DBRS Morningstar Finalises Provisional Ratings on Cartesian Residential Mortgages 5 S.A.

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following notes issued by Cartesian Residential Mortgages 5 S.A. (Cartesian 5 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 (high) (sf)

The final ratings assigned to the Class B and Class C notes differ from the provisional ratings of AA (low) (sf) and A (low) (sf), respectively, because of tighter initial and step-up margins on Class A, Class B, and Class C notes in the final structure.

The Issuer is a securitisation collateralised by a portfolio of prime Dutch residential mortgage loans granted by Venn Hypotheken B.V. (the Originator) in the Netherlands. All of the loans in the portfolio are secured by a first-ranking mortgage right.

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date in November 2055. The rating on the Class B Notes addresses timely payment of interest when most senior and the ultimate payment of principal on or before the final maturity date. The ratings assigned to the Class C and Class D notes address the ultimate payment of interest and principal on or before the final maturity date. An increased margin on the rated notes is payable from the step-up date falling in November 2025. Such additional interest amounts are payable at a subordinated level in the revenue waterfall and DBRS Morningstar does not rate them.

The proceeds of the Class A to Class E notes were used to fund the purchase of a portfolio of prime Dutch residential mortgage loans secured over properties located in the Netherlands. Additionally, Cartesian 5 also issued the Class S Notes to fund the reserve fund, which provides 1.6% credit enhancement at closing. The reserve fund is available to cover senior costs, expenses, and interest shortfall on the rated notes. If there is a further interest shortfall on the senior-most notes, it will be covered from the use of principal receipts.

The initial credit enhancement on the Class A, Class B, Class C, and Class D notes is sized at 10.4%, 7.55%, 5.75%, and 5.0%, respectively. This credit enhancement is provided in the form of overcollateralisation by the portfolio and a partially amortising reserve fund.

DBRS Morningstar was provided with information the mortgage portfolio as of 31 August 2020. Unlike Cartesian 4, Cartesian 5 does not have prefunding period, and the portfolio will be static. The portfolio consists of 2,190 loan parts (equivalent to 804 loans) with an aggregate principal balance of EUR 299.9 million extended to 804 borrowers.

All of the mortgage loans in the portfolio are owner-occupied and are secured by a first-ranking mortgage right. The entire portfolio consists of fixed-rate mortgage loans with different reset intervals, ranging from 12 months to 30 years; most of the loans reset after 10, 20, or 30 years. Furthermore, 34.8% of the portfolio consists of interest-only loan parts, and 8.1% of the loans were granted to self-employed borrowers. All mortgage loans were performing as of the cut-off date.

The notes pay a floating interest rate indexed to three-month Euribor plus a margin. To mitigate the interest rate risk that arises because of this mismatch, the Issuer entered into a swap agreement with BNP Paribas (the swap counterparty; Long Term Critical Obligations Rating of AA (high) with a Stable trend). The Issuer will pay the swap counterparty an amount equal to the swap notional amount multiplied by the swap rate plus the prepayment penalties received by the Issuer. The swap counterparty will pay the Issuer the swap notional amount multiplied by three-month Euribor. The weighted-average portfolio swap rate is currently at 0.517%.

If the portfolio’s constant prepayment rate (CPR) falls outside a particular CPR range, the Issuer may have to make a subordinated payment on the swap, as a NAMS rebalancing payment. This payment is deferrable and junior in the capital structure but senior to the Class E principal deficiency ledger (PDL).

Once the loan reaches the end of the reset period, the borrowers will be offered a mortgage rate that takes into account the interest rate policy. The interest rate policy considers the market swap rate (hedging costs) on the reset date, a variable margin, and an additional credit risk spread based on the loan-to-value. Following a revised interest rate policy letter, the absolute floor on the mortgage rate of 1% is removed, but the minimum margin of 1% over the market swap rate persists.

The structure includes a PDL comprising five subledgers (Class A PDL to Class E PDL) that provision for realised losses as well as the use of any principal receipts applied to meet any shortfall in payment of senior fees and interest on the most senior class of notes outstanding. The losses will be allocated starting from Class E PDL and then to the subledgers of each class of notes in reverse sequential order. The junior payment on the swap could lower the rate of cures on the Class E PDL.

