The upcoming E1.25 billion residential mortgage-backed securitization from SNS Bank in the Netherlands will have a unique reverse amortization structure to address set-off risk. This deal, Hermes VI, will be the first time the so-called reverse amortization structure has been used, according to Simon Collingridge, director of structured finance ratings at Standard & Poor's. The deal is expected to price this month via lead arrangers Barclays Bank and Deutsche Bank.
Set-off risk is unique to the Netherlands and arises from the way mortgages there are originated. Dutch borrowers take out interest-only mortgages and enter into an insurance policy to repay the mortgage at maturity. The borrower makes payments into the policy, which increases in value as the loan reaches maturity. Set-off risk is that in the event an insurance company becomes insolvent, the borrower could set off the amount owed on the mortgage against the amount owed to the borrower from the insurance policy, explains Collingridge.
Hermes VI has been designed to amortize the junior notes first and to overcollateralize the more senior notes. A swap will provide the 24 basis points of excess spread to fund the reverse amortization. Collingridge says using this technique has made S&P much more comfortable rating a Dutch RMBS transaction, which the ratings agency has tended to avoid because it could not get comfortable with the set-off risk. S&P will rate Dutch RMBS transactions if they feature a mechanism to address set-off risk, he says.
