DBRS Morningstar Confirms and Upgrades Ratings of Notes Issued by Two SapphireOne Transactions

DBRS Ratings GmbH (DBRS Morningstar) confirmed and upgraded its ratings on the bonds issued by two SapphireOne transactions (together, the Issuers), as follows:

SapphireOne Mortgages FCT 2016-2 (Sapphire 2)
-- Class A confirmed at AAA (sf)
-- Class B confirmed at AAA (sf)
-- Class C confirmed at AAA (sf)
-- Class D confirmed at AA (high) (sf)
-- Class E confirmed at AA (low) (sf)

SapphireOne Mortgages FCT 2016-3 (Sapphire 3)
-- Class A confirmed at AAA (sf)
-- Class B confirmed at AAA (sf)
-- Class C confirmed at AA (sf)
-- Class D upgraded to AA (low) (sf) from A (high) (sf)
-- Class E upgraded to AA (low) (sf) from A (sf)

The ratings address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in June 2061.

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the September 2020 payment date.
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables.
-- Current available credit enhancements to the rated notes to cover the expected losses at their respective rating levels.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Sapphire 2 and Sapphire 3 closed in November 2016 and December 2016, respectively. Both transactions are securitisations of French residential mortgage loans related to debt consolidation, originated and serviced by My Money Bank S.A. (previously, GE Money Bank S.C.A).

The majority of variable-rate mortgages in the portfolio fall under the Instalment Protection Mechanism, whereby the borrowers’ monthly instalments are protected from the full extent of interest rate rises that would otherwise lead to an increased instalment. The monthly instalments are recalculated on an annual basis, with the amount of any increase linked to the current inflation. When interest rates are flat or declining, the monthly instalment amount will remain constant.

The transactions have unique structures where interest and principal receipts are reallocated to the Issuers’ revenue and principal funds in order to enable the amortisation of the notes based on a schedule defined at the close of the transactions.

Please refer to each transaction’s rating report available on www.dbrsmorningstar.com for further details on the reallocation of collections and the amortisation mechanism of the notes.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
SAPPHIRE 2
As of September 2020, loans two to three months in arrears represented 0.5% of the outstanding portfolio balance, up from 0.4% in September 2019. The 90+ days delinquency ratio was 2.1%, up from 1.3% in September 2019 and the cumulative loss ratio was 0.5%. DBRS Morningstar updated the base case PD and LGD assumptions for the remaining collateral pool to 9.2% and 2.8%, respectively.

SAPPHIRE 3
As of September 2020, loans two to three months in arrears represented 0.5% of the outstanding portfolio balance, unchanged since September 2019. The 90+ days delinquency ratio was 1.8%, up from 1.4% in September 2019 and the cumulative loss ratio was 0.5%. DBRS Morningstar updated the base case PD and LGD assumptions for the remaining collateral pool to 10.0% and 3.0%, respectively.

CREDIT ENHANCEMENT
The credit enhancement available to all the rated notes has increased in both transactions as the transactions deleverage. The sources of credit enhancements to each class of notes are the subordinated notes and the non-liquidity reserve funds portion of the total reserve funds.

The total reserve fund is split into two components, the liquidity reserve fund and the non-liquidity reserve fund, which are available to cover senior fees, interest on the rated notes, and principal on the rated notes (via the principal deficiency ledgers). Amounts released due to the amortisation of the liquidity reserve fund in each transaction are added to the non-liquidity reserve fund, accelerating the increase in credit enhancements to each class of rated notes. The total reserve funds are currently at their non-amortising target amount of EUR 20.0 million and EUR 17.8 million for Sapphire 2 and Sapphire 3, respectively.

For Sapphire 2, as of the September 2020 payment date, the credit enhancements available to the Class A, Class B, Class C, Class D, and Class E notes were 47.3%, 37.9%, 30.3%, 25.1%, and 20.5%, respectively. As of the September 2019 payment date, the credit enhancements available to the Class A, Class B, Class C, Class D, and Class E notes were 36.6%, 29.3%, 23.4%, 19.3%, and 15.7%, respectively.

