DBRS Assigns Ratings to Penates Funding NV/SA, acting through its Compartment Penates-6

DBRS Ratings Limited (DBRS) has today assigned ratings to the securitisation notes issued by Penates Funding NV/SA, Institutionele VBS naar Belgisch recht, acting through its Compartment Penates-6 (Penates-6 or the Issuer):

-- Class A1 notes rated AAA (sf)
-- Class A2 notes rated AAA (sf)

The ratings assigned to the Class A1 and Class A2 notes (together, the Class A notes) address the full and timely payment of interest and ultimate payment of principal to the noteholders by the legal final maturity date. For the avoidance of doubt, DBRS’s ratings do not address the payment of interest that is not paid as a result of the post-step Class A coupon cap.

Penates-6 is a static cash securitisation of a portfolio comprising Belgian residential mortgage loans. The portfolio was originated by Belfius Bank NV/SA as revolving credit facilities (all-sums mortgages). The transaction documents provide that all Belfius debts originated under the all-sums facilities are (or will upon origination become) subordinated to the securitised mortgage balances. The collateral is largely recent originations, with a weighted-average seasoning of 2.41 years and a weighted-average current loan-to-value ratio of 62.22%. Included in the portfolio are loans with limited adverse credit (risk) features such as unemployed borrowers (2.14%), self-employed borrowers (13.31%) and non-owner occupied loans (1.85%). All borrowers undergo full income verification and an underwriting process that is considered in line with the Belgian market standard.

At closing, the Issuer purchased the mortgage loans and all accessory rights by way of a true sale. Security for the loans is provided by a combination of mortgage inscriptions and mortgage mandates, with the weighted-average mortgage inscription to current loan ratio equal to 120.53%, as of the 3 February 2017 pool cut-off date. A mortgage mandate is an irrevocable power of attorney allowing for creation of a mortgage inscription at any point, without a requirement for borrower approval, and commonly used in Belgium. DBRS has analysed historical data, as well as Belfius’ origination and servicing practices for mortgage mandate conversion, and considers the process to convert mortgage mandates to mortgage inscriptions adequate, if required.

The mortgage portfolio largely comprises loans yielding a fixed rate of interest for the life of the loan, 89.45% of the outstanding mortgage balance. The remaining portfolio pays a fixed rate of interest that resets on a periodic basis. Such interest rate features are common in the Belgian mortgage market, which is significantly regulated. The coupon on the Class A notes is one-month Euribor, plus a margin, giving rise to interest rate risk. Partial interest rate hedging is provided by an interest rate cap agreement, prior to the First Optional Redemption Date (FORD, May 2022), and a Class A coupon cap equal to 5% thereafter. Under the interest rate cap agreement Belfius will pay the positive difference, if any, between 3-month Euribor and 3%. The cap notional is a fixed amortisation profile assuming a 2% conditional prepayment rate (CPR). The payment of interest greater than the post-FORD Class A coupon cap is not addressed by DBRS’s ratings.

The transaction’s capital structure provides 17.50% of credit enhancement to the Class A notes – in the form of subordination of the Class B notes (17.00% of the total issuance) and a non-amortising cash reserve fund (0.50%). The reserve fund is funded through the issuance of uncollateralised Class C notes. The structure has further liquidity support from a non-amortising liquidity facility, equal to EUR 145 million and the ability to use principal collections to pay senior fees and interest due on the Class A notes. The structure will follow a fast-pay/slow-pay amortisation profile, whereby the Class A2 notes will not receive any principal until the Class A1 notes are redeemed in full. A principal deficiency ledger will record the outstanding balances of defaulted loans (defined as 90 days delinquent), as well as the amount of any principal collections used to pay interest liabilities. Defaulted loan balances will be allocated initially to the Class B sub-ledger, and then pro rata to the Class A1 and Class A2 sub-ledgers, providing that the Class A1 and A2 notes have equivalent credit support.

Belfius, the seller, will act as the mortgage portfolio servicer, hedging provider, transaction and collection account bank, liquidity facility provider and the calculation agent. DBRS currently maintains a long-term Critical Obligations Rating (COR) of A (high) on Belfius. The minimum rating criteria, downgrade provisions and collections’ sweep timing leads DBRS to conclude that Belfius meets the criteria to act as the collection and transaction account bank, hedging provider and liquidity facility provider. Commingling risk mitigation is provided by a Belfius bank downgrade trigger, whereby, in the event that DBRS’s long-term COR falls below BBB, Belfius would deposit an amount equal to the aggregate interest and principal collections expected from the mortgage portfolio during the succeeding calendar month to a third-party financial institution that fulfills the requisite criteria. These funds can be applied as available interest and principal, as appropriate, in the event that Belfius becomes insolvent.

For the structural analysis, DBRS has applied two default timing curves (front-ended and back-ended), its prepayment curves (low, medium and high CPR assumptions) and interest rate stresses as per the DBRS “Unified Interest Rate Model for European Securitisations” methodology. DBRS tested additional 0% CPR scenarios. The Class A2 notes did not pass 0% CPR scenarios when combined with rising interest rate stresses. DBRS will continue to monitor CPR as part of its surveillance process.

DBRS considers the legal structure and presence of legal opinions addressing the sale and assignment of the assets to the Issuer to be consistent with DBRS’s “Legal Criteria for European Structured Finance Transactions”.

As a result of the analytical considerations, DBRS derived a Base Case probability of default (PD) of 1.49% and loss given default (LGD) of 20.52%, which resulted in an expected loss of 0.30% 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 12 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 Belgian 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.

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

The sources of data and information used for these ratings include Belfius Bank NV/SA, Intex Solutions, Bloomberg, Penates Funding NV/SA Investor Reports, Ernst & Young and FOD Economie.

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 these ratings to be of satisfactory quality.

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

These ratings concern a newly 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 A1 and Class A2 notes and a rating category of AAA (sf), PD of 21.28% and LGD of 48.95%, resulting in an expected loss of 10.42%.

DBRS concludes the following impact on the rated notes:

Class A1:
-- A hypothetical increase in both PD and LGD by 25%, ceteris paribus would not lead to a downgrade.
-- A hypothetical increase in both PD and LGD by 50%, ceteris paribus would not lead to a downgrade.
-- A hypothetical increase in PD by 25%, ceteris paribus would not lead to a downgrade.
-- A hypothetical increase in PD by 50%, ceteris paribus would not lead to a downgrade.
-- A hypothetical increase in LGD by 25%, ceteris paribus would not lead to a downgrade.
-- A hypothetical increase in LGD by 50%, ceteris paribus would not lead to a downgrade.
-- A hypothetical increase in PD by 25% and increase in LGD by 50%, ceteris paribus would not lead to a downgrade.
-- A hypothetical increase in PD by 50% and increase in LGD by 25%, ceteris paribus would not lead to a downgrade.

Class A2:
-- A hypothetical increase in both PD and LGD by 25%, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- A hypothetical increase in both PD and LGD by 50%, ceteris paribus would lead to a downgrade to AA (sf).
-- A hypothetical increase in PD by 25%, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- A hypothetical increase in PD by 50%, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- A hypothetical increase in LGD by 25%, ceteris paribus would not lead to a downgrade.
-- A hypothetical increase in LGD by 50%, ceteris paribus would lead to a downgrade to AA (high) (sf).
-- A hypothetical increase in PD by 25% and increase in LGD by 50%, ceteris paribus would lead to a downgrade to AA (sf).
-- A hypothetical increase in PD by 50% and increase in LGD by 25%, ceteris paribus would lead to a downgrade to AA (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: 15 May 2017

DBRS Ratings Limited
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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.