DBRS Morningstar Upgrades Rating of Nostrum Mortgages No. 2

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating of the Class A notes issued by Nostrum Mortgages No. 2 (the Issuer) to AAA (sf) from AA (high) (sf).

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

The upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the February 2021 payment date;
-- Portfolio default rate (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;
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease
(COVID-19) pandemic.

The Issuer is a securitisation of Portuguese residential mortgage loans originated and serviced by Caixa Geral de Depósitos S.A. On 5 November 2010, the special-purpose vehicle issued mortgage‐backed floating-rate notes, Class A and Class B, in addition to Class C notes, to finance the purchase of the mortgage portfolio and fund the cash reserve. In April 2016, a liquidity reserve was incorporated into the transaction to mitigate payment disruption risks from the Servicer.

PORTFOLIO PERFORMANCE

As of the February 2021 payment date, two- to three-month arrears represented 0.1% of the outstanding portfolio balance, which has been stable since February 2020. Loans more than three months in arrears represented 0.1% of the outstanding portfolio balance, down from 0.2% in February 2020. As of the February 2021 payment date, cumulative write-offs were 4.4%

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS

DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables, including additional coronavirus-related adjustments, and updated its base case PD and LGD assumptions to 9.1% and 21.5%, respectively.

CREDIT ENHANCEMENT

Credit enhancement consists of subordination of the Class B notes and a cash reserve fund. As of the February 2021 payment date, credit enhancement to the Class A notes was 50.7%, up from 46.6% as of the February 2020 payment date.

The cash reserve fund covers senior fees, swap payments, and any interest shortfall or principal loss on the Class A notes via the principal deficiency ledger and is at its target level of EUR 80.2 million or 1.5% of the original balance of Class A and Class B notes. The transaction also benefits from a liquidity reserve fund that covers senior fees, swap payments and any interest shortfall on the Class A notes in the event of nonpayment by the Servicer which causes a liquidity shortfall. The liquidity reserve fund is at its target level of EUR 17.5 million or 1.2% of the outstanding balance of the Class A notes.

Banco Santander SA acts as the account bank for the transaction. Based on the account bank reference rating of Banco Santander SA at A (high), one notch below the DBRS Morningstar public Long-Term Critical Obligations Rating of AA (low), the downgrade provisions outlined in the transaction documents, and structural mitigants 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.

Banco Santander SA acts as the swap counterparty for the transaction. DBRS Morningstar's public Long-Term Critical Obligations Rating of Banco Santander SA at AA (low) is above the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp 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, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar increased the expected default rate for self-employed borrowers and assumed a moderate decline in residential property prices. In addition, DBRS Morningstar conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolios. As of the February 2021 payment date, loans in payment holidays accounted for 13.6% of the outstanding portfolio.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus is likely to affect the DBRS Morningstar-rated RMBS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

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 Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include investor reports provided by Deutsche Bank AG, London Branch, and loan-level data provided by the European DataWarehouse GmbH.

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 not 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 26 March 2020, when DBRS Morningstar confirmed its rating on the Class A notes at AA (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to Alfonso Candelas.

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (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 are 9.1% and 21.5%, 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 of the Class A notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A notes would be expected to fall to AA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A notes would be expected to fall to AA (sf).

Class A notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
http://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: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 4 May 2012

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500

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Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (8 February 2021)
https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020)
https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 January 2021) and European RMBS Credit Model 1.0.0.0
https://www.dbrsmorningstar.com/research/372339/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020)
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020)
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021)
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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