DBRS Ratings GmbH (DBRS Morningstar) assigned a provisional AAA (sf) rating to the EUR 1,550.9 million Class A Notes to be issued by FCT Bpifrance SME 2019-1 (the Issuer or Bpifrance SME).
The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date in October 2052. The Issuer will also issue EUR 450.3 million Class B Notes due October 2052 (the Class B Notes) and EUR 58,136 Units (the Units), which will not be rated by DBRS Morningstar.
The transaction is a cash flow securitisation collateralised by a portfolio of performing mortgage and non-mortgage loans to French small and medium-sized enterprises (SMEs). The loans were granted by Bpifrance Financement (Bpifrance or the Originator). As of 30 September 2019, the transaction’s transferred portfolio included 4,243 loans to 2,180 borrower groups, totalling EUR 2,001.3 million. The economic effect of the transfer of the portfolio from the Originator to the Issuer took place on 1 October 2019.
The transaction has a revolving period of three years, during which time Bpifrance has the option to sell new loans at par to the Issuer as long as the eligibility criteria is complied with on a monthly basis. However, the revolving period will end prematurely if replenishment termination events occur — for example, if the cumulative default rate reaches certain limits.
Interest and principal payments on the notes will be made quarterly on the 25th of January, April, July and October, with the first payment interest date on 27 January 2020, while the first principal payment will only occur after the end of the revolving period. The Class A Notes and the Class B Notes will pay a fixed interest of 20 basis points and 25 basis points, respectively. The Units will pay variable return.
The rating will be finalised upon receipt of an executed version of the governing transaction documents. To the extent that the documents and information provided to DBRS Morningstar differ from the executed version of the governing transaction documents, DBRS Morningstar may assign a different final rating to the Class A Notes.
During the revolving period, the transaction will acquire new loans if they satisfy the eligibility criteria. To account for changes in portfolio composition, DBRS Morningstar considered the limitations established in the eligibility criteria to create a worst-case portfolio that was used for the analysis. The eligibility criteria fixed a relatively high limit regarding the DBRS Morningstar industry concentration: the maximum concentration in the Food Products industry will be 30.0% of the portfolio balance, followed by Building & Development and Lodging & Casinos, which could represent 25.0% and 20.0% of the portfolio balance, respectively.
The eligibility criteria also allows for high loan-to-value levels for the secured loans. As a result, DBRS Morningstar recovery assumptions are low.
As a positive, the eligibility criteria sets relatively low obligor concentration limits. The exposure to the top one and top 20 borrower groups cannot exceed 0.5% and 7.5% of the outstanding portfolio balance, respectively.
The transaction benefits from a Principal Deficiency Ledger that ranks high in the interest priority of payments and will capture excess spread to cover principal shortfalls due to portfolio defaults. In addition, the Issuer benefits from a 1.86% weighted-average (WA) interest rate from the portfolio. According to the eligibility criteria, the minimum WA interest rate will be 1.35%, and the notes will pay a fixed rate of 20 basis points and 25 basis points for the Class A and Class B Notes, respectively. DBRS Morningstar considers the excess spread to be a highly positive feature of this transaction.
There is limited interest rate risk in the transaction. The Class A and Class B Notes pay a fixed interest rate, and the assets could be fixed or floating, the effect of which is very small considering floating-rate loans can represent a maximum of 7.0% of the portfolio balance (in the current portfolio, floating-rate loans represent 2.5% of the outstanding balance).
The Originator is not a deposit-taking entity; therefore, the risk that a borrower under the relevant SME loan would succeed in gaining set-off rights against sums due by the Originator is remote.
The rating is based on DBRS Morningstar’s “Rating CLOs Backed by Loans to European SMEs” methodology and the following analytical considerations:
-- The probability of default rate (PD) for the portfolio was determined using the historical performance information supplied. DBRS Morningstar assumed an annualised PD of 0.95%.
-- The assumed WAL of the portfolio is 6.3 years.
-- The PD and WAL were used in the DBRS Morningstar Diversity Model to generate the hurdle rate for the assigned rating.
-- The recovery rate was determined by considering the market value declines for Europe, the security level and the collateral type. A recovery rate of 18.02% was used for the secured and unsecured loans at the AAA (sf) rating level.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is “Rating CLOs Backed by Loans to European SMEs”.
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found on www.dbrs.com at: http://www.dbrs.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.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for the rating includes the Originator, Bpifrance Financement and the Issuer.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
DBRS Morningstar was 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 the 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 rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.
Information regarding DBRS Morningstar ratings, including definitions, policies and methodologies, is available on www.dbrs.com.
To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- PD Used: Base case PD of 0.95%, a 10.0% and 20.0% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 18.02% at the AAA (sf) stress level, a 10.0% and 20.0% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rate are assumed for the other stress recovery rate levels.
DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20.0%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf). A hypothetical decrease of the base case recovery rate by 20.0% would lead to a downgrade of the Class A Notes to AA (high) (sf). Finally, a scenario combining both an increase in the base case PD by 10.0% and a decrease in the base case recovery rate by 10.0% would lead to a downgrade of Class A Notes to AA (high) (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.
Ratings assigned by DBRS Ratings GmbH, Sucursal en España are subject to EU and US regulations only.
Lead Analyst: Maria Lopez, Vice President, Global Structured Finance
Rating Committee Chair: Carlos Silva, Senior Vice President, Global Structured Finance
Initial Rating Date: 17 October 2019
DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
-- Rating CLOs Backed by Loans to European SMEs
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Interest Rate Stresses for European Structured Finance Transactions
-- Rating CLOs and CDOs of Large Corporate Credit
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at email@example.com.