DBRS Morningstar Confirms Rating on FCT Bpifrance SME 2019-1

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AA (high) (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 the ultimate payment of principal on or before the legal final maturity date.

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, as of 31 August 2022;
-- The one-year base case probability of default (PD) and default and recovery rates on a potential portfolio migration based on replenishment criteria;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AA (high) (sf) rating level; and
-- 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 based in France.

The transaction is currently in its revolving period, which is scheduled to end on 27 November 2023. 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. The legal final maturity date is on 25 October 2052.

The transaction was subject to a major amendment in October 2021, which included an increase in the Class A Notes issuance, a decrease in credit enhancement to the Class A Notes, a decrease in the coupon on the Class A Notes, an increase in the minimum reserve balance, and changes regarding limits for the eligibility criteria and renegotiations. For further details, please see: https://www.dbrsmorningstar.com/research/386303/dbrs-morningstar-downgrades-rating-on-fct-bpifrance-sme-2019-1-following-amendment.

PORTFOLIO PERFORMANCE
Delinquencies have been low since closing. As of 31 August 2022, two- to three-month arrears and the 90+-day delinquency ratio represented 0.2% and 0.1%, respectively. The cumulative defaults are low, representing 1.2% of the initial portfolio balance as of the October 2021 amendment. Defaults are based on a definition of 180 days in arrears.

The transaction is subject to a delinquency ratio trigger of 3.5% and a cumulative default ratio trigger of 2.8% (which increases to 4.1% after the October 2022 payment date), both ending the revolving period upon a breach. The delinquency ratio and the cumulative default ratio trigger of 0.3% and 1.2%, respectively, were well within their respective triggers as of 31 August 2022. As of the same date, the defaulted loans amounting to EUR 42.6 million had all been repurchased at par.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Given that 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 decreased its lifetime default rate assumption at the AA (high) (sf) rating level to 26.9% from 29.7% at the October 2021 amendment. The decrease reflects the removal of the adjustments that DBRS Morningstar previously applied in the context of the Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar maintained the one-year base case PD at 0.8%. DBRS Morningstar’s recovery rate assumption at the AA (high) (sf) rating level remains in line with the assumption of 20.3% for the unsecured portion and 27.1% for the secured portion at the October 2021 amendment date.

CREDIT ENHANCEMENT
The credit enhancement to the Class A Notes is provided by the subordination of the junior notes. The credit enhancement has remained stable at 20.0% since the October 2021 amendment 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 is nonamortising and was at its target level of EUR 5.95 million at the September 2022 settlement date.

BNP Paribas SA acts as the account bank for the transaction. Based on DBRS Morningstar’s reference rating of AA on BNP Paribas SA (one notch below its Long Term Critical Obligations Rating of AA (high)), 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

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

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” (10 June 2022).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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 consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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

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/401817/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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

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 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.

The last rating action on this transaction took place on 20 October 2021, when DBRS Morningstar downgraded its rating on the Class A Notes to AA (high) (sf) from AAA (sf) following an amendment to the transaction.

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 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):
-- PD rates used: Base case PD of 0.8%, a 10% and 20% increase on the base case PD.
-- Recovery rates used: Base case recovery rate of 20.3% for the unsecured portion and 27.1% for the secured portion at the AA (high) (sf) rating level, and 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 Morningstar concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would not have an impact on the rating of the Class A Notes. A hypothetical decrease of the recovery rate by 20%, ceteris paribus, would not have an impact on the rating of the Class A Notes. A scenario combining both a hypothetical increase in the PD by 10% and a hypothetical decrease in the recovery rate by 10% would not have an impact on the rating of the Class A Notes.

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. 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: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 17 October 2019

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

-- Rating CLOs Backed by Loans to European SMEs (10 June 2022) and DBRS Morningstar SME Diversity Model v2.6.0.1, https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.
-- Master European Structured Finance Surveillance Methodology (19 May 2022),
https://www.dbrsmorningstar.com/research/397033/master-european-structured-finance-surveillance-methodology.
-- Rating CLOs and CDOs of Large Corporate Credit (26 January 2022),
https://www.dbrsmorningstar.com/research/391226/rating-clos-and-cdos-of-large-corporate-credit.
-- Cash Flow Assumptions for Corporate Credit Securitizations (26 January 2022),
https://www.dbrsmorningstar.com/research/391225/cash-flow-assumptions-for-corporate-credit-securitizations.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022),
https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022),
https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022),
https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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