EUR 597 million of rated debt securities affected
London, 01 March 2011 -- Moody's Investors Service has today assigned definitive credit ratings
to the following class of notes issued by Essence IV B.V.:
Aaa(sf) to Euro 597,000,000 Class A Mortgage-Backed
Notes 2011 due 2060
The class B and class C notes are not rated by Moody's.
RATINGS RATIONALE
The transaction represents a securitisation of Dutch prime mortgage loans
backed by residential properties located in the Netherlands and originated
or acquired by subsidiaries of NIBC Bank N.V. (NIBC,
Baa2/P-2). The portfolio will be serviced by NIBC.
The rating addresses the expected loss posed to investors by the legal
final maturity of the notes. In Moody's opinion, the structure
allows for timely payment of interest and principal with respect of the
notes by the legal final maturity. Moody's ratings only address
the credit risk associated with the transaction. Non-credit
risks have not been addressed, but may have a significant effect
on yield to investors.
The ratings of the notes take into account the credit quality of the underlying
mortgage loan pool, from which Moody's determined the MILAN Aaa
Credit Enhancement and the portfolio expected loss.
The expected portfolio loss of 0.65% of current balance
of the portfolio at closing and the MILAN Aaa required Credit Enhancement
of 9.8% served as input parameters for Moody's cash flow
model, which is based on a probabilistic lognormal distribution
as described in the report "The Lognormal Method Applied to ABS Analysis",
published in September 2000.
The MILAN Aaa Credit Enhancement is higher than for other recently closed
prime Dutch RMBS transactions with a revolving pool. The key drivers
for the MILAN Aaa Credit Enhancement are (i) the weighted average loan-to-foreclosure-value
(LTFV) of 93.5%, which is average compared to other
Dutch RMBS transactions, (ii) the weighted average seasoning of
6.6 years, (iii) the proportion of advisor verified loans,
and (iv) the substitution period of five years. The risk of a deteriorating
pool quality through the addition of loans during the revolving period
is partly mitigated by substitution criteria. The MILAN Aaa Credit
Enhancement is also driven by our concerns regarding the below average
quality on some of the elements of the loan-by-loan data
we received. Our concern is addressed by an additional adjustment
in the MILAN model which lead to an increase of the MILAN Aaa Credit Enhancement.
The key drivers for the portfolio expected loss are (i) the performance
of the sellers' precedent transactions, which is slightly better
than the average in the Dutch market, (ii) benchmarking with comparable
transactions in the Dutch market and (iii) the current economic conditions
in the Netherlands in combination with historic recovery data of foreclosures
received from the sellers.
6.4% of the portfolio at closing comprises loans for which
the originator did not verify the income of the borrower at origination
of the loan. The proportion of these loans can increase during
the revolving period to 10.0%. For these loans the
borrower's income was verified by the borrower's mortgage
advisor or intermediary. This product type is not common in the
Dutch prime mortgage market. We applied an adjustment for these
loans in the MILAN model, because we view these loans as being more
risky than the benchmark loan in the Netherlands.
A key characteristic of this transaction is that there is no interest
rate swap in this transaction. 94.6% of the portfolio
is linked to a fixed interest rate and 42.0% of the portfolio
has an interest reset in more than 5 years. The weighted average
interest rate on the mortgage loans at closing is approximately 5.1%.
The coupon on the class A notes is fixed at 3.25%.
Over time fixed rate loans can reset. The transaction documentation
provides that at reset the new interest rate cannot be set lower than
3.5%. This limit of 3.5% also applies
for new loans being added during the revolving period. Because
there is no swap in this transaction, the excess spread in the transaction
can vary over time, depending on the weighted average yield on the
portfolio. In the cash flow analysis we applied a stressed assumption
on the development of the weighted average yield on the portfolio over
time. This stressed assumption is based on adverse prepayments
of higher yielding mortgage loans and loans resetting at a low interest
rate. For the yield on the substituted mortgage loans during the
revolving period we applied an assumption based on interest rate limit
of 3.5%.
