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Atypical Dutch RMBS prepped




RNHB is in the market with an unusual Dutch RMBS backed by owner-occupied and buy-to-let mortgage loans secured by residential, mixed-use and commercial properties. Dubbed Dutch Property Finance 2017-1, the €1.5bn transaction is unique in that borrowers are divided into risk groups and are obliged to share servicing of the debt across the risk group.

The preliminary collateral pool comprises 8,368 loans extended to 10,602 borrowers, of which 80.69% are BTL. The properties are 52.17% residential, 23.58% mixed-use and 24.26% commercial, located in Zuid Holland (29.18%), Noord Holland (24.92%) and Noord-Brabant (16.95%).

The average loan size is €178,360, while the weighted-average seasoning of the portfolio is 7.4 years with a WA remaining term of 4.3 years. At 61.9%, S&P notes that the WA current loan-to-value is comparatively low for a Dutch portfolio.

The majority (99.4%) of loans included in the portfolio are fixed with future resets, while the notes pay a floating rate of interest. To address this mismatch, the transaction features a balance guaranteed interest rate swap (with NatWest Markets as the counterparty) that swaps a fixed rate interest into three-month Euribor.

Until the first optional redemption date in July 2022, the seller has the ability to grant - and the issuer the obligation to purchase - further advances and borrowers can sell collateral without using the proceeds to pay down their debt, subject to adhering to certain asset conditions. Borrowers can also be granted permitted variations, which can continue to occur post the first optional redemption date.

S&P notes that the underlying loans in the pool and lending methodology are atypical for the Dutch RMBS market. "Lending by RNHB is done on a risk group basis, where one or more borrowers can take on debt to acquire residential, mixed-use or commercial properties," the agency explains. "The risk group's entire debt is secured over all of the underlying properties associated with the risk group and each of the associated borrowers is responsible for the debt. This feature can be complicated further as a borrower can be present in multiple risk groups, although underwriting is done on a loan-by-loan basis."

From a credit perspective, this feature can have both a positive and negative effect, according to S&P. For example, should borrower X and Y in risk group A default and their collateral sale proceeds be insufficient to clear the outstanding debt, then risk group B - which contains borrower X and Z - can also be foreclosed upon to generate proceeds to clear the debt of risk group A. Under the transaction documentation, RNHB is permitted to take such an action, but in practice this has never been used and may be subject to legal challenges from borrowers in unaffected risk groups.

The pool includes higher levels of non-residential properties than is typical for the Dutch RMBS market and S&P has therefore applied an adjustment to its WAFF of 1.5x for private individuals to purchase a mixed-use or commercial property and 2x for commercial borrowers. Given that the loans in a risk group can be for multiple properties, the agency assumes all loans in a risk group to be for commercial properties, if there is any element of commercial collateral supporting the risk group. For its weighted-average loss severity analysis, the agency has applied higher MVD assumptions to risk groups with mixed-use and commercial properties, in line with its covered bond commercial real estate criteria.

Of the loans in the pool, 89.18% mature within the next 10 years. However, in most cases, the monthly instalments will not result in the loans being redeemed on their maturity dates.

When a maturity date approaches, RNHB may offer the borrower a new rate. The borrower can either accept the revised rate and term or refinance elsewhere and repay their loan.

Alternatively, RNHB can give the borrower three months' notice prior to maturity that it wishes to call the loan and the borrower must repay. "In our view, this presents a potential payment shock risk, as the borrowers in question will have to source alternative financing to redeem their loan ahead of the anticipated schedule," S&P suggests.

At closing, 3.72% of the pool is expected to be in arrears of greater than one month, which is higher than the 0.90% observed in S&P's Dutch RMBS index. To address the potential for increasing arrears in the pool, the agency forecast an additional 1.74% based on historical data from the originator.

Provisionally rated by DBRS and S&P, the transaction comprises AAA/AAA rated class A notes, AA/AA class Bs, A/A+ class Cs, BBB/A- class Ds, BB/BBB class Es and unrated zero coupon class F and Gs. Preliminary tranche percentages for the class A, B, C, D, E and F notes are 76.35%, 10.65%, 3.95%, 4.1%, 1.95% and 3% respectively.

A non-amortising reserve fund will be funded by the class G notes equating to 2% of the balance of the class A to F notes. The notes will also be provided with liquidity support from principal receipts, which can be used to cover interest shortfalls on the most senior class of notes, provided credit is applied to the principal deficiency ledgers in reverse sequential order.

RNHB was formed in 2008 when Rijnlandse Hypotheekbank and Nederlandse Hypotheekbank were merged by their parent company, FGH Bank, which in turn was owned by Rabobank. In December 2016, RNHB - which de-merged from FGH Bank into Yellow Newco and is currently merged into Vesting Finance Servicing - was acquired by funds managed or advised by Carval Investors and Arrow Global in a joint venture.

HSBC is arranger on the deal and joint lead manager with ABN AMRO.

CS

17/07/2017 12:30:41



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