Press Release

DBRS Morningstar Confirms Rating on FCT Lafayette 2021 Following Restructuring

Structured Credit

February 28, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (sf) rating on the EUR 2,044,000,000 Class A Asset-Backed Fixed-Rate Notes due January 2051 (the Class A Notes) issued by FCT Lafayette 2021 (the Issuer), following a transaction restructuring.

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 January 2051. The Issuer also issued EUR 756,000,000 Class B Asset-Backed Fixed-Rate Notes due January 2051 (together with the Class A Notes, the Notes), which were not rated by DBRS Morningstar.

The confirmation is based on the following analytical considerations:
-- The transaction restructuring, consisting of an increase in the balance of the Notes following the purchase of a new portfolio and an extension of the revolving period;
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the November 2022 payment date;
-- The one-year base case probability of default (PD) and default and recovery rates on the collateral portfolio, considering the updated vintage performance data received in the context of the restructuring;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (sf) rating level; and
-- Absence of purchase termination events, breach of concentration limits, or trigger events to date.

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 by BNP Paribas S.A. (BNPP or the originator). The transaction closed in February 2021 and was structured with an 18-month revolving period that was scheduled to end in August 2022 but was extended until November 2022 (included). Following the restructuring, the revolving period was further extended by 24-months and is now scheduled to end in February 2025 (included).

During the revolving period, 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.

As of 31 January 2023, the portfolio consisted of 32,810 loans extended to 24,190 borrowers, with an aggregate par balance of EUR 2.8 billion. The initial portfolio consists of secured and unsecured loans with a weighted average (WA) remaining term of 7.1 years and a WA life of 3.7 years. Retail borrowers account for 79.6% of the portfolio, whereas corporate borrowers account for 20.4%. The WA of the originator’s internal probability of default estimates for the initial portfolio is 2.4%.

RESTRUCTURING
The following amendments to the transaction took effect on 20 February 2023:
-- Increase on the balance of the Class A and Class B Notes, following the purchase of a new portfolio by the Issuer;
-- Decrease of the credit enhancement of the Class A Notes to 27.0% from 30.0%;
-- Extension of the revolving period to February 2025 (included) from November 2022 (included);
-- Removal and amendment of certain replenishment criteria;
-- Repurchase of defaulted and delinquent loans, and certain performing loans;
-- Extension of the timeframe to substitute the account bank to 60 calendar days from 30;
-- Change of the consequence of a servicer termination event, which will no longer trigger the post-enforcement scenario but rather stop the revolving period;
-- Inclusion of interest deficiency on the principal deficiency ledger (PDL) calculation and reduction of the PDL shortfall limit to stop the revolving period (to 3.5% from 5.0%); and
-- Change of the receiving rate of the cash swap agreement to 2.86% from -0.35%.

PORTFOLIO PERFORMANCE
As of the October 2022 cut-off date, one to two month arrears represented 0.1% of the outstanding portfolio balance, stable from 0.1% in October 2021. As of the same cut-off date, 60 to 90 day arrears were 0.03%. As of October 2022, the gross cumulative default ratio was equal to 2.7% of the aggregate portfolio balance (initial plus subsequent portfolios), up from 0.7% in October 2021, with recoveries standing at 25.6% of the cumulative defaulted loans.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated its one-year base case PD assumptions to 2.5% and 1.9% on retail and corporate borrowers, respectively. The purchase conditions during the revolving period limit the maximum WA internal PD of the aggregate and the further portfolios to 3.5%. DBRS Morningstar updated its lifetime default and recovery assumptions on the outstanding portfolio to 44.4% and 34.5%, respectively, at the AA (sf) rating level, based on updated historical default and recovery data received from BNPP. The portfolio assumptions continue to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents. DBRS Morningstar continues to base its analysis on a stressed portfolio created considering the scheduled amortisation plan of the initial portfolio and the updated purchase conditions on the aggregate and the further portfolios.

CREDIT ENHANCEMENT
The Class A Notes benefit from a total credit enhancement of 27.0% (down from 30.0% at closing), which is provided by the overcollateralisation of the portfolio. The transaction includes a non-amortising liquidity reserve, 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 and will therefore not provide any credit enhancement. The target liquidity reserve is equal to 1.0% of the original balance of the Class A Notes.

BNPP is a dominant counterparty for the transaction as it acts as servicer and holds the servicer collection account. It also 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 a counterparty to be consistent with the rating assigned to the Class A Notes, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

BNPP 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

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 https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes (10 June 2022).

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 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.

DBRS Morningstar has conducted a review of the transaction’s legal documents provided in the context of the restructuring. 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/401817/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 the originator and arranger, BNPP.

DBRS Morningstar received the following data information:
-- Static quarterly default data from Q1 2012 to Q4 2021 for retail borrowers;
-- Static semiannual recovery data from S1 2003 to S2 2021 for retail borrowers;
-- Static quarterly recovery data from Q1 2004 to Q4 2021 for corporate borrowers;
-- Annual rating migration matrices from 2007 to 2021 for corporate borrowers;
-- Dynamic quarterly delinquency data from Q3 2020 to Q2 2021 for retail borrowers;
-- Dynamic monthly prepayment data from January 2014 to October 2022; and
-- Loan-level characteristics, set-off exposure and contractual amortisation profile as at 31 January 2023.

In addition, DBRS Morningstar received transaction reports and information provided by the management company, France Titrisation (part of Groupe BNP Paribas).

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.

The last rating action on this transaction took place on 25 February 2022, when DBRS Morningstar confirmed its AA (sf) rating on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Ilaria Maschietto.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

Sensitivity Analysis: 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 a 20% increase in the base-case PD.
-- Recovery rates used: Base-case recovery rate of 34.5% 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 on 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 on 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 on 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: Ilaria Maschietto, Vice President
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.

Download This Press Release