Press Release

DBRS Morningstar Assigns AA (sf) Rating to FCT Lafayette 2021

Structured Credit

February 26, 2021

DBRS Ratings GmbH (DBRS Morningstar) assigned an AA (sf) rating to the EUR 1,400,000,000 Class A Asset-Backed Fixed-Rate Notes due 30 April 2048 (the Class A Notes) issued by FCT Lafayette 2021 (the Issuer).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in April 2048. The Issuer also issued EUR 600,000,000 Class B Asset-Backed Fixed-Rate Notes due 30 April 2048 (together with the Class A Notes, the Notes), which were not rated by DBRS Morningstar.

FCT Lafayette 2021 is a revolving cash flow securitisation collateralised by a portfolio of performing secured and unsecured loans to French micro, small or medium-size enterprises. The loans were granted by BNP Paribas S.A. (BNP Paribas or the Originator).

As of the 31 January 2021, the portfolio consisted of 20,633 loans extended to 13,610 borrowers, with an aggregate par balance of EUR 2.00 billion.

The transaction includes a 18-month revolving period, scheduled to end in August 2022 (included), during which time the Originator may sell new receivables (i.e., further portfolios) to the Issuer subject to certain conditions and limitations. The revolving period will end prematurely if certain events occur, including the cumulative gross default rate exceeding 7.0% and the insolvency of the Originator. During the revolving period, the purchase of new receivables will be funded through principal collections.

The Class A Notes benefit from a total credit enhancement of 30.0%, which is provided by the overcollateralisation of the portfolio. The transaction includes a non-amortising liquidity reserve, funded at closing, which is available to cover expenses, senior fees, cash swap payments, and interest on the Class A Notes. Any released amount will not be used to redeem the Class A Notes, hence not providing credit enhancement. The target liquidity reserve is equal to 1.0% of the original balance of the Class A Notes.

The deal is structured with separate waterfalls for the payment of interest and principal on the Notes and a principal deficiency ledger mechanism whereby provisioning occurs when a loan is classified as defaulted. In addition, the transaction will use excess spread to amortise the Class A Notes.

DBRS Morningstar based its analysis on a stressed portfolio created considering the scheduled amortisation plan of the initial portfolio and the purchase conditions on the aggregate and the further portfolios.

The initial portfolio consists of secured and unsecured loans with a weighted average remaining term of 7.4 years and weighted-average life (WAL) of 3.5 years. The weighted-average of the Originator’s internal probability of default (PD) estimates for the initial portfolio is 2.8%.

The purchase conditions during the revolving period limit the maximum remaining term of the aggregate and the further portfolios to 8.0 years and the maximum weighted-average internal PD of the aggregate and the further portfolios to 3.5%. The stressed portfolio was built considering the characteristics of the initial portfolio on the portion of the total balance scheduled to be outstanding at the end of the revolving period and the characteristics of the replaced portfolio in line with the purchase conditions for the remainder of the total balance.

Building & development is the largest sector of the portfolio, with a weight of 36.4%. The second- and third-largest industries are food/drug retailers and business equipment & services, which represent 12.2% and 7.6% of the pool, respectively. Industries related to financial activities (NACE Letter K) like brokers, dealers & investment houses, conglomerates, financial intermediaries, and insurance companies comprise 15.0% of the initial portfolio. Purchase conditions limit the industry concentration based on the aggregate and subsequent portfolios, and these limits were considered when DBRS Morningstar created its stressed portfolio.

The portfolio is granular and the top borrower group represents 0.7% of the portfolio, while the top 10 and the top 20 borrower groups represent 2.5% and 4.0%, respectively. Purchase conditions limit the concentration of the top largest borrower group and the top 10 and 25 borrower groups in the aggregate and further portfolios to 1.0%, 5.0%, and 10.0%; these limits were considered when DBRS Morningstar created its stressed portfolio.

The portfolio is well diversified across France, with higher concentration in the regions of Ile-de-France (31.1%), Rhône-Alpes (12.7%) and Provence-Alpes-Côte d'Azur (8.4%).

The transaction is exposed to set-off risk on 38.1% of the initial portfolio balance (reduced to 13.4% if all borrowers claim the first EUR 100,000 covered by the deposit guarantee scheme). A set-off reserve will be funded if the long-term Critical Obligations Rating (COR) of BNP Paribas is downgraded below BBB (high) (or the long-term rating is downgraded below BBB) for an amount equal to the minimum between (1) the amount exceeding EUR 100,000 of the deposits made by the borrowers and (2) the outstanding amount of their receivables, mitigating set-off risk.

The transaction is exposed to commingling risk. A commingling reserve will be funded if the long-term COR of BNP Paribas is downgraded below BBB (or the long-term rating is downgraded below BBB (low)) for an amount equal to 4.0% of the principal amount outstanding of the Notes, mitigating commingling risk.

BNP Paribas is a dominant counterparty for the transaction as it acts as servicer and holds the servicer collection account, and through BNP Paribas Securities Services it covers the roles of account bank and paying agent and holds the general account, the principal account, the interest account, the liquidity reserve account, the commingling reserve account, and the set-off reserve deposit account. Based on the account bank’s rating and the replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such counterparty to be consistent with the rating assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar determined its rating based on the principal methodology and the following analytical considerations:
-- The PD for the portfolio was determined using the Originator’s internal PD estimates and the historical performance information supplied. DBRS Morningstar assumed an annualised PD of 2.8% for the outstanding portfolio after the end of the revolving period, and an annualised PD of 3.5% for the replenished portfolio. Additional adjustments were applied in the context of the current Coronavirus Disease (COVID-19) pandemic.
--The assumed WAL of the portfolio was 3.9 years.
-- The PDs and WAL were used in the DBRS Morningstar Diversity Model to generate the hurdle rate for the assigned rating.
-- The recovery rate was determined using the historical performance information supplied. Recovery rates of 36.5% and 20.8% were used for the loans granted to retail and corporate borrowers, respectively, at the AA (sf) rating level.
-- The breakeven rates for the interest rate stresses and default timings were determined using DBRS Morningstar’s cash flow tool.

INFORMATION ON COVID-19
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 small and medium-size enterprise (SME) transactions, some meaningfully. The rating is based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread 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 updated on 28 January 2021. For details see the following commentaries: https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-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.

For more information on DBRS Morningstar considerations for European Structured Credit transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/361098.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
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 is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 originator and arranger, BNP Paribas S.A.

DBRS Morningstar received the following data information:
-- Static quarterly default data from Q1 2012 to Q4 2019 for retail borrowers;
-- Static semiannual recovery data from S1 2003 to S2 2019 for retail borrowers;
-- Annual rating migration matrices from 2010 to 2019 for corporate borrowers;
-- Dynamic quarterly delinquency data from Q1 2018 to Q3 2020 for retail borrowers;
-- Dynamic monthly prepayment data from January 2014 to September 2020.

In addition, DBRS Morningstar received loan-level characteristics, set-off exposure and contractual amortisation profile as at 31 January 2021.

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

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 purposes 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- Probability of Default Rates Used: Base Case PD of 3.6%, a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case Recovery Rate of 30.2% at the AA (sf) stress level, a 10% and 20% decrease in the Base Case Recovery Rate.

DBRS Morningstar 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 Class A Notes to A (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 A (high) (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Ilaria Maschietto, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 26 February 2021

DBRS Ratings GmbH
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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].

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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