DBRS Assigns Rating to Loan Invest NV/SA. Compartment SME Loan Invest 2017

DBRS Ratings Limited (DBRS) has today assigned a rating to the senior notes issued by Loan Invest NV/SA. Compartment SME Loan Invest 2017 (the Issuer) as follows:

-- EUR 3,920,000,000 SME Asset-Backed Floating Rate Notes due 2051, rated AAA (sf).

The rating on the Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date (April 2051).

The Issuer is a cash flow securitisation transaction collateralised by a portfolio of loans granted by KBC Bank (KBC or the Originator) within the framework of small and medium-sized enterprises (SMEs) in Belgium. As of 31 March 2017, the final transferred portfolio included 54,719 loans to 27,913 obligor groups, totalling EUR 5,600 million.

The Issuer has entered into a Subordinated Loan Agreement with KBC to fund part of the portfolio acquisition and to fund the Reserve Amount; the Subordinated loan has been granted for EUR 1,736 million of which EUR 56 million (1% of the total portfolio) is used to fund the Reserve Amount into the Reserve Account and EUR 1,680 million has been used for portfolio acquisition. The Notes are Senior and supported by 31.0% credit enhancement.

Interest and principal payments on the Notes and the Subordinated loan will be made monthly starting in May 2017. The Notes will pay an interest rate equal to one-month Euribor plus a 0.75% margin. Principal will be paid pro rata between the Notes and Subordinated loan unless a Sequential Trigger Event occurs, then the sequential amortisation will be applied.

The portfolio exhibits some industry concentration, particularly to the “Building & Development” industry, representing 26.2% of the outstanding balance; “Business Equipment & Services” (15.1%) and “Farming & Agriculture” (13.9%) complete the top three industries based on the DBRS Industry classification. The top obligor group and the largest ten obligors represent 0.6% and 3.6% of the outstanding balance, respectively. There is a very high regional concentration in Flanders representing 87.5% of the total portfolio.

The rating of the Notes is based upon DBRS’s review of the following items:

-- The portfolio characteristics: as per DBRS’s industry classification, the portfolio exhibits a relatively high concentration towards Building & Development, which represents 26.2% of the portfolio. DBRS believes that the risk stemming from the concentration is captured by the agency’s default assumptions at the AAA scenario (35.62%).
-- The portfolio has a weighted-average life (WAL) of 4.91 years, but the servicer-permitted variations allow increases of the loans’ maturity (up to four years for 5.0% of the portfolio). To account for such extensions, DBRS has estimated an adjusted portfolio WAL equal to 5.08 years.
-- The portfolio is granular. The exposure to the largest one, ten and 20 borrower groups represents 0.6%, 3.6% and 5.5% of the portfolio, respectively.
-- The Principal Deficiency Ledgers (PDLs) will register losses incurred due to 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 pro rata amortisation between the Notes and Subordinated loan could affect the benefit of the credit enhancement. DBRS addresses this situation in the cash flow model, and documents include triggers to stop the pro rata amortisation.
-- The Reserve Fund represents 1.0% of the initial portfolio balance and it does not amortise, which benefits the credit enhancement over the life of the transaction.
-- The presence of a swap agreement avoids any interest risk.
-- The Risk mitigation deposit limits the commingling risk which exists given the high exposure to one counterparty, KBC.

DBRS determined the ratings on the Notes as follows, as per the principal methodology specified below:
-- The annualised probability of default (PD) for the securitised portfolio, determined using the historical data supplied by the Originator; the PD was 1.76%.
-- The assumed WAL of the portfolio was 5.08 years.
-- The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target rating.
-- The recovery rate was determined by considering the market value declines for the Kingdom of Belgium, the security level and the type of collateral. Recovery rates of 42.9% and 23.5% were used for the secured and unsecured loans, respectively, at the AAA (sf) rating level.
-- The break-even rates for the interest rate stresses and default timings were determined using the DBRS Cash Flow Model.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs Backed by Loans to European SMEs”. 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.

All DBRS methodologies can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies.

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

The sources of information used for these ratings include the Arranger and the Originator in both cases KBC Bank.

DBRS did not rely upon third-party due diligence in order to conduct its analysis. DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS determined key inputs used in its analysis based on historical performance data provided for the Originator and Servicer as well as analysis of the current economic environment. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Further information on DBRS’s analysis of this transaction will be available in a rating report at http://www.dbrs.com or by contacting us at info@dbrs.com.

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.

This rating concerns newly issued financial instruments.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the base case):

-- PD rates used: base-case PD of 1.76%, a 10% and 20% increase on the base-case PD.
-- Recovery rates used: base-case recovery rates of 36.4% at AAA (sf) stress levels and a 10% and 20% decrease in the base-case recovery rate. Please note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

With respect to the Notes, DBRS 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 each lead to a downgrade of the Notes to AA (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 (high) (sf).

It should be noted that the interest rates and other parameters that would normally vary with the rating level, including the recovery rates, were allowed to change as per the DBRS methodologies and criteria.

For further information on DBRS historic 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 regulations only.

Initial Lead Analyst: María López, Vice President
Initial Rating Date: 7 April 2017
Rating Committee Chair: Carlos Silva, Senior Vice President, European Structured Credit

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

-- Rating CLOs Backed by Loans to European Small and Medium Sized Enterprises (SMEs)
-- Rating CLOs and CDOs of Large Corporate Credit
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structure Finance Transactions
-- Unified Interest Rate Model for European Securitisations
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda

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