Press Release

DBRS Morningstar Confirms Rating on Essence VI B.V. Following Restructure

RMBS

May 09, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) rating on the Class A Notes issued by Essence VI B.V. (the Issuer) following certain structural amendments to the transaction.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2065.

The confirmation follows review of amendments to the structure as outlined below as well as an annual review of the transaction and is based on the following analytical considerations:
-- A structural amendment to the transaction, extending the revolving period of the transaction by a further 3 years, amendments to the substitution and replenishment conditions, mortgage loan criteria, principal amount outstanding for the Class A and B Notes, and interest rates on all classes of issued notes , as well as reassignment of the mortgage receivables executed on 9 May 2023;
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the March 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level; and
-- No early termination events to date.

The transaction is a securitisation of a portfolio of Dutch prime residential mortgage loans originated or acquired by NIBC Bank N.V. (NIBC) and its subsidiaries. NIBC acts as servicer for the mortgage portfolio while Stater Nederland B.V. and Quion Hypotheekbemiddeling B.V., Quion Hypotheekbegeleiding B.V., and Quion Services B.V. act as subservicers.

The Issuer funded the purchase of the initial mortgage portfolio via the issuance of the Class A and Class B Notes and used the Class C Notes to establish the reserve fund and liquidity reserve. Following the amendment, the principal amount outstanding of the Class A Notes increased to EUR 804,705,260 from EUR 741,963,214 and the principal amount outstanding of the Class B Notes decreased to EUR 99,457,953 from EUR 162,200,000 through a cashless principal settlement between the Class A and Class B Notes.

As of January 2023, the mortgage portfolio had a current balance of EUR 864,527,397.50, and a weighted-average (WA) seasoning of 74.8 months. The mortgage portfolio comprises mortgage loans to individuals and is secured by residential properties located in the Netherlands. The WA current loan-to-market value of the portfolio is 73.0%.

The mortgage pool consists of both Nationale Hypotheek Garantie (NHG) (53.9%) and non-NHG loans (46.1%). DBRS Morningstar views this as a credit positive, as NHG loans typically show lower default rates because of the eligibility conditions in the NHG scheme and lower losses because loans are guaranteed if the loan underwriting follows NHG requirements. The mortgage portfolio also has a relatively high proportion of amortising loans (53.8%) compared with typical Dutch residential mortgage-backed security transactions. Amortising loans have the benefit that, as the borrower repays principal, in the event of their default, the amount outstanding would be less than 100% of the initial principal balance; therefore, all things equal, the LGD would be lower than for an interest-only (IO) loan.

The portfolio has IO mortgage loans (39.2%) as well as other types of mortgage loans where the repayment vehicle may not provide for the full repayment of principal in all cases, such as investment mortgage loans. IO loans are typically considered riskier than repayment loans, as borrowers who typically select these may have a reduced financial capacity to service the loan and would therefore 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.

The WA coupon of the mortgage portfolio is currently 2.5%. Dutch borrowers tend to favour longer-term, fixed-rate products where mortgage interest rates tend to be relatively higher than for floating-rate loans. The current fixed-rate proportion in the portfolio is 99.7%.

The interest payable on the Class A Notes is fixed at 0.50% subject to the fixed step-up rate of 0.90%.

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 that reduce the set-off risk within the transaction.

The transaction revolving period has been extended to 9 May 2026 from 9 May 2023, subject to the adherence to replenishment conditions. The transaction documents specify criteria that must be met during the substitution and replenishment periods, the failure of which would cause the revolving period to end. DBRS Morningstar stressed the portfolio in accordance with the replenishment and substitution conditions to assess the worst-case scenario to which the portfolio characteristics can migrate. The replenishment limit has been temporarily reduced to 10% per annum from 20%, which is computed on a 12-month rolling basis.

PORTFOLIO PERFORMANCE
As of the March 2023 payment date, loans two to three months in arrears represented 0.15% of the outstanding portfolio balance and loans more than three months in arrears represented 0.10% of the outstanding portfolio balance. The cumulative default ratio was 0.69%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-level analysis of the receivables based on the worst-case portfolio composition given the transaction revolving period. DBRS Morningstar assumes a base case PD and LGD of 9.4% and 26.5% at the B (sf) rating level, respectively. The assumptions continue to be based on the worst-case portfolio composition outlined in the portfolio covenants.

CREDIT ENHANCEMENT
Post amendment, the Class A Notes will benefit from 11.50% of credit enhancement provided via subordination of the Class B Notes (11.00%) and the reserve fund (0.50%). The amortising liquidity reserve is available to cover shortfalls in the payment of senior fees and Class A interest. To the extent applicable, amortised amounts will form part of the revenue waterfall. The step-up interest rates have reduced to 0.90%, 1.70%, and 3.00% for Class A, Class B, and Class C Notes, respectively. The amortising reserve fund is available to cover shortfalls in the payment of senior fees and Class A interest. To the extent applicable, amortised amounts will form part of the revenue waterfall. The reserve is currently funded to its target balance of EUR 4.5 million.

BNP Paribas SA, Netherlands Branch (BNPP) acts as the Issuer account bank for the transaction. Based on DBRS Morningstar’s private rating on BNPP, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

There is no swap counterparty for the transaction. The majority of the loans (99.72%) pay a fixed rate while the remaining 0.28% pay a floating rate. As the notes pay fixed rates of interest, the resulting basis risk is unhedged.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
The portfolio is exposed to loans guaranteed by the Dutch NHG mortgage scheme. This scheme supports home ownership in the Netherlands by providing low interest rate loans for the purchase of properties up to EUR 405,000 (as of January 2023).

The exposure to NHG loans is 53.9% of the actual portfolio and must be at least 30.0% of the portfolio under the amended substitution and replenishment conditions. DBRS Morningstar considered the presence of NHG loans in the portfolio to be a social factor as outlined within the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings”. DBRS Morningstar assumed reduced loss severities for loans backed by an NHG guarantee as outlined in its “European RMBS Insight: Dutch Addendum” methodology. This is credit positive and affects the rating.

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on the replenishment criteria set forth in the transaction legal documents.

A review of the amended transaction legal documents was conducted in the context of the amendments. The remaining transaction legal documents were not reviewed.

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/401817/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 investor reports and loan-level data provided by NIBC.

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

At the time of the initial rating, 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.

The last rating action on this transaction took place on 13 May 2022, when DBRS Morningstar confirmed its rating on the Class A Notes at AAA (sf).

The lead analyst responsibilities for this transaction have been transferred to Lina Mukhitdinova.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the base case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of loans for the Issuer at the B (sf) rating level are 9.4% and 26.5%, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to fall to AA (low) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to fall to AA (low) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to fall to A (low) (sf).

Class A Notes Risk Sensitivity
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of A (high)(sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (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 (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Lina Mukhitdinova, Senior Analyst
Rating Committee Chair: Ketan Thaker, Managing Director
Initial Rating Date: 17 May 2016

DBRS Ratings GmbH
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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: 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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