For Sapphire 3, as of the September 2020 payment date, the credit enhancements available to the Class A, Class B, Class C, Class D, and Class E notes were 33.3%, 25.4%, 18.1%, 15.3%, and 14.1%, respectively. As of the September 2019 payment date, the credit enhancements available to the Class A, Class B, Class C, Class D, and Class E notes were 25.5%, 19.4%, 13.7%, 11.4%, and 10.5%, respectively.

Société Générale, S.A. acts as the main account bank provider to both transactions. Based on DBRS Morningstar’s account bank reference rating of Société Générale, S.A. of A (high), which is two notches below the DBRS Morningstar Long Term Critical Obligations Rating (COR) of AA, the downgrade provisions outlined in the transactions documents, and other mitigating factors inherent in the transactions structures, DBRS Morningstar considers the risk arising from the exposure to the account bank in both transactions to be consistent with the ratings assigned to the Class A notes of each transaction, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

HSBC Bank plc acts as the swap counterparty to Sapphire 2. HSBC Bank plc’s DBRS Morningstar private rating is above the first rating threshold as described in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology, given the rating assigned to the Class A notes in Sapphire 2.

BNP Paribas S.A. acts as the swap counterparty to Sapphire 3. BNP Paribas S.A.’s DBRS Morningstar Long Term COR of AA (high) is above the first rating threshold as described in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology, given the rating assigned to the Class A notes in Sapphire 3.

DBRS Morningstar analysed the transaction structures in Intex DealMaker.

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 increase in the coming months for many RMBS 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.

For these transactions, DBRS Morningstar increased the expected default rate for self-employed borrowers, incorporated a moderate reduction in residential property values, and conducted additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand potential high levels of payment holidays in the portfolio.

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.

On 5 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect DBRS Morningstar-rated RMBS transactions in Europe. For more details please see https://www.dbrsmorningstar.com/research/360599/european-rmbs-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 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 ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://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 these ratings include investor reports provided by EuroTitrisation, the management company, and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial ratings, 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 these ratings 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 actions on both transactions took place on 15 November 2019, when DBRS Morningstar took the following rating actions:

Sapphire 2
-- Class A confirmed at AAA (sf)
-- Class B confirmed at AAA (sf)
-- Class C upgraded to AAA (sf) from AA (high) (sf)
-- Class D upgraded to AA (high) (sf) from AA (sf)
-- Class E confirmed at AA (low) (sf)

Sapphire 3
-- Class A confirmed at AAA (sf)
-- Class B upgraded to AAA (sf) from AA (high) (sf)
-- Class C upgraded to AA (sf) from A (high) (sf)
-- Class D upgraded to A (high) (sf) from BBB (high) (sf)
-- Class E upgraded to A (sf) from BBB (low) (sf)

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 ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for both pools based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- For Sapphire 2, the base case PD and LGD assumptions for the collateral pool are 9.2% and 2.8%, respectively.
-- For Sapphire 3, the base case PD and LGD assumptions for the collateral pool are 10.0% and 3.0%, respectively.

The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, in Sapphire 2 transaction, if the LGD increases by 50%, the rating of the Class A would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A would be expected to remain at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A would still be expected to remain at AAA (sf).

SAPPHIRE 2
Class A Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Class B Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Class C Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Class D Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

Class E Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low)(sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

SAPPHIRE 3
Class A Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Class B Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

Class C Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

Class D Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (sf)

Class E Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
https://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: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 20 October 2016 (Sapphire 2)
Initial Rating Date: 8 December 2016 (Sapphire 3)

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of these transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (22 April 2020),
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.

-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.

-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.

-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020),
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.

-- Derivative Criteria for European Structured Finance Transactions (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (21 September 2020) and European RMBS Credit Model v 1.0.0.0 https://www.dbrsmorningstar.com/research/366958/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.

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

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