DBRS Confirms Ratings on Belgian Lion NV / SA (Belgian Lion SME II)

DBRS Ratings Limited (DBRS) has today confirmed the ratings on the following notes issued by Belgian Lion NV / SA (Belgian Lion SME II or the Issuer):

-- €2,074,788,392.00 Class A1 at AAA (sf)
-- €2,489,500,000.00 Class A2 at AAA (sf)

The transaction is a cash flow securitisation collateralised by a portfolio of loans granted to self-employed, small and medium-sized enterprises (SMEs) and corporate borrowers based in Belgium. The loans were originated by ING Belgium SA/NV (ING). The rating on the Class A1 and Class A2 notes address the timely payment of interest and the ultimate payment of principal on or before the Maturity Date in November 2039.

The rating action reflects the following considerations:

-- An annual review of the transaction, which is performing in line with DBRS’s expectations.
-- An amendment to the transactions signed on 5 May 2015.

The amendment or restructuring of the deal includes, among other changes, an extension of the replenishment period of the transaction, being the next redemption date in May 2017.

Prior to this amendment, the first amortisation date was scheduled for February 2015 and the Class A1 notes paid down around €211.7 million at that payment date. This has helped to increase the current credit enhancement of Class A1 and Class A2 notes to 31.0% from 30.5%.

As part of the restructuring of the transaction, all assets on the performance watchlist, assets which have a performance rating below a certain level, assets in arrears, defaulted or are under liquidation have been bought by ING at arm’s-length sale.

To fund the loss as a result of this sale (€9.1 million), a subordinated funding loan has been funded, also covering the amounts on the Principal Deficiency Ledger (PDL) for the Class B notes (€3.9 million). Cash proceeds of the subordinated funding loan are used to replenish the pool and are being integrated with the structure and placed between the Class A1 and A2 notes and Class B notes, and will rank pari passu with the Class B notes (DBRS does not rate the Class B notes).

There is a PDL for the same amount of the subordinated funding loan that is effectively a realised loss for the Class B notes because this is not expected to cure over the life of the transaction. This is because, under the Swap Agreement, the Swap Counterparty (ING) receives all collected proceeds minus the senior expenses and returns the interest due and payable on the notes, minus the PDL balances, to the Issuer in that period. This structural feature eliminates the possibility of trapping any excess cash in the interest waterfall and therefore curing the current PDL.

Other changes to the transaction include some changes in the eligibility criteria that DBRS has factored into its ratings analysis and the release of €32.9 million corresponding to the part of the reserve account funded at closing to cover the Mobilisation Act (to address set-off risk) following changes in the mobilisation laws. A Legal Opinion covering also this point has been provided.

As a result of these changes, the ratings of the Class A and Class B notes have been confirmed based on the following analytical considerations:
-- The annualised probability of default (PD) for the Originator was determined using the updated historical performance information supplied. For this transaction, DBRS assumed an annualised PD of 1.60%.
-- Updated recovery rates, determined by considering the market value declines for Belgium, the security level and type of collateral. For the Class A1 and Class A2 notes, DBRS applied the following recovery rates: 40.91% for secured loans and 23.50% for unsecured loans with a 25.24% average recovery rate based on the worst-case portfolio given by the replenishment criteria limits.
-- The assumed weighted-average life (WAL) of the portfolio was 4.5 years.
-- The PD and portfolio WAL were used in the DBRS Diversity Model to generate the hurdle rates for the current worst-case portfolio.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs), which can be found on the DBRS website under Methodologies at http://www.dbrs.com/about/methodologies.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include Belgian Lion NV / SA, ING and other public sources.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; however, Agreed upon Procedures (AUP) are included in the requested documentation.

DBRS was not supplied with AUP documents/audit documents. Data checks were performed and DBRS did not apply additional cash flow stresses in its scenarios.

DBRS considers the information made available to it for the purposes of providing this rating to have been of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The previous rating action on this transaction took place on 17 April 2014, when the ratings of the Class A1 and Class A2 Notes were confirmed and removed from Under Review with Developing Implications.

To assess the impact of the changing the transaction parameters on the rating, DBRS 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 1.60%, and a 10% and 20% increase in the base-case PD.
• Recovery rates used: base-case recovery rates, corresponding to a recovery rate of 25.24% at the AAA (sf) stress level, and a 10% and 20% decrease in the case-case recovery rates.

DBRS concludes that either a hypothetical increase of the base PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would each lead to a downgrade of the Class A1 and Class A2 Notes to AA (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 also lead to a downgrade of the Class A1 and Class A2 Notes to AA (high) (sf).

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Mudasar Chaudhry
Initial Rating Date: 14 August 2012
Initial Rating Committee Chair: Jerry Van Koolbergen

Lead Surveillance Analyst: Alfonso Candelas
Rating Committee Chair: Jerry Van Koolbergen

DBRS Ratings Limited
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London, EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960.

The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- Derivative Criteria 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
-- Unified Interest Rate Model for U.S. and European Structured Credit
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda

A description of how DBRS analyses structured finance transactions and how its methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.