DBRS Confirms Rating on Nostrum Mortgages No. 2

DBRS Ratings Limited (DBRS) has today confirmed its rating on the Class A notes issued by Nostrum Mortgages No. 2 (the Issuer) at AA (sf).

The confirmation of the rating on the Class A notes follows an annual review of the transaction and is based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies and defaults, as of February 2017.
-- Updated portfolio default rate, loss given default (LGD) and expected loss assumptions for the remaining collateral pool.
-- Current available credit enhancement to the Class A notes to cover the expected losses at the AA (sf) rating level.

Nostrum Mortgages No. 2 is a securitisation of Portuguese residential mortgage loans originated and serviced by Caixa Geral de Depósitos S.A.

PORTFOLIO PERFORMANCE
As of February 2017, the 90+ delinquency ratio was at 0.64%. Current cumulative written-off mortgage assets as a percentage of the original portfolio balance were at 3.74%.

PORTFOLIO ASSUMPTIONS
DBRS has conducted a loan-level analysis of the collateral pool and decreased its Base Case probability of default (PD) assumption to 14.09%. The Base Case LGD assumption has been increased to 31.22%.

CREDIT ENHANCEMENT
As of the February 2017 payment date, credit enhancement to the Class A notes stood at 36.13%, up from 33.81% in February 2016. Credit enhancement to the Class A notes consists of subordination of the Class B and the Cash Reserve Fund.

The Cash Reserve Fund is available to cover senior fees, interest shortfall and principal losses on the Class A notes via the Principal Deficiency Ledger (PDL). The Cash Reserve is currently at its target level of EUR 80.18 million.

In April 2016, there was an amendment to the transaction whereby a Liquidity Reserve was incorporated to mitigate potential payment disruption risks from the Servicer. The Liquidity Reserve covers senior fees and interest payments on the Class A notes in the event of non-payment by the Servicer, which in turn causes a Liquidity Shortfall. An initial Liquidity Reserve amount of EUR 36 million was deposited at the Liquidity Reserve Account Bank, Banco Santander S.A. (Banco Santander). The Liquidity Reserve is currently at its target level of EUR 31.82 million.

The PDL records Realised Losses and any Principal Draw Amounts. As of February 2017, the debit balance on the PDL was zero.

Banco Santander acts as the account bank for the transaction. The account bank reference rating of ”A” – being one notch below the DBRS Long-Term Critical Obligations Rating (COR) of Banco Santander at A (high) – complies with the Minimum Institution Rating given the rating assigned to the Class A notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Banco Santander also acts as the Swap Counterparty for the transaction. DBRS’s COR of Banco Santander at A (high) is above the First Rating Threshold as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology”.

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

A review of the transaction’s legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” at: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of data and information used for this rating include investor reports provided by Deutsche Bank AG and data from the European Data Warehouse GmbH.

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

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

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

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

The last rating action on this transaction took place on 29 April 2016 when DBRS confirmed the rating of AA (sf) on the Class A notes.

The lead responsibilities for this transaction have been transferred to Andrew Lynch.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared with the parameters used to determine the rating (the “Base Case”):
-- 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 credit ratings.
-- The base case PD and LGD of the current pool of mortgages for the Issuer are 14.09% and 31.22%, respectively. At the AA (sf) rating level, the corresponding PD is 37.74% and the LGD is 47.81%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A notes would be expected to remain at AA (sf), assuming no change in the PD. If the PD increases by 50%, the rating for the Class A notes would be expected to remain at AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to fall to A (high) (sf).

Class A notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf).
-- 50% increase in LGD, expected rating of AA (sf).
-- 25% increase in PD, expected rating of AA (sf).
-- 50% increase in PD, expected rating of A (high) (sf).
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf).
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf).
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf).
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf).

For further information on DBRS historic 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: Andrew Lynch, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 4 May 2012

DBRS Ratings Limited
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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
-- Derivative Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- 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.