Press Release

DBRS Morningstar Confirms Rating on Notes Issued by FCT Lafayette 2021

Structured Credit

February 25, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (sf) rating on the Class A Notes issued by FCT Lafayette 2021 (the Issuer).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in April 2048. The Issuer also issued the Class B Notes (together with the Class A Notes, the Notes), which are not rated by DBRS Morningstar.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the November 2021 payment date.
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables.
-- The current available credit enhancement to the Class A Notes to cover the expected losses at the AA (sf) rating level.
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

FCT Lafayette 2021 is a revolving cash flow securitisation collateralised by a portfolio of performing secured and unsecured loans to French micro, small, or medium-size enterprises. The loans were granted by BNP Paribas S.A. (BNP Paribas or the Originator). The transaction closed in February 2021.

The transaction includes an 18-month revolving period, scheduled to end in August 2022 (included), during which time the Originator may sell new receivables (i.e., further portfolios) to the Issuer subject to certain conditions and limitations. The revolving period will end prematurely if certain events occur, including the cumulative gross default rate exceeding 7.0% and the insolvency of the Originator. During the revolving period, the purchase of new receivables will be funded through principal collections.

DBRS Morningstar based its analysis on a stressed portfolio created considering the scheduled amortisation plan of the initial portfolio and the purchase conditions on the aggregate and the further portfolios.

PORTFOLIO PERFORMANCE
The transaction’s performance has been stable since closing. As of November 2021, the 30-60 days delinquency ratio stood at 0.1% and there were no 60-90 days delinquencies reported. The cumulative default ratio was 0.6%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated the portfolio’s one-year base case PD assumption to 3.2% (including coronavirus-related adjustments). DBRS Morningstar updated its lifetime default and recovery assumptions on the outstanding portfolio to 44.8% and 30.2%, respectively, at the AA (sf) rating level.

CREDIT ENHANCEMENT
The Class A Notes benefit from a total credit enhancement of 30.0%, which is provided by the overcollateralisation of the portfolio. The credit enhancement is unchanged from closing given the transaction is still in the revolving period. The transaction includes a non-amortising liquidity reserve, funded at closing, which is available to cover expenses, senior fees, cash swap payments, and interest on the Class A Notes. Any released amount will not be used to redeem the Class A Notes, hence not providing credit enhancement. The target liquidity reserve is equal to 1.0% of the original balance of the Class A Notes.

BNP Paribas is a dominant counterparty for the transaction as it acts as servicer and holds the servicer collection account, and through BNP Paribas Securities Services it covers the roles of account bank and paying agent and holds the general account, the principal account, the interest account, the liquidity reserve account, the commingling reserve account, and the set-off reserve deposit account. Based on the account bank’s rating and the replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such counterparty to be consistent with the rating assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

BNP Paribas is also the Cash Swap counterparty for this transaction. DBRS Morningstar has not given full credit to the derivative agreement as the swap documentation is not consistent with “DBRS Morningstar’s Derivative Criteria for European Structured Finance Transactions” methodology, given the rating assigned to the Class A Notes.

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 immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many SME transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus. As per DBRS Morningstar’s assessment, 10.1% of the outstanding portfolio balance represented industries classified in the high-risk economic sectors. This led the underlying one-year PDs to be multiplied by 1.5 times. DBRS Morningstar also conducted an additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 10 February 2022, DBRS Morningstar updated its 18 May 2020 commentary outlining the impact of the Coronavirus Disease (COVID-19) crisis on the performance of DBRS Morningstar-rated structured credit transactions in Europe almost two years on. For more details, please see: https://www.dbrsmorningstar.com/research/392167/two-years-into-covid-19-risks-to-european-structured-credit-transactions and https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating CLOs Backed by Loans to European SMEs” (28 June 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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 continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include transaction reports and information provided by the Management Company, France Titrisation (Groupe BNP Paribas), and loan-level 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 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 is the first rating action on this transaction since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Helvia Meana.

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 3.2%, a 10% increase of the base case and a 20% increase of the base-case PD.
-- Recovery Rates Used: Base-case recovery rate of 30.2% at the AA (sf) rating level, and 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%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (low) (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf). A scenario combining both a hypothetical increase in the PD by 10% and a hypothetical decrease in the recovery rate by 10%, would lead to a downgrade of the Class A Notes to A (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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Helvia Meana, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 26 February 2021

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main – Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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