DBRS Assigns Rating to Essence VII B.V.

DBRS Ratings Limited (DBRS) has today assigned a rating to the following Notes issued by Essence VII B.V (the Issuer):

--AAA (sf) to the EUR 778,350,000 Class A Notes

Essence VII B.V. is a securitisation of a portfolio of Dutch prime residential mortgage loans originated or acquired by NIBC Bank N.V. (NIBC) and its subsidiaries (the Seller). The securitisation has a revolving period of seven years ending in May 2024, subject to the adherence of replenishment conditions. The mortgage portfolio comprises mortgage loans to individuals that are secured by residential properties located in the Netherlands.

The rating assigned addresses timely payment of interest and the Issuer’s obligation to repay principal on the Class A Notes up to the Principal Amount Outstanding of EUR 550,216,028 in accordance with transaction documents. DBRS does not rate the EUR 121,500,000 Class B Notes and EUR 6,900,000 Class C Notes. On the Closing Date (22 May 2017), each issued Class A Note will have a minimum denomination of EUR 150,000, for which NIBC will pay a price equal to factor 70.69% of the face value at closing. In accordance with the transaction documents, the Seller may make an offer to the Issuer to purchase an additional mortgage portfolio. In the event an offer is made by the Seller, the Issuer will request NIBC to pay an amount equal to the remaining portion of the Class A Notes’ face value. NIBC, as the initial note purchaser, will be obliged to pay to the Issuer the remaining amount of the Class A Notes, before the notes payment date falling in September 2017. The Issuer will use these funds to purchase the additional mortgage loans. If the additional portfolio is not purchased and the additional payment of the Class A Notes is not made, the Class A factor will remain unchanged from the Closing Date (subject to any interim principal payments of the Class A Notes) and the Issuer’s payment obligations will not be increased. The additional mortgage portfolio will have to comply with mortgage loan criteria and the replenishment conditions.

The purchase of the mortgage portfolio is funded via the issuance of the Class A and B Notes with the Class C Notes used to establish the reserve fund and liquidity reserve. The Class A Notes benefit from 18.76% of credit enhancement provided via subordination of the Class B Notes (18.09%) and the reserve fund at closing (0.68%). It should be noted that credit enhancement is available through the liquidity reserve (0.35%) to the extent available, as amortised amounts will form part of the revenue waterfall. Figures are represented as percentage of the portfolio balance (31 March 2017).

The mortgage portfolio will be serviced by NIBC with Stater Nederland B.V. (Stater), Quion Hypotheekbemiddeling B.V., Quion Hypotheekbegeleiding B.V. and Quion Services B.V. (together, Quion) assuming the role of sub-servicers. The portfolio largely consists of advisor-verified mortgage loans (60.3%) and has a relatively higher portion of interest-only (IO) loans (77.2%) compared with previous securitisations under the Essence shelf.

As of March 2017, the mortgage portfolio had a current balance of EUR 671.7 million and is 95 months seasoned. The mortgage portfolio comprises mortgage loans to individuals and is secured by residential properties located in the Netherlands. DBRS calculates the weighted-average current loan to market aalue (WA CLTMV) of the portfolio as 72.8%. The Indexed WA CLTMV is calculated as 76.3%.

The portfolio has IO mortgage loans (77.2%), as well as other types of mortgage loans where the repayment vehicle may not in all cases provide for the repayment in full of principal such as investment mortgage loans (2.97%). IO loans are typically considered riskier than repayment loans as they are typically chosen by borrowers who may have a reduced financial capacity to service the loan and therefore would prefer smaller mortgage instalments. Additionally, while servicers normally advise such borrowers to plan for the principal repayment by setting aside money on a regular basis, the borrower is under no obligation to do so.

60.3% of the mortgage portfolio consists of advisor-verified loans. The advisor checks whether the borrower has sufficient income available to service the mortgage. The advisor states in an income declaration to the originator that the borrower has sufficient income to make the payments under the mortgage loans. Such advisor-verified income should be sufficient to meet the payments under a mortgage loan in accordance with the underwriting process applicable to all mortgage loans. The income declaration provided is signed jointly by the advisor and the borrower.

The weighted-average coupon of the mortgage portfolio, as of 31 March 2017, was 3.3%. Dutch borrowers tend to favour longer-term fixed-rate products, where mortgage interest rates tend be relatively higher than floating-rate loans. The current fixed-rate proportion in the portfolio is 81.2% (excluding loans with a reset period of 12 months). The interest payable on the rated Class A Notes is fixed at 0.30% subject to the fixed step-up rate of 0.60% on the first optional redemption date (May 2024).

There are two main sources of potential liquidity. Firstly, there is an amortising reserve fund, and secondly there is an amortising liquidity reserve available to cover senior fees and interest on the Class A Notes. In the event of interest shortfalls the reserve fund is used before the liquidity reserve. Prior to the Notes’ payment date falling in September 2017, the target amounts of the reserve fund and the liquidity reserve are equal to EUR 4,542,462 and EUR 2,357,538, repspectively. Following the Notes’ payment date falling in September 2017, the target amount of the reserve fund is the higher of 0.50% of the outstanding balance of the Class A and B Notes and 0.25% of the balance of the Class A and B Notes at closing. Following the notes payment date falling in September 2017, the target amount of the liquidity reserve is the higher of 0.30% of the outstanding balance of the Class A Notes and 1.50% of the total outstanding principal balance of loans in arrears for a period exceeding 30 days. Excess spread, if available, can be used to amortise the Class A Notes following the first optional redemption date.

