DBRS Confirms Rating on Mercurius Funding N.V. / S.A. Following the Transaction Restructuring

DBRS Ratings Limited (DBRS) confirmed its AA (sf) rating on the Class A (ISIN: BE0002469444) notes (Class A Notes) issued by Mercurius Funding N.V. / S.A., acting through its compartment Mercurius-1 (the Issuer, or Mercurius Funding).

The rating action follows an entire review of the transaction in the context of a restructuring becoming effective on 25 June 2018 and is based on the following analytical considerations:
-- The amendments to the transaction in the context of the restructuring;
-- The overall portfolio performance as of the May 2018 payment date, particularly with regard to delinquencies and cumulative net losses;
-- Updated portfolio default rate, recovery rate and expected loss assumptions for the remaining collateral pool;
-- The current available credit enhancement (CE) to the Class A Notes to cover the expected losses assumed in line with the AA (sf) rating level.

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal payable on or before the Class A Notes Final Maturity Date in April 2035.

The Issuer is a securitisation collateralised by a portfolio of secured and unsecured loans originated and serviced by Belfius Bank SA/NV (Belfius Bank) to small- and medium-sized enterprises (SMEs) and self-employed individuals based in Belgium.

The transaction closed in May 2012 and in May 2014 (the Closing Date) new Class A and Class B notes were issued while the notes issued in 2012 were fully redeemed. As of 24 May 2018, the structure consisted of EUR 766.6 million of Class A Notes and EUR 924.0 million of Class B notes, backed by a EUR 1,567.2 million portfolio (excluding written-off loans).

AMENDMENTS
On 25 June 2018, the following amendments to Mercurius Funding structure become effective:

-- The principal priority of payments to be modified in order to switch from a sequential amortisation structure to a target amortisation structure of the notes, where 40.0% of the principal available funds will be allocated to the amortisation of the Class A Notes and the remaining 60.0% to the amortisation of the Class B Notes; once the Class B notes reach a minimum balance of EUR 200.0 million, the amortisation will switch to sequential.

-- Introduction of performance triggers (the Sequential Events) in the transaction: if either the cumulative amount of written-off loans (since May 2012) exceeds 5.0% of the pool balance as at the Closing Date, or delinquencies greater than 90 days exceed 3.75% of the portfolio balance, amortisation of the notes will revert to fully sequential.

-- Reduction of the Reserve Fund Required Level 1 to EUR 15.0 million from EUR 48.0 million, and of the Reserve Fund Required Amount to EUR 40.0 million from EUR 124.0 million. The EUR 84.0 million proceeds resulting from the reduction of the cash reserve target balance to be used to partially redeem the Class B notes to EUR 840.0 million on 25 June 2018.

-- Decrease of the Class A Notes coupon to 0.9% and the Class B notes coupon to 1.4% from 2.75% and 4.5%, respectively.

PORTFOLIO PERFORMANCE
As at May 2018, loans in arrears between 31 days and 60 days and loans in arrears between 61 days and 90 days represented 0.1% and 0.04% of the principal outstanding balance of the portfolio, respectively, while delinquencies greater than 90 days were 0.8%. Cumulative written-off loans were 0.8% of the portfolio balance as at the Closing Date, with recoveries of 54.5%.

PORTFOLIO ASSUMPTIONS
DBRS conducted a loan-by-loan analysis on the remaining pool and updated its portfolio default and recovery assumptions on the outstanding portfolio to 33.2% and 50.8%, respectively, at the AA (sf) rating level.

CREDIT ENHANCEMENT
On the June 2018 payment date, the CE for Class A Notes will decrease to 54.7% from 59.0% in May 2018. The CE of the Class A Notes considers the balance of the portfolio (excluding written-off loans) and the Reserve Fund account.

The Reserve Fund is available to cover senior expenses, missed interest payments on the Class A Notes and the amounts of principal deficiency ledgers while the Class A Notes are outstanding. The target amount of the Reserve Fund is defined in two stages: the Reserve Fund Level 1 (EUR 15.0 million) is replenished after the interest on the Class A Notes has been paid, while the Reserve Fund Required Amount (EUR 40.0) is funded after the payment of the balance of principal deficiency ledgers.

Belfius Bank is the Account Bank of the transaction. The account bank reference rating is “A” – being one notch below the DBRS Long Term Critical Obligations Rating of Belfius Bank of A (high). On the basis of Belfius Bank’s rating and the mitigants outlined in the transaction documents, DBRS considers the risk arising from the exposure to Belfius Bank to be consistent with the rating assigned to the notes.

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”.

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

DBRS has conducted a review of the transaction’s legal documents provided in the context of the aforementioned amendments. A review of any other transaction’s legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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

These may 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include loan-by-loan data and investor reports provided by Belfius Bank.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS 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 31 July 2017, when DBRS confirmed its rating on the Class A Notes at AA (sf).

The lead analyst responsibilities for this transaction have been transferred to Joana Seara da Costa.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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”):

-- Probability of Default (PD) Rates Used: base case PD of 2.4%, a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: base case recovery rates of 50.8% at the AA (sf) rating level, 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 concludes that either a hypothetical increase of the base case PD by 20%, a hypothetical decrease of the recovery rate by 10%, or a scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would lead to a confirmation of the Class A Notes at AA (sf). A hypothetical decrease of the recovery rate by 20%, ceteris paribus, or a scenario combining both an increase in the base case PD by 20% and a decrease in the base case recovery rate by 20%, ceteris paribus, would also lead to a confirmation of the Class A Notes at AA (sf).

For further information on DBRS 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 US regulations only.

Lead Analyst: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 8 May 2012

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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 SMEs
-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Interest Rate Stresses 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

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.

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