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Fitch Downgrades SGML II; Affirms DMPL X and XI
October 10, 2016 / 5:01 PM / a year ago

Fitch Downgrades SGML II; Affirms DMPL X and XI

(The following statement was released by the rating agency) LONDON, October 10 (Fitch) Fitch has downgraded one and affirmed two tranches of Dutch RMBS, comprising prime mortgage loans originated by Achmea Hypotheekbank N.V., now Achmea Bank N.V (A/Negative/F1), part of the Achmea group. Fitch also placed Securitized Guaranteed Mortgage Loans II B.V.'s (SGML II) class A notes on Rating Watch Negative (RWN). The rating actions are as follows: Securitized Guaranteed Mortgage Loans II B.V. class A (ISIN NL0006477739): Downgraded to 'AA+sf' from 'AAAsf'; placed on Rating Watch Negative Dutch Mortgage Portfolio Loans X B.V. (DMPL X), Class A2 (ISIN NL0010200473): Affirmed at 'AAAsf'; Outlook Stable Dutch Mortgage Portfolio Loans XI B.V. (DMPL XI), Class A (ISIN NL0010514154): Affirmed at 'AAAsf'; Outlook Stable KEY RATING DRIVERS Excessive Counterparty Exposure Fitch has capped the rating on SGML II at the rating of the account bank, Bank Nederlandse Gemeenten (BNG; AA+/Stable/F1+). This is due to excessive exposure to BNG, as all the credit enhancement available to the class A notes is provided by the reserve fund deposited at the issuer account held with BNG. If BNG were to default the class A notes would be downgraded by more than nine notches. As in previous years, Fitch acknowledges that BNG's Long-Term Issuer Default Rating is relatively high compared to peers'. The bank's Support Rating remains at '1'. The ratings capture the bank's state-owned nature, and its long-lasting policy role in financing the Dutch public sector. However, the agency decided that no further credit to BNG beyond its existing rating should be given in the rating of this transaction. Maturity Concerns Result in RWN The maturity of one loan in SGML II exceeds that of the class A notes. The loan is non-amortising. The structure does not include over-collateralisation of the class A notes. Therefore, if this loan does not prepay or default (and generate recoveries) before maturity, the noteholders would incur a loss. Fitch is awaiting feedback from the issuer about any corrective action that may be taken. If no action is taken the note would not be rateable under Fitch's criteria. DMPL X Performance Marginally Worsening Late-stage arrears (loans delinquent for over three months) in DMPL X have increased by over 14bp in the 12 months leading to June 2016. At the same time Fitch's Dutch All Deals index has decreased by 32bp, suggesting weaker performance by DMPL X than other Fitch-rated Dutch RMBS. The late-stage arrears in DMPL XI and SGML II have followed the index trend and decreased by 18bp and 41bp, respectively. Total arrears have reduced by 1.84 percentage points in DMPL X, suggesting that although late-stage delinquencies may be worsening, the pool performance as a whole is not. Total foreclosures and losses in the transaction (as a proportion of original portfolio balance) are also relatively low, at 0.79% and 0.18%. Fitch has considered the overall performance of all three transactions as stable and broadly mirroring the trends in the Dutch market. However, the agency will continue to monitor the performance in DMPL X for any further deterioration. NHG Credit to Performance The foreclosure frequency (FF) applicable to loans backed by NHG guarantees in SGML II was discounted by 10%. Analysis of NHG loans across Achmea's book revealed they have a lower rate of default than non-NHG loans for the vintages represented in the SGML II pool. The discount did not have a material impact on the rating outcome. Lender Adjustment Fitch applied a lender adjustment of 1.1x. This is in line with the adjustment applied to recent Fitch-rated Achmea-originated transactions. Performance Adjustment Factor Applied Fitch applied a PAF of 1, which is a variation from Fitch's "EMEA RMBS Rating Criteria". The variation is based on Fitch's review of Achmea's loan book default data, adjusted for vintages in the pool. The data was used to compare the bank's default distribution to Fitch's own criteria defined default curves for the Netherlands. The agency found Achmea's default distribution to be most comparable to Fitch's front-loaded default curve, however the rate of default was not as steep in the early years. This factor was adjusted upwards from the model-implied PAF, reflecting the agency's opinion of the continued stable performance of the transactions. Interest-Only Concentration All three transactions have interest-only