The Issuer Account Bank is Citibank Europe plc, Luxembourg Branch. Based on the DBRS Morningstar private rating of the account bank, the downgrade provisions outlined in the transaction documents and structural mitigants, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Based on DBRS Morningstar’s Long Term Critical Obligations Rating of AA (high) on BNP Paribas, the downgrade provisions outlined in the documents, and the transaction structural mitigants, DBRS Morningstar considers the risk arising from the exposure to BNP Paribas to be consistent with the ratings assigned to the rated notes as described in DBRS Morningstar's “Derivative Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its ratings on a review of the following analytical considerations:

-- The transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS Morningstar calculated probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio, which are used as inputs into the cash flow tool. The mortgage portfolio was analysed in accordance with DBRS Morningstar’s “European RMBS Insight: Dutch Addendum” methodology.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A, Class B, Class C, and Class D notes according to the terms of the transaction documents. The transaction structure was analysed using Intex DealMaker.
-- DBRS Morningstar’s sovereign rating on the Kingdom of the Netherlands at AAA/R-1(high) with Stable trends as of the date of this press release.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and presence of legal opinions addressing the assignment of the assets to the Issuer.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that payment holidays and delinquencies may arise in the coming months for many RMBS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar assumed that there was a moderate decline in residential property prices.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the ratings are: “European RMBS Insight Methodology” (2 April 2020) and the “European RMBS Insight: Dutch Addendum” (13 March 2020).

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 at: https://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include loan-level data as of 30 June 2020 provided by ARA Venn and investor reports for Cartesian Residential Mortgages 4 S.A. covering period from November 2019 to May 2020 obtained from Intertrust.

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 these financial instruments.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.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, a PD of 19.9% and LGD of 38.5%, corresponding to the AAA (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class B Notes, a PD of 16.7% and LGD of 33.0%, corresponding to the AA (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class C Notes, a PD of 13.0% and LGD of 28.7%, corresponding to the A (low) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.
-- In respect of the Class D Notes, a PD of 9.5% and LGD of 25.5%, corresponding to the BBB (high) (sf) rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Risk sensitivity when the PD is stressed by 25.0%:
--The Class A rating is AA (high) (sf)
--The Class B rating is A (high) (sf)
--The Class C rating is A (low) (sf)
--The Class D rating is BBB (sf)

Risk sensitivity when the PD is stressed by 50.0%:
--The Class A rating is AA (sf)
--The Class B rating is A (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BBB (low) (sf)

Risk sensitivity when the LGD is stressed by 25.0%:
--The Class A rating is AA (high) (sf)
--The Class B rating is A (high) (sf)
--The Class C rating is A (low) (sf)
--The Class D rating is BBB (sf)

Risk sensitivity when the LGD is stressed by 50.0%:
--The Class A rating is AA (sf)
--The Class B rating is A (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BBB (low) (sf)

Risk sensitivity when the PD and LGD are stressed by 25.0%:
--The Class A rating is AA (low) (sf)
--The Class B rating is A (sf)
--The Class C rating is BBB (high) (sf)
--The Class D rating is BBB (low) (sf)

Risk sensitivity when the PD is stressed by 50.0% and LGD is stressed by 25.0%:
--The Class A rating is A (high) (sf)
--The Class B rating is A (low) (sf)
--The Class C rating is BBB (low) (sf)
--The Class D rating is BB (high) (sf)

Risk sensitivity when the PD is stressed by 25.0% and LGD is stressed by 50.0%:
--The Class A rating is A (high) (sf)
--The Class B rating is A (low) (sf)
--The Class C rating is BBB (low) (sf)
--The Class D rating is BB (high) (sf)

Risk sensitivity when the PD is stressed by 50.0% and LGD is stressed by 50.0%:
--The Class A rating is A (sf)
--The Class B rating is BBB (high) (sf)
--The Class C rating is BB (high) (sf)
--The Class D rating is BB (high) (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 U.S. regulations only.

Lead Analyst: Hrishikesh Oturkar, Senior Analyst
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 28 August 2020

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

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.dbrsmorningstar.com/about/methodologies.

-- European RMBS Insight Methodology (2 April 2020) and European RMBS Insight Model v4.3.1.0.
https://www.dbrsmorningstar.com/research/359192/european-rmbs-insight-methodology
-- European RMBS Insight: Dutch Addendum (13 March 2020),
https://www.dbrsmorningstar.com/research/357926/european-rmbs-insight-dutch-addendum
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019),
https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020),
https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020),
https://www.dbrsmorningstar.com/research/357430/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.dbrsmorningstar.com/research/278375.

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