The transaction has a revolving period of seven years - subject to the adherence of replenishment conditions - ending in May 2024. The transaction documents specify criteria which must be complied with during the substitution and replenishment periods, failure of which will cause the revolving period to end. DBRS has stressed the portfolio in accordance with the replenishment and substitution conditions to assess the ‘worst case’ to which the portfolio characteristics can migrate. There are also rolling limits of 5% and 20% per annum for substitution and replenishment, respectively.

There are a number of different sources of set-off risk in the Dutch mortgage market and although representations have been provided that borrower payments should be made without set off, Dutch law does not give absolute comfort that set-off would be avoided. There are potential mitigants in place which reduce the set-off risk within the transaction.

The rating is based upon review by DBRS of the following analytical considerations:
-- The transaction’s cash flow structure and form and sufficiency of available credit enhancement. Credit enhancement for the Class A Notes is provided in the form of subordination via the Class B Notes and the amortising reserve fund (subject to collateral performance conditions). At closing, DBRS calculates the credit enhancement level at 18.76%. Credit enhancement is based on the principal amount outstanding of the Class A Notes (EUR 550,216,028) and is expressed as a percentage of the portfolio balance. The calculation includes the reserve fund which represents 0.68% of the portfolio balance. Credit enhancement is also provided to the extent available, via amortised amounts of the liquidity reserve. Excess spread may also be available; however, the availability of excess spread is determined by the performance of the portfolio.

Liquidity coverage is provided through the aforementioned amortising reserve fund and liquidity reserve. The liquidity reserve is available to pay senior fees and interest on the Class A Notes in the event of an interest shortfall. Following the end of the revolving period, excess spread, where available, will be utilised to pay the Class A Notes after the replenishment of the reserve fund.

-- The credit quality of the expected mortgage loans against which the Class A Notes are secured and the ability of the servicer to perform collection activities on the collateral. The transaction has a seven-year revolving period subject to the adherence of replenishment conditions. The Default Probability and Loss Given Default is based on an assessment of the ‘worst case’ to which the portfolio characteristics can migrate during the revolving period. DBRS achieved this through stressing the loan-by-loan data provided in accordance with the conditions defined in the transaction documents. The mortgage portfolio was assigned an underwriting score of medium and a benchmark of moderate in the European RMBS Insight model.

-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the transaction documents. The transaction cash flows were modelled using portfolio default rates and loss-given default outputs provided by the European RMBS Insight model. Interest payable on the rated Notes is fixed, with 81.2% of the portfolio balance linked to a fixed rate of interest and the remaining portion linked to a floating Standard Variable Rate. The floating-rate percentage includes loans with reset period of 12 months (3.5%). The issuer account bank has the right to charge negative interest rates provided ten days’ notice has been given. The cash flow assumptions were stressed to assess this risk of negative interest rates on the issuer account bank. The transaction cash flows were modelled using Intex. DBRS considered additional sensitivity scenario of 0% conditional prepayment rate (CPR) stress. The Class A notes passed DBRS’s AAA stresses in all 0% CPR scenarios.

-- ABN Amro Bank N.V. acts as the issuer account bank for the transaction. The DBRS Critical Obligations Rating of AA/R-1(high)/Stable 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.

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “European RMBS Insight Methodology” and “European RMBS Insight: Dutch Addendum.”

DBRS has applied the principal methodology consistently.

An asset and a cashflow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of data and information used for this rating include NIBC Bank N.V. and its representatives.

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 issued financial instrument. This is the first DBRS rating on this 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 rating parameters Probability of Default (PD) and Loss Given Default (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 scenario constitutes the parameters used to determine the ratings (the Base Case):

-- For the AAA (sf) rating category, PD of 33.8% and the LGD of 46.1%.

DBRS concludes that for the Class A notes (amongst other possible changes PD/LGD and impact of such changes to the ratings):

-- A hypothetical increase of the PD by 25% would lead to maintaining the rating of AAA (sf).
-- A hypothetical increase of the PD by 50% would lead to downgrade of the rating to AA (sf).
-- A hypothetical increase of the LGD by 25% would lead to maintaining the rating of AAA (sf).
-- A hypothetical increase of the LGD by 50% would lead to downgrade of the rating to AA (high) (sf).
-- A hypothetical increase in both PD and LGD by 25% would lead to downgrade of the rating to AA (sf).
-- A hypothetical increase of the PD by 25% and LGD by 50% would lead to downgrade of the rating to A (high) (sf).
-- A hypothetical increase of the PD by 50% and LGD by 25% would lead to downgrade of the rating to A (high) (sf).
-- A hypothetical increase in both PD and LGD by 50% would lead to downgrade of the rating to A (low) (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: Asim Zaman, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 May 2017

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

-- European RMBS Insight Methodology and European RMBS Insight: Dutch Addendum (April 2017)
-- Legal Criteria for European Structured Finance Transactions (September 2016)
-- Unified Interest Rate Model for European Securitisations (November 2016)
-- Operational Risk Assessment for European Structured Finance Originators (October 2016)
-- Operational Risk Assessment for European Structured Finance Servicers (October 2016)

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