concentration: interest-only loans maturing over any three-year period constitute more than 20% of the portfolio's current balance. However, this had no impact on the rating outcome. The agency applied the interest-only test in line with UK RMBS criteria, rather than the Dutch criteria. This is because Fitch believes that the UK test reflects the risks posed by such concentrations more appropriately. The test is also better specified. This is a variation from Fitch's "Criteria Addendum: Netherlands - Residential Mortgage Assumptions". The stressed weighted average FF calculated by applying this test did not result in an implied downgrade of more than three notches. Therefore, the analysis was not adjusted for interest-only concentration. Additional Criteria Variation Fitch has applied an FF increase of 150%, and 100% for borrowers who are full-time employees or self-employed and whose income is not verified. Fitch's criteria do not specify an FF adjustment for such borrowers. The rating impact is insignificant due to the small number of borrowers to which this variation applies. Data Adjustments There is a mismatch between the data on life insurance loans available at transaction close and that available in the loan-level data. For the purpose of the insurance set-off analysis, Fitch has assumed that loans classified as life insurance and investments are both subject to insurance set-off exposure. Fitch made assumptions on employment type, valuation dates and income verification for a negligible number of loans across the three portfolios because this loan-level data was not complete. The effect of these assumptions is insignificant for the ratings. RATING SENSITIVITIES SGML II is capped at the account bank's rating, so changes to the account bank's Long-Term Issuer Default Rating will be reflected in the transaction's rating. If no corrective action is taken on the loan with maturity beyond the note's maturity, SGML II will not be rateable. Deterioration in asset performance in DMPL X and XI may lead to an increase in defaults. Any reduction in excess spread would reduce the credit enhancement available to the transaction and may lead to a negative rating action. USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that affected the rating analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring. Fitch did not undertake a review of the information provided about SGML II's underlying asset pool ahead of the transaction's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable. Prior to the DMPL transactions' closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information and concluded that there were no findings that affected the rating analysis. Prior to the transactions' closing, Fitch conducted a review of a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. SOURCES OF INFORMATION The information below was used in the analysis. - Loan-by-loan data provided by the European Data Warehouse as at 31 May 2016, 30 June 2016, and 31 July 2016 - Transaction reporting provided by Intertrust Management B.V. and Intertrust Administrative Services B.V. as at 27 June 2016, 30 June 2016, 25 July 2016, 31 July 2016, and 26 August 2016 - Discussions with and updates from the servicer dated 3 October 2016 MODELS The models below were used in the analysis. Click on the link for a description of the model. <a href="https://www.fitchratings.com/jsp/creditdesk/ToolsAndModels.faces?context=2 &detail=135"> ResiEMEA. <a href="https://www.fitchratings.com/web_content/pages/rmbs/emea-rmbs-surveillance -model.htm"> EMEA RMBS Surveillance Model. <a href="https://www.fitchratings.com/web_content/pages/sf/emea-cash-flow-model.htm ">EMEA Cash Flow Model. Contacts: Lead Surveillance Analyst Samarth Bhasin Associate Director +44 20 3530 1669 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Sanja Paic, CFA Senior Director +44 20 3530 1282 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable Criteria Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016) here Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016) here Criteria Addendum: Netherlands - Residential Mortgage Assumptions (pub. 18 Dec 2015) here Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016) here EMEA RMBS Rating Criteria (pub. 18 May 2016) here Global Structured Finance Rating Criteria (pub. 27 Jun 2016) here Related Research Dutch Mortgage Portfolio Loans X B.V. - Appendix here Dutch Mortgage Portfolio Loans XI B.V. - Appendix here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012892 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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