DBRS Assigns Ratings to BELGIAN LION NV/SA Compartment Belgian Lion SME III

DBRS Ratings Limited (DBRS) assigned ratings of AAA (sf) to the EUR 2.00 billion Class A1 Notes and the EUR 4.83 billion Class A2 Notes (together with the unrated Class B Notes, the Notes) issued by Belgian Lion NV/SA Compartment Belgian Lion SME III (the Issuer).

The transaction is a cash flow securitisation collateralised by a portfolio of loans granted to self-employed individuals, small and medium-sized enterprises (SMEs) and corporate borrowers based in Belgium granted by ING Belgium NV/SA. As of 28 September 2018, the transaction’s transferred portfolio included 78,769 loans to 33,862 obligor groups, totalling EUR 9.29 billion.

The ratings of the Class A1 and Class A2 Notes address the timely payment of interest and ultimate payment of principal on or before the Final Maturity Date, which falls in December 2046.

The transaction has a revolving period of almost three years, during which ING Belgium has the option to sell new loans at par to the Issuer as long as the eligibility criteria is complied with on a monthly basis. The revolving period will end prematurely after the occurrence of certain events (Replenishment Termination Events), including a cumulative default rate or cumulative realised losses rate exceeding 3.0% and 0.5% of the initial portfolio balance, respectively.

Interest and principal payments on the Notes will be made quarterly on the 10th of February, May, August and November, with the first interest payment date on 11 February 2019 and the first amortisation payment in November 2021. The Class A1 Notes will pay an interest rate equal to three-month Euribor, plus a 0.45% margin floored at 0.0% and capped at 2.5%. The Class A2 Notes and Class B Notes will pay a fixed coupon of 0.70% and 2.00%, respectively.

The transaction has two structural features to mitigate commingling risk: two different triggers to establish cold or warm back-up servicing, and the obligation to ensure there is a deposit to avoid commingling risk.

These ratings are based on DBRS’s review of the following items:

-- The Eligibility Criteria, based on which DBRS has created a worst-case portfolio. The main characteristics of the eligibility criteria include: industry and obligor concentration limits, limits on specific internal rating bands, limit of the overall portfolio weighted-average internal PD at 1.7%, and limit of the Bullet amortisation loan at 6.0%.

-- The transaction structure, the form and sufficiency of available credit enhancement and the portfolio characteristics.

-- At closing, the Class A Notes benefit from a total credit enhancement of 26.5% that DBRS considers to be sufficient to support the AAA (sf) rating. Credit enhancement is provided by subordination of the Class B Notes.

-- DBRS considers that there are adequate mitigants to the commingling risk. To address this risk, the transaction includes the commitment to fund a deposit if a specific trigger is broken as well as establishing two triggers to include a back-up servicer in the transaction.

DBRS determined these ratings as follows, as per the principal methodology specified below:
-- The PD for the portfolio was determined using the historical performance information supplied by the originator and migration matrices from internal rating models supplied by the Originator, assigning a different PD to each rating level and stressing up to the worst-case PD in the eligibility criteria, where the maximum internal PD is 1.7%. According to migration matrices analysis, the weighted-average annualised probability of default (WAPD) assumed by DBRS for this portfolio is 1.91%.

-- The assumed weighted-average life (WAL) of the portfolio was 4.5 years based on the maximum allowed under the replenishment criteria.

-- The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the assigned ratings.

-- DBRS applied the following recovery rates: 23.5% for the Class A Notes. Even if the initial portfolio contains secured loans, there is no guarantee in the eligibility criteria to keep a minimum percentage of secured loans with measurable characteristics. DBRS then considers that the portfolio is composed exclusively of senior unsecured loans.

-- The break-even rates for the interest rate stresses and default timings were determined using the DBRS cash flow engine.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings 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 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 the ratings include the parties involved in the ratings, including but not limited to the Originator and Arranger, ING Belgium NV/SA.

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.

The vintage performance data provided did not match the definition on which DBRS bases its analysis. The historical performance data was based on number of clients rather than the number of loans used by DBRS. Additional internal rating system migration matrices were provided by the Originator to determine a conservative average annual default rate. DBRS opted to use the internal rating model migration matrices data comparing with an internal PD of the originator to assume the most conservative approach. Despite this, DBRS considers the overall information available to it for the purposes of providing these ratings was of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

These ratings concern a newly issued financial instrument. These are the first DBRS ratings on these financial instruments.

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”):

-- PD Used: Base Case PD of 1.9%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 23.5% at the AAA (sf) stress level, a 10% and 20% decrease in the base-case recovery rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

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 lead to a downgrade of the Class A 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 Class A Notes to AA (high) (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: Maria Lopez, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 12 December 2018

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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 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
-- Operational Risk Assessment for European Structured Finance Originators

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.