 25% without any change in PD would lead to downgrade of the rating to A (low) (sf).
-- A hypothetical increase in LGD by 50% without any change in PD would lead to downgrade of the rating to BBB (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50% would lead to downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25% would lead to downgrade of the rating to BB (high) (sf).

Class C:
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to B (sf).
-- A hypothetical increase in PD by 25% without any change in LGD would lead to downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase in PD by 50% without any change in LGD would lead to downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in LGD by 25% without any change in PD would lead to downgrade of the rating to BBB (sf).
-- A hypothetical increase in LGD by 50% without any change in PD would lead to downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50% would lead to downgrade of the rating to BB (low) (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25% would lead to downgrade of the rating to BB (low) (sf).

Class D:
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to B (high) (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to C (sf).
-- A hypothetical increase in PD by 25% without any change in LGD would lead to downgrade of the rating to BB (sf).
-- A hypothetical increase in PD by 50% without any change in LGD would lead to downgrade of the rating to B (high) (sf).
-- A hypothetical increase in LGD by 25% without any change in PD would lead to downgrade of the rating to BB (high) (sf).
-- A hypothetical increase in LGD by 50% without any change in PD would lead to downgrade of the rating to BB (low) (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50% would lead to downgrade of the rating to B (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25% would lead to downgrade of the rating to B (sf).

Class E:
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to C (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to C (sf).
-- A hypothetical increase in PD by 25% without any change in LGD would lead to downgrade of the rating to B (sf).
-- A hypothetical increase in PD by 50% without any change in LGD would lead to downgrade of the rating to C (sf).
-- A hypothetical increase in LGD by 25% without any change in PD would lead to downgrade of the rating to B (sf).
-- A hypothetical increase in LGD by 50% without any change in PD would lead to downgrade of the rating to C (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50% would lead to downgrade of the rating to C (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25% would lead to downgrade of the rating to C (sf).

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Kali Sirugudi, Vice President, European RMBS
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 11 January 2017

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

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

-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Unified Interest Rate Model for European Securitisations

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