Analysis: RNHB's Dutch BTL RMBS captures investor interest in spite of unfamiliar features

26 July 2017

 

RNHB has opened the books on its unconventional Dutch RMBS, Dutch Property Finance 2017-1, and it expects to price the deal this week after strong investor interest. The deal is being syndicated via ABN Amro and HSBC as joint leads.

 

The bank held on-site presentations for potential investors on 13 July, shortly after it first announced the deal. UK and Dutch market players attended, according to one investor interviewed.

 

Investors canvassed by Debtwire viewed the deal as an interesting new entrant from a sector that has great potential for growth, though the diverse and unfamiliar collateral requires more in-depth analysis than usual for Dutch RMBS. “The product [BTL RMBS] will need to go through some development,” said the first investor.

 

The deal has yet to be sized, though orders were approximately EUR 1bn as of Wednesday (26 July). It offers notes rated from triple-A down to BB/BBB (DBRS/S&P) with credit enhancement ranging from 25.65% to 5%.

 

The senior notes, which make up 76.35% of the deal, have IPTs between 75bps and 80bps over three-month Euribor. “There is scarcity in euro assets so the deal is quite tight compared to a UK buy-to-let deal,” said the investor. “Its equivalent in sterling would be offered at 100bps discount margin.”

 

The double-A rated Bs, making up 10.65% of the deal and with 15% credit enhancement, have IPTs in the mid-to-high 100bps over three-month Euribor.

 

The C tranche, sized at 3.95% and with CE of 11.05%, has IPTs in the low 3ME+ 200bps. The notes are rated A+/A (S&P/DBRS). The D notes, rated A-/BBB and accounting for 4.1% of the deal with 6.95% CE, have IPTs in 3ME+ mid-200bps. The BBB/BB rated Es, making up 1.95% of the deal with 5% CE, have IPTs in the mid–3ME+ 300bps.

 

The senior notes have a 2.63-year WAL and the mezzanine 5.08 years to the call date in July 2022. The margin on the As doubles after the step-up date, while the B through E note margins step up 1.5x.

 

The transaction is backed by a EUR 1.504bn pool of 8,368 mainly buy-to-let loans backed by residential (52.17%), mixed-use (23.58%) and small scale commercial (24.26%) properties. Owner occupied loans make up 19.31% and construction loans 4.87%. The pool’s average seasoning is 7.4 years and the average current loan to market value ratio is 61.9%. The average (indexed) LTV stands at 56.1%. 79.1% of the portfolio is amortising (but with a balloon payment), and 3.7% is at least one month in arrears.

 

Some 7% of the collateral in the mixed-use classification is retail shops, flagged the first investor, consisting of tiny high street shops which pose rental risks.

 

The loans are to 10,602 individual borrowers, which are part of 5,658 different “risk groups”. The use of risk groups is standard for this sector of the Dutch property market according to the same investor; business partners or family members, typically buy buy-to-let property portfolios together and are jointly liable for the mortgage loans involved, which may cover multiple properties.

 

According to DBRS, only a third of the risk groups are pure residential, while a quarter have CRE exposure below 50%, and around one-fifth each have CRE exposure of more than 50% and a combination of residential and mixed-use collateral.

 

The loans contain cross-collateralisation and cross-default provisions within risk groups, and moreover a default by a borrower in one risk group can trigger enforcement elsewhere if the same lender holds security under a different debt instrument.

 

According to Rabobank research, this poses a challenge for credit analysis when the same individuals are part of several borrower groups, but RNHB has mitigated that risk by ensuring that no cross-default provisions exist outside the pool.

 

Based on the make-up of the collateral, the deal could be classified between a CMBS and an RMBS, according to the investors and Rabobank research.

 

“I am not a fan of this kind of deals (cauldron of mixed asset types) so I didn’t go deeper in the docs. I think it’s more for buy & hold portfolios,” said a second investor.

 

Another point of concern in the collateral is the short tenor of the loans in the pool, with a weighted average remaining term of 4.3 years. Unlike regular Dutch mortgage loans, the loans do not have an interest-reset date during the term, instead they have a relatively short maturity date, which can be extended with a reset interest rate at RNHB’s discretion (or the borrower can refinance elsewhere).

 

"There is an obvious refi risk after five years, you are left with a big balloon payment which would get rolled over, but it is not obvious if the lender is not there,” said a third investor. “That said, there is enough enhancement, at least at the senior level, to make me feel comfortable about it.”

 

“[T]here is not much difference in practice [from a rate reset], as it is clear that RNHB intends to rollover the loan at its maturity date,” according to Rabobank research. “In fact, RNHB has also the discretion to do this for the loans included in the securitisation transaction.”

 

However, this feature makes cashflow modelling challenging, flags Rabo, and RNHB is well aware of this, as it said in its investor presentation that the “WALs of the notes cannot be stated”.

 

The main issue is the assumptions that RNHB makes around the rolling over of mortgages, said the first investor. There is no clarity as to what will happen at that time with interest rates, for instance, he added. The seller has covenanted not to reduce interest rates below a minimum rate so that the weighted average swap rate of the loans resetting or extending during the period falls below 3ME+ 300bps, which is the payment due from the swap provider on the performing loans balance. At closing, the weighting average margin over the swap rate is 360bps, according to DBRS.

 

The RNHB presented investors with a WAL table, with a CPR of 15% highlighted. According to that, for the AAA tranche, the WAL would be 2.6 years in this case, but the WAL uncertainty remains relatively high for this transaction, according to the first investor and Rabo research.

 

The latter added that the call date of July 2022 should provide some comfort, even though the structure does not contain strong incentives to exercise this option, other than the step-up of the margins (x2 for the senior tranche, x1.5 for the mezzanine tranches).

 

Sponsor considerations

 

Originator RNHB was previously owned by FGH Bank, itself a subsidiary of Rabobank and was sold to CarVal Investors and Vesting Finance (a subsidiary of Arrow Global Group) at the end of 2016.

 

According to Rabo, the reputation of RNHB as seller is important to consider in the call risk context especially as the lender has indicated it wants to use securitisation to fund its future origination.

 

The servicer is also a potential point of risk, said the first investor, as Vesting is a new player in the servicing market. However, as RNHB’s servicing team was transferred to Vesting at the time of sale, there should be no interruption in servicing, he added.

 

According to Rabo’s research, other notable features are a relatively simple interest rate swap with NatWest Markets as counterparty as well as the deferrability of interest on the mezzanine notes without directly triggering a default.