Press Release

DBRS Morningstar Confirms Rating on FCT Bpifrance SME 2019-1

Structured Credit

October 23, 2020

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) rating on the Class A Notes issued by FCT Bpifrance SME 2019-1 (the Issuer).

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in October 2052.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses.
-- The one-year base case probability of default (PD), and default and recovery rates on the receivables.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.
-- No revolving termination events have occurred.

The transaction is a securitisation of mortgage and nonmortgage loans originated by Bpifrance Financement to small and medium-size enterprises (SMEs) based in France.

The transaction has a three-year revolving period scheduled to end on 25 November 2022. During this period, Bpifrance Financement has the option to sell new loans at par to the Issuer subject to portfolio eligibility criteria and provided that no early amortisation triggers are breached. On the April 2020 payment date, mandatory principal and interest payments suspensions for six months were introduced following an agreement with the French government in the context of the coronavirus pandemic and these will end on the October 2020 payment date. To support the moratorium, the reserve balance was temporarily increased to EUR 10.5 million from EUR 4.0 million.

PORTFOLIO PERFORMANCE
Delinquencies have been volatile and low since closing: as of 31 August 2020, two- to three-month arrears and the 90+ delinquency ratio represented 0.0% and 0.1%, respectively. The cumulative defaults are low, representing 0.2% of the initial portfolio balance. Defaults are based on a 180 days in arrears definition. The transaction is subject to a delinquency ratio trigger of 3.50% and a cumulative default ratio trigger of 4.50% (5.50% from the April 2021 payment date), both ending the revolving period upon breach. Both the delinquency ratio and the cumulative default ratio trigger, each at 0.2%, are well within their respective triggers. The defaulted loans to date (EUR 3.6 million) have all been repurchased. As of 31 August 2020, 53.5% of the outstanding portfolio balance benefitted from a payment holiday of up to six months granted in the context of the coronavirus pandemic while 22.6% had been either refused or been ineligible to such payment holiday. As of 31 August 2020, 22.6% of the outstanding portfolio corresponded to borrowers currently with their interest or principal payments.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Given the transaction is currently in its revolving period, DBRS Morningstar’s analysis is based on a worst-case portfolio, which complies with the portfolio eligibility criteria limits. DBRS Morningstar updated its lifetime default rate assumption at the AAA (sf) rating level to 39.4% from 33.8% at the initial rating. The one-year base case PD has been updated to 1.2% following coronavirus adjustments from 1.0% at the initial rating. The DBRS Morningstar recovery rate assumption at the AAA (sf) rating level remains in line with the one at closing at 18.0%.

CREDIT ENHANCEMENT
The credit enhancement is provided by subordination of the junior notes. The credit enhancement remained stable at 22.50% since the initial rating as the transaction is still in the revolving period.

The transaction benefits from a cash reserve, which is available to cover senior expenses and interest on the Class A Notes and to redeem the remaining principal on the Class A Notes on the date of their redemption. The reserve was funded at closing at EUR 4 million and is nonamortising. However, the reserve balance has been increased to EUR 10.5 million on the April 2020 payment date in the context of payment holidays granted to the loans in the portfolio following the coronavirus pandemic, and the excess amount above EUR 4 million will decrease as shortfalls on the interest payments on the Class A Notes are covered by the reserve. As of the September 2020 settlement date, the reserve outstanding balance is EUR 7.6 million. The reserve required amount will again be equal to EUR 4 million at the end of the current moratorium period on the October 2020 payment date.

BNP Paribas Securities Services SCA acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of BNP Paribas Securities Services SCA, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many SME CLOs transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

DBRS Morningstar has assessed the potential impact of the Coronavirus Disease (COVID-19) pandemic on the transaction by adjusting its loss assumptions in line with the risk factors in its commentary published on 18 May 2020 outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated structured credit transactions in Europe. For more details, please see the following commentaries: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

For this transaction DBRS Morningstar applied in its worst-case portfolio analysis a 1.5 or a 2.0 adjustment factor on the underlying one-year PD for obligors in mid-high or high risk industries based on their perceived exposure to the adverse disruptions of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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” (30 September 2020). 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 be based on the worst-case replenishment criteria set forth in the transaction legal documents.

DBRS Morningstar reviewed the legal documents at the time of the recent amendment, which took place on 1 April 2020.

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include investor reports provided by Eurotitrisation, and loan-level data provided by Bpifrance Financement.

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 purpose 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 October 2019, when DBRS Morningstar finalised its provisional rating on the Class A Notes at AAA (sf).

The lead analyst responsibilities for this transaction have been transferred to Alfonso Candelas.

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

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: One year base case PD of 1.2%; a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: base case Recovery Rate of 18.0% at the AAA (sf) rating level; a 10% and 20% decrease in the Base Case Recovery Rate at each stress level.

DBRS Morningstar concludes that a hypothetical increase of base case PD by 20% or a hypothetical decrease of the base case Recovery Rate by 20%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (low) (sf) or AA (sf), respectively. A scenario combining both an increase in the base case PD by 10% and a decrease in the base case Recovery Rate by 10% would lead to a downgrade of the Class A Notes to AA (sf).

For further information on DBRS Morningstar 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 GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Alfonso Candelas, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 17 October 2019

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: http://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 http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

This press release was amended on 5 November 2020 to correct the date when DBRS Morningstar finalised its provisional ratings to 25 October 2019 from 17 October 2019. It was later amended on 12 November 2020 to state the Diversity Model v.2.4.1.0 was used in this transaction.

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.

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