DBRS Morningstar Finalises Provisional Ratings on Delft 2020 B.V.

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following notes issued by Delft 2020 B.V. (Delft 2020; the issuer):

-- Class A notes at AAA (sf)
-- Class B notes at AA (sf)
-- Class C notes at A (sf)
-- Class D notes at BBB (sf)
-- Class E notes at BB (low) (sf)
-- Class F notes at B (low) (sf)

The rating assigned to the Class A notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in October 2042. The rating assigned to the Class B notes addresses the timely payment of interest once most senior and the ultimate repayment of principal on or before the final maturity date.

The ratings on the Class C, Class D, Class E, and Class F notes address the ultimate payment of interest and repayment of principal by the legal final maturity date. DBRS Morningstar does not rate the Class Z or Class X notes or the residual certificates.

Delft 2020 is a new transaction formed by securitising the collateral currently under Delft 2017 B.V. (Delft 2017) and Delft 2019 B.V. (Delft 2019). Delft 2017 is a seasoned Dutch, nonconforming transaction comprising mortgage loans originated by ELQ Portfeuille 1 B.V. (ELQ) and sold into EMF-NL 2008-1 B.V. in 2017. The mortgage loans in Delft 2019 were originated by ELQ and Quion 50 B.V. (Quion), which were subsidiaries of Lehman Brothers through ELQ Hypotheken N.V. ELQ and Quion no longer originate loans and were sold to EMF-NL 2008-2 B.V. in April 2019. Delft 2017 and Delft 2019 have been called on the interest payment date in January 2020.

The legal and beneficial titles of the mortgage loans have been transferred to the issuer on the closing date. Adaxio B.V. will service the mortgage portfolio during the life of the transaction with Intertrust Administrative Services B.V. acting as backup servicer facilitator. The servicing of loans originated by Quion will be delegated to Quion Hypotheekbemiddeling B.V. but will switch to Adaxio B.V. some day in the future as agreed between the parties.

As of 31 December 2019, the portfolio balance was EUR 253.3 million. The portfolio includes mortgage loans with nonconforming characteristics such as self-certified borrower income (44.0% by loan balance); negative Bureau Krediet Registratie listings of borrower credit history (30.5%); and loans to borrowers classified as unemployed, self-employed, or pensioners (33.2%). The loans are mostly floating rate (93.5%), repay on an interest-only (99.1%) basis, and have a weighted-average coupon of 2.8%. The weighted-average current loan-to-value (CLTV) ratio of the portfolio is 82.0%, with 8.5% of the loans having a CLTV equal to or above 100%.

The rated notes benefit from credit enhancement provided by subordination, excluding the Class X notes, and the nonliquidity reserve, which can clear any principal deficiency ledger (PDL) debits in the revenue priority of payments. Initially, the Class A notes will have 24.8% of credit enhancement. Additionally, the liquidity reserve is available to cover interest shortfalls on the Class A notes.

The nonliquidity reserve was funded from the issuance of the Class R certificates and can be applied to cover shortfalls in senior fees, pay interest on Classes A to F, and clear PDL balances on the Class A to F subledgers. The nonliquidity reserve has a balance equal to 2.0% of the initial balance of the Class A to Z notes minus the required balance of the liquidity reserve. The liquidity reserve is available to support senior fees and interest shortfalls on the Class A notes, following the application of revenue and the nonliquidity reserve. While the Class A notes are outstanding, the liquidity reserve will have a required balance equal to 2.0% of the outstanding balance of the Class A notes, subject to a floor of 1.0% of the initial balance of the Class A notes. As this liquidity reserve amortises, the excess amounts will become part of the revenue available funds and allow the nonliquidity reserve to increase in size.

Principal funds can be diverted to pay shortfalls in senior fees and unpaid interest due on the Class A to F notes, which remain after applying revenue collections and exhausting both reserve funds. Principal receipts can only be used to pay interest shortfalls if the corresponding note has a PDL balance less than 10% of its outstanding balance. This does not apply to the senior-most note where principal can always be used to cover interest shortfalls.

If principal funds are diverted to pay revenue liabilities, including replenishing the liquidity reserve, the amount will subsequently be debited to the PDL. The PDL comprises seven subledgers that will track principal used to pay interest, as well as realised losses, in a reverse-sequential order that begins with the Class Z subledger.

Accrued interest on the Class B to F notes is subject to a net weighted-average coupon cap (NWC). The NWC is calculated as the gross WAC 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 Morningstar’s ratings do not address payments of the NWC additional amounts, which are the amounts accrued and become payable junior in the revenue and principal waterfall if the coupon due on a series of notes exceeds the applicable NWC. NWC additional amounts will accrue interest at the lower of the NWC and the applicable coupon.