Furthermore, approximately 21.2% of the portfolio
comprises life mortgage loans, which are exposed to set-off
risk in case an insurance company goes bankrupt. The overall exposure
to life insurance linked mortgage linked mortgages is not limited during
the revolving period. Furthermore, the distribution of exposure
to different insurance company counterparties can also change during the
revolving period. Because there are no limits on the proportion
of life mortgage loans and the distribution of insurance company counterparties,
we have applied a stressed proportion of life mortgage loans and a conservative
distribution of insurance company counterparties for the purpose of modelling
the set-off risk in the cash flow analysis.
The amortising reserve fund will be funded at 0.5% of the
outstanding portfolio at closing. The reserve fund will amortise
to 0.5% of the outstanding amount of the class A and class
B notes, with a floor of 0.25% of the outstanding
amount of the class A and class B notes at closing. The reserve
fund is replenished before interest payment on the class B notes.
Operational Risk Analysis: Moody's has analysed the potential operational
risks associated with the servicing and cash management functions in the
transaction. The named servicer in the transaction is NIBC (Baa2/P-1).
NIBC has sub delegated the loan administration to three sub servicer (Stater,
Quion and Welcium). If NIBC's rating falls below Baa3,
the issuer and the security trustee will appoint a back-up servicer.
Furthermore, the issuer and security trustee will use best efforts
to appoint a substitute servicer if the main servicer is no longer able
to service the mortgage loan pool. Moody's views this undertaking
to be similar to a back-up servicer facilitator function.
The role of cash manager in this transaction is also performed by NIBC.
If the NIBC's rating falls below Baa3, the issuer and the
security trustee will appoint a back-up cash manager.
The transaction has the benefit of two sources of liquidity; (i)
a liquidity reserve account, which is fully funded at closing and
(ii) a fully funded reserve fund. The size of the liquidity reserve
account is 0.3% of the class A notes. The available
liquidity in this transaction is sufficient to cover 3 monthly interest
payments on the class A notes.
The composite V-Score for this transaction is Low/Medium,
which is in line with the V-Score assigned for the Dutch RMBS sector,
mainly due to the fact that it is a standard Dutch prime RMBS structure
for which we have over 10 years of historical performance data on precedent
transactions. The primary source of uncertainty surrounding our
assumptions is the development of the weighted average interest on the
mortgage loans in the portfolio over time, which impacts the available
excess spread. Another source of uncertainty surrounding our assumptions
is the proportion of advisor verified loans in this pool. For this
product type there is less historical performance data available than
for normal Dutch prime mortgage loans. V-Scores are a relative
assessment of the quality of available credit information and of the degree
of dependence on various assumptions used in determining the rating.
High variability in key assumptions could expose a rating to more likelihood
of rating changes. The V-Score has been assigned accordingly
to the report "V-Scores and Parameter Sensitivities in the Major
EMEA RMBS Sectors" published in April 2009.
Moody's Parameter Sensitivities: If the portfolio expected loss
was increased from 0.65% of current balance to 1.95%
(a stress of 3 times) of current balance and assuming MILAN Aaa CE remained
at 9.8% and all other factors were constant, the model
output indicates that the class A have achieved Aaa. If MILAN Aaa
CE increased to 13.7% (a stress of 1.4 times) and
the portfolio expected loss remained at 0.65%, the
model output indicates that the class A would not have achieved Aaa,
but Aa1. Moody's Parameter Sensitivities provide a quantitative/model-indicated
calculation of the number of rating notches that a Moody's structured
finance security may vary if certain input parameters used in the initial
rating process differed. The analysis assumes that the deal has
not aged and is not intended to measure how the rating of the security
might migrate over time, but rather how the initial rating of the
security might have differed if key rating input parameters were varied.
Parameter Sensitivities for the typical EMEA RMBS transaction are calculated
by stressing key variable inputs in Moody's primary rating model.
The principal methodologies used in this rating were Moody's Updated MILAN
Methodology for Rating Dutch RMBS published in September 2009, Cash
Flow Analysis in EMEA RMBS: Testing Features with the MARCO Model
(Moody's Analyser of Residential Cash Flows) published in January 2006,
Moody's Updated Approach to NHG Mortgages in Rating Dutch RMBS,
published in March 2009, and Moody's Updated Methodology for Set-Off
in Dutch RMBS published in November 2009.
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instruments
in this transaction.
REGULATORY DISCLOSURES
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's Investors
Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
London
Ivo Raschl
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Annabel Schaafsma
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns definitive ratings to one class of Dutch RMBS notes issued by Essence IV B.V.
