DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (sf) rating on the Class A notes issued by Mercurius Funding N.V. / S.A. (the Issuer).
The confirmation 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 March 2020 payment date.
-- Base case probability of default (PD) and recovery rates on the remaining pool of receivables.
-- Current available credit enhancement to the Class A notes to cover the expected losses at the respective rating level.
The rating addresses the timely payment of interest and ultimate payment of principal payable on or before the Class A notes’ final maturity date in April 2035.
The Issuer is a securitisation collateralised by a portfolio of secured and unsecured loans originated and serviced by Belfius Bank SA/NV (Belfius Bank) to small and medium-size enterprises (SMEs) and self-employed individuals based in Belgium.
The transaction closed in May 2012, and in May 2014 (the closing date) new Class A and Class B notes were issued while the notes issued in 2012 were fully redeemed. In June 2018, an amendment to the transaction structure became effective, including changes to the principal priority of payments, introduction of performance triggers, reduction of the reserve fund required level, and decrease of the Class A and B notes’ coupon.
As of the March 2020 payment date, the structure consisted of EUR 520.8 million of Class A notes and EUR 518.9 million of Class B notes, backed by a EUR 1,000.2 million portfolio (excluding written-off loans).
As of the March 2020 payment date, loans in arrears between 31 days and 60 days and loans in arrears between 61 days and 90 days represented 0.08% and 0.03% of the principal outstanding balance of the portfolio, respectively, while delinquencies greater than 90 days were 0.8%. Cumulative written-off loans were 1.0% of the original portfolio, with recoveries of 62.4%.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool of receivables and updated its portfolio default and recovery assumptions on the outstanding portfolio to 38.3% and 51.7%, respectively, at the AA (sf) rating level. The base case PD has been updated to 2.9% following COVID-19 adjustments.
As of the March 2020 payment date, the credit enhancement for the Class A notes stood at 52.9%, in line with last year, because of the pro-rata amortisation of the Class A and B notes. The credit enhancement of the Class A notes considers the balance of the portfolio (excluding written-off loans) and the reserve fund account.
The reserve fund is available to cover senior expenses, missed interest payments on the Class A notes, and the amounts of principal deficiency ledgers while the Class A notes are outstanding. The target amount of the reserve fund is defined in two stages: the Reserve Fund Level 1 (EUR 15.0 million) is replenished after the interest on the Class A notes has been paid, while the Reserve Fund Required Amount (EUR 40.0 million) is funded after the payment of the balance of principal deficiency ledgers.
Belfius Bank acts as the account bank for the transaction. Based on the account bank reference rating of Belfius Bank at A (high), which is one notch below the DBRS Morningstar Long-Term Critical Obligations Rating of AA (low), the downgrade provisions outlined in the transaction documents, and other mitigating factors 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.
DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.
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 arise in the coming months for many SME 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.
On 16 April 2020, the DBRS Morningstar Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 time frame. These scenarios were updated on 1 June 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/361867/global-macroeconomic-scenarios-june-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings.
For more information on DBRS Morningstar considerations for European Structured Credit transactions and Coronavirus Disease (COVID-19), please see the following commentary:
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.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is the “Rating CLOs Backed by Loans to European SMEs” (8 July 2019).
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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for this rating include investor reports provided by Belfius Bank and loan-by-loan 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 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 purpose 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 20 June 2019, when DBRS Morningstar confirmed the rating of the Class A notes at AA (sf).
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):
-- PD Rates Used: Base case PD of 2.9%, a 10% and 20% increase of the base case PD.
-- Recovery Rates Used: Base case recovery rates of 51.7% at the AA (sf) rating level, a 10% and 20% decrease in the base case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.
DBRS Morningstar concludes that a hypothetical increase of the base case PD by 20%, or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation of the Class A notes at AA (sf). A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A notes at AA (sf). A scenario combining both an increase in the base case PD by 20% and a decrease in the base case recovery rate by 20%, ceteris paribus, would also lead to a confirmation of the Class A notes at 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:
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 8 May 2012
DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- Rating CLOs Backed by Loans to European SMEs (8 July 2019) and SME Diversity Model v.2.4, https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes
-- Rating CLOs and CDOs of Large Corporate Credit (28 February 2020)
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-nance-servicers
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (10 December 2019) https://www.dbrsmorningstar.com/research/354403/master-european-residential-mortgage-backed-securities-ratingmethodology-and-jurisdictional-addenda
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
-- Cash Flow Assumptions for Corporate Credit Securitizations (28 February 2020)
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 email@example.com.