Press Release

DBRS Morningstar Finalises Provisional Rating on Candide Financing 2021-1 B.V.

RMBS

November 18, 2021

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional rating of AAA (sf) on the Class A notes issued by Candide Financing 2021-1 B.V. (the Issuer). The notes are collateralised by a portfolio of Dutch residential mortgage loans sold by Lloyds Bank GmbH (the Seller) and originated by Lloyds Bank GmbH-Amsterdam branch, Lloyds Hypotheken BV, and the Bank of Scotland Plc-Amsterdam branch (the Originators) in the Netherlands. The Nationale Hypotheek Garantie secures 58% of the loans in the portfolio.

The Issuer issued two tranches of mortgage-backed securities (the Class A and Class B notes) to finance the purchase of Dutch residential mortgage loans secured over properties located in the Netherlands. Additionally, it issued Class C notes, which are noncollateralised and whose proceeds will be used to fund a reserve fund.

The rating addresses the timely payment of interest and the Issuer’s obligation to repay principal on the Class A notes by the legal final maturity date in November 2060. DBRS Morningstar does not rate the Class B or the Class C notes. The coupon on the Class A notes will be three-month Euribor plus 0.70% up to (but excluding) the First Optional Repayment Date (May 2028), plus 1.05% afterwards.

Credit support to the Class A notes is sized at 5.1% and is provided by subordination and a nonamortising reserve fund. The reserve fund was funded at 0.75% of the Class A and Class B notes’ initial balance.

Further liquidity support for the Class A notes is provided through a cash advance facility, along with a priority of payments allowing principal to be borrowed to support revenue items with a corresponding debit to the appropriate principal deficiency ledger. The cash advance facility will amortise with no performance conditions attached and is sized at 1.0% of the Class A notes’ outstanding balance with a floor of 0.5% of the Class A notes’ initial balance. The cash advance facility is a renewable facility initially in place until the First Optional Repayment Date and, if it is not renewed, the Issuer will draw it down.

As of 31 October 2021, the portfolio consisted of 4,831 loan parts granted to 2,884 borrowers with an aggregate principal balance of EUR 522 million. As of the same date, the weighted-average (WA) seasoning of the portfolio was 3.7 years with a WA residual maturity of 25.8 years. The WA loan-to-value ratio of the portfolio (on the original property value) was 74.0%. The mortgage loans in the asset portfolio are all classified as owner occupied and are secured by a first-ranking mortgage right (or first and sequential ranking, for loans backed by the same property). The portfolio contains 16.3% interest-only loans, and 7.5% of the loans were granted to self-employed borrowers. As of the cut-off date, all mortgage loans were performing.

Almost all loans pay a fixed rate of interest: 8% of the pool is fixed for life whereas the remaining 92% pays a fixed rate with future reset, with an average reset date of 14 years. In comparison, the Class A notes pay an interest rate linked to three-month Euribor, which resets on a quarterly basis. The Issuer’s interest rate risk exposure is hedged through a balance-guaranteed interest rate swap agreement with Lloyds Bank plc. Based on its rating and on the collateral posting provisions included in the documentation, DBRS Morningstar considers the risk of such counterparty to be consistent with the rating assigned, in accordance with its “Derivative Criteria for European Structured Finance Transactions” methodology.

Further advances are allowed only until the First Optional Repayment Date and are subject to certain annual quantitative limits. Furthermore, the sale of further advance receivables is subject to certain conditions as well as the general pool eligibility criteria, limiting the deterioration of the pool quality. DBRS Morningstar reviewed these conditions and considered them in its analysis.

The Issuer account bank is BNG Bank N.V. Based on DBRS Morningstar’s private rating on the account bank and the replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such counterparty to be consistent with the rating assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

The Seller services the mortgages, with Stater Nederland B.V. acting as subservicer.

DBRS Morningstar based its rating primarily on the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement and liquidity provisions.
-- 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 outputs on the mortgage portfolio, which DBRS Morningstar uses as inputs into its cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “European RMBS Insight Methodology” and “European RMBS Insight: Dutch Addendum" methodologies.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the notes. DBRS Morningstar analysed the transaction structure using Intex Dealmaker.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the 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 immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many RMBS transactions. The rating is based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated an increase in default probability for self-employed borrowers in its analysis and conducted additional analysis to determine the transaction benefits from sufficient liquidity support in case there is a high level of payment moratoriums in the portfolio.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the rating are the “European RMBS Insight Methodology” (3 June 2021) and the “European RMBS Insight: Dutch Addendum” (4 May 2021).

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.

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

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include historical performance (static pool defaults data, dynamic delinquencies, and dynamic prepayments data from 2016 to 2021; recovery data from 2015 to 2021) and loan-level data as at 31 October 2021, provided by Lloyds Bank Corporate Markets plc on behalf of the Originators.

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 this rating 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating 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.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, the PD and LGD at the AAA (sf) stress scenario of 13.94% and 17.92%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar concludes the following impact on the Class A notes:
-- 25% increase of the PD, ceteris paribus, would not lead to a rating change;
-- 50% increase of the PD, ceteris paribus, would not lead to a rating change;
-- 25% increase of the LGD, ceteris paribus, would not lead to a rating change;
-- 50% increase of the LGD, ceteris paribus, would not lead to a rating change;
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would not lead to a rating change;
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would not lead to a rating change;
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would not lead to a rating change;
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 2 November 2021

DBRS Ratings GmbH, Sucursal en España
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DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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