DBRS Ratings Limited (DBRS Morningstar) assigned a rating of AA (high) (sf) to the EUR 3.5 billion rated Notes issued by Loan Invest NV/SA. Compartment SME Loan Invest 2020 (the Issuer).
The rating addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in July 2054.
The transaction is a static cash flow securitisation of a portfolio of secured and unsecured loans originated by KBC Bank NV (KBC; rated AA (low) with a Stable trend by DBRS Morningstar) to Belgian small and medium-size enterprises (SMEs). In addition to issuance of the Notes by the Issuer, a Subordinated Loan (a junior tranche to the Notes) totalling EUR 1.55 billion was also issued. The proceeds of the Notes and the Subordinated Loan will be used to fund the portfolio acquisition and the non-amortising Reserve Account (RA) totalling EUR 50 million (1% of the total issuance). The Notes are senior and supported by 31.0% credit enhancement provided by the overcollateralisation of the portfolio and the RA.
At the portfolio cut-off date of 30 June 2020, the portfolio consisted of 29,001 loans extended to 16,661 borrowers with an aggregate balance of EUR 5 billion, of which EUR 547,310 is deposited in the Issuer account. The portfolio consists of 54.3% secured loans and 45.6% unsecured loans per DBRS Morningstar’s definition, and 40.8% of the portfolio balance benefits from security in the form of a “mortgage mandate,” which is not a perfected form of security. The use of mortgage mandates as a form of security is common practice in the Belgian market. DBRS Morningstar gave limited benefit to mortgage mandates in its recovery rate analysis.
The portfolio exhibits some industry concentration. The top three exposures, according to DBRS Morningstar’s industry classifications, are Building and Development (26.6%), Business Equipment and Services (19.9%), and Farming and Agriculture (10.8%). The largest borrower group and the largest 10 obligors represent 1.4% and 5.6% of the outstanding balance, respectively.
There is a principal deficiency ledger (PDL) mechanism for each tranche that allocates defaulted loan balances to the Subordinated Loan PDL before the Notes PDL. The transaction is structured to amortise on a pro rata basis until a sequential trigger event occurs, after which the Notes will be amortised prior to the Subordinated Loan. The sequential trigger events include a cumulative default trigger, a dynamic delinquency trigger and once the subordinated loan balance is less than 33% of its original balance.
KBC Bank acts as the servicer and Intertrust Administrative Services B.V. acts as the backup servicer facilitator for this transaction. In the event the Servicer needs to be replaced, the backup servicer facilitator will assist the Issuer in appointing a substitute of the servicer within 60 calendar days.
DBRS Morningstar determined its rating based on the principal methodology and the following analytical considerations:
-- The probability of default (PD) for the portfolio was determined using the historical performance data supplied. DBRS Morningstar calculated an annualised PD of 1.78% for all loans. DBRS Morningstar applied additional adjustments to 16.7% of the portfolio in the context of the current Coronavirus Disease (COVID-19) pandemic.
-- The servicer may agree to variations to increase the loans’ maturity (up to four years prior to the maturity date of the Notes for up to 5.0% of the portfolio). To account for such extensions, DBRS Morningstar has estimated an adjusted portfolio weighted-average life (WAL) equal to 5.96 years.
-- The PDs 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 Belgium, the security level, and collateral type. Recovery rates of 43.6% and 25.8% were used for the secured and unsecured loans, respectively, at the AA (high) (sf) rating scenario.
-- The pro rata amortisation means the structure does not deleverage. Amortisation switches to a sequential structure once either the dynamic delinquent trigger is breached, the default trigger is breached, or the subordinated loan amount falls below 33% of its original balance. DBRS Morningstar addresses this in its analysis in the cash flow tool and tested the transaction with a time delay to sequential payment structure from closing.
-- The presence of a swap agreement mitigates the interest risk present. DBRS Morningstar addresses this in the cash flow tool.
-- DBRS Morningstar notes a high exposure to one counterparty, KBC. DBRS Morningstar considers that the servicing and backup servicing arrangements do not sufficiently mitigate commingling risk and further incorporated stressed assumptions for commingling risk in its analysis.
-- The PDLs will register losses incurred from defaults on the loan portfolio. This structural feature is beneficial to the Notes as it enables excess cash to be trapped in the interest priority of payments until such PDL balances are cured.
-- The breakeven rates for the different interest rate stresses and default timings were determined using DBRS Morningstar’s cash flow tool.
INFORMATION ON CORONAVIRUS
The coronavirus pandemic 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 rating is 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 released a set of macroeconomic scenarios for the 2020–22 period in select economies. 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.
The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the most recent referenced report.
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 on DBRS Morningstar considerations for European Structured Credit transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/361098.
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: “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.
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/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for this rating include data received from KBC Bank NV.
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 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.
This 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.dbrsmorningstar.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):
-- Probability of Default Rates Used: Base Case PDs of 1.8%, 2.7%, and 3.6%, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rates of 25.8% and 43.6% at the AA (high) (sf) stress level, a 10% and 20% decrease in the Base Case Recovery Rate.
DBRS Morningstar concludes that a hypothetical increase of the Base Case PDs by 20% or a hypothetical decrease of the Recovery Rates by 20%, ceteris paribus, would lead to a downgrade of the transaction to A (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would lead to a downgrade of the Notes to 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.
Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.
Lead Analyst: Mudasar Chaudhry, Senior Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 15 July 2020
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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 DBRS Morningstar SME Diversity Model version 2.4, https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.
-- Cash Flow Assumptions for Corporate Credit Securitizations (28 February 2020), https://www.dbrsmorningstar.com/research/357453/cash-flow-assumptions-for-corporate-credit-securitizations.
-- Rating CLOs and CDOs of Large Corporate Credit (28 February 2020), https://www.dbrsmorningstar.com/research/357452/rating-clos-and-cdos-of-large-corporate-credit.
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (14 July 2020), https://www.dbrsmorningstar.com/research/363998/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
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.
This press release was amended on 18 August 2020 to add the following disclosure note: "Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only."