On the interest payment date in April 2023, the coupon due on the notes will step up and the notes may be optionally called. The notes must be redeemed at par plus pay any accrued interest.

Monthly mortgage receipts are deposited into a bankruptcy-remote Stichting collection foundation account at ABN AMRO Bank N.V. (ABN AMRO; rated at A (high) with a Stable trend by DBRS Morningstar), mostly via direct debit. The amounts in the collection account will be transferred to the issuer account on at least a monthly basis. Commingling risk is considered mitigated by the use of a Stichting and the regular sweep of funds. The collection account bank is subject to a DBRS Morningstar investment-grade downgrade trigger. If DBRS Morningstar’s long-term senior debt rating of ABN AMRO is downgraded below “A”, the collection account bank will be replaced by, or obtain a guarantee from, an appropriately rated bank within 30 calendar days of such breach.

ABN AMRO is also the account bank for the transaction. DBRS Morningstar’s account bank reference rating at AA (low) is one notch below the Critical Obligations Rating of AA, and is consistent with the minimum institution rating given the ratings assigned to the Class A notes, as described in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its ratings primarily on the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage loan portfolio and the ability of the parties to perform servicing and collection activities. DBRS Morningstar estimated stress-level probability of default (PD), loss given default (LGD), and expected losses (EL) on the mortgage portfolio. The PD, LGD, and EL are used as inputs into the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS Morningstar’s “European RMBS Insight Methodology” and the “European RMBS Insight: Dutch Addendum” methodology.
-- The transaction’s ability to withstand stressed cash flows assumptions and repay investors according to the terms of the transaction documents. The transaction structure was analysed using Intex DealMaker. DBRS Morningstar considered additional sensitivity scenarios of 0% conditional repayment rate stress.
-- The consistency of the transaction’s legal structure with the DBRS Morningstar “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the issuer.
-- The relevant counterparties, as rated by DBRS Morningstar, are appropriately in line with DBRS Morningstar legal criteria to mitigate the risk of counterparty default or insolvency.
-- The structural mitigants in place to avoid potential payment disruptions caused by operational risk, such as downgrade and replacement language in the transaction documents.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the ratings are: “European RMBS Insight Methodology” and the “European RMBS Insight: Dutch Addendum”.

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

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include Morgan Stanley & Co. International plc.

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

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar 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. These are the first DBRS Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

In respect of the Class A notes, the PD of 42.6% and LGD of 39.7%, corresponding to a AAA (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)

In respect of the Class B notes, the PD of 38.6% and LGD of 34.1%, corresponding to a AA (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

In respect of the Class C notes, the PD of 33.7% and LGD of 29.7%, corresponding to an A (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)

In respect of the Class D notes, the PD of 27.6% and LGD of 24.9%, corresponding to a BBB (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD:
-- 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)

In respect of the Class E notes, the PD of 18.8% and LGD of 20.2%, corresponding to a BB (low) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD:
-- 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in LGD, expected rating of B (sf)
-- 25% increase in PD, expected rating of B (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of B (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of B (low) (sf)
-- 50% increase in PD, expected rating of B (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of CCC (sf)

In respect of the Class F notes, the PD of 13.1% and LGD of 18.3%, corresponding to a B (low) (sf) stress scenario, were stressed assuming 25% and 50% increase on the PD and LGD:
-- 25% increase in LGD, expected rating of CCC (sf)
-- 50% increase in LGD, would lead to Class F being downgraded to below CCC (sf)
-- 25% increase in PD, expected rating of CCC (sf)
-- 25% increase in PD and 25% increase in LGD, would lead to Class F being downgraded to below CCC (sf)
-- 25% increase in PD and 50% increase in LGD, would lead to Class F being downgraded to below CC (sf)
-- 50% increase in PD, would lead to Class F being downgraded to below CCC (sf)
-- 50% increase in PD and 25% increase in LGD, would lead to Class F being downgraded to below CC (sf)
-- 50% increase in PD and 50% increase in LGD, would lead to Class F being downgraded to below CC (sf)

For further information on DBRS Morningstar 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Ronja Dahmen, Assistant Vice President
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 6 January 2020

DBRS Ratings GmbH
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Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

--European RMBS Insight: Dutch Addendum
--European RMBS Insight Methodology
--Legal Criteria for European Structured Finance Transactions
--Derivative Criteria for European Structured Finance Transactions
--Interest Rate Stresses for European Structured Finance Transactions
--Operational Risk Assessment for European Structured Finance Servicers
--Operational Risk Assessment for European Structured Finance Originators

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.