DBRS Morningstar Assigns Rating to Red & Black Home Loans France 2 2023 Class A Notes and Confirms Rating on Outstanding 2022 Class A Notes

DBRS Ratings GmbH (DBRS Morningstar) assigned a rating of AA (sf) to the 2023 Class A Notes issued by Red & Black Home Loans France 2 (the Issuer). At the same time, DBRS Morningstar confirmed its AA (sf) rating on the existing 2022 Class A Notes issued in February 2022. With the proceeds of the 2023 Class A Notes and the proceeds of the further Class B issuance, the Issuer subsequently purchased an additional portfolio (the tap portfolio) of French residential mortgage loans originated by Société Générale, S.A. (the originator), which in combination with the existing portfolio, make up the aggregate portfolio. The 2023 Class A Notes and the 2022 Class A and Class B Notes (the Notes) are collateralised by the total aggregate portfolio. Crédit Logement S.A. secures 72.2% of the loans in the aggregate portfolio, while the remaining 27.8% is represented by first-lien mortgage loans.

DBRS Morningstar does not rate the Class B Notes issued in this transaction.

The ratings assigned to the 2023 Class A Notes and confirmed on the 2022 Class A Notes (the Senior Notes) address the timely payment of interest and the ultimate repayment of principal on or before the final maturity date in February 2060.

As of the 27 January 2023 payment date, the Senior Notes benefit from a credit enhancement of 5.5% (calculated as a percentage of the aggregate portfolio), consisting of subordination of the Class B Notes.

The transaction structure benefits from a cash reserve, fully funded by the originator, which provides liquidity support to the Senior Notes in the event of a servicer disruption that results in collections not being available on any payment date. Such reserve, set at 0.6% of the initial balance of the Senior Notes as of 27 January 2023, is subject to a EUR 5 million floor. In case of a Servicer Downgrade event, the Servicer being downgraded below investment grade, the amount of the Liquidity and Commingling Reserve Account will be increased to 1.8% of the outstanding balance of the Senior Notes. Any released amounts following the amortisation of the reserve will flow through the priority of payments.

Liquidity for the Senior Notes is also supported by the combined waterfall structure, whereby all monthly collections are distributed through a single priority of payments (principal to pay interest).

As of 31 December 2022, the aggregate performing portfolio consisted of 77,205 mortgage loans granted to 72,216 borrowers. The total current balance of the portfolio is EUR 12.8 billion and the average loan balance (per borrower) is EUR 176,945. The weighted-average (WA) seasoning of the portfolio is 3.9 years with a WA time to maturity of 16.3 years. The WA loan-to-value of the portfolio (calculated on the indexed property value) is 74.4%. The portfolio is concentrated in Ile-de-France, which accounts for 42.8% of the pool balance.

The entire portfolio pays a fixed rate of interest, with a WA interest rate of 1.3%. The coupon on the 2022 Class A Notes and the 2023 Class A Notes is also fixed at 0.45% each.

Société Générale, S.A. acts as transaction account bank, servicer, cash manager, and the paying agent . Based on DBRS Morningstar’s rating of such entity and the account bank replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with its “Legal Criteria for European Structured Finance Transactions”.

The transaction structure, which initially provided for a sequential amortisation of the Notes, led to an increase in subordination for the 2022 Class A Notes equivalent to 5.5% from 5%. However, after the subordination of the Senior Notes reached a level of 5.5% on the November 2022 payment date, the structure switched to pro rata payments between the senior notes and the Class B Notes. This feature provides that the Notes will amortise in a way that the credit enhancement for the Class A Notes is maintained at 110% of the initial credit enhancement from the closing date in February 2022. Redemption of the notes is subject to a switch event (linked to the portfolio performance) that will irreversibly trigger sequential amortisation if breached.

DBRS Morningstar based its ratings primarily on the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. DBRS Morningstar calculated probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio, which DBRS Morningstar uses as inputs into its cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda".
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the notes.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.
-- The sovereign rating on the Republic of France, rated AA (high) with a Stable trend by DBRS Morningstar as of the date of this press release.

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.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the ratings are: “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” (28 November 2022), https://www.dbrsmorningstar.com/research/405779/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda, and “Master European Structured Finance Surveillance Methodology” (21 December 2022), https://www.dbrsmorningstar.com/research/407695/master-european-structured-finance-surveillance-methodology.

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 principal methodology.

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 these ratings which were provided by Société Générale, S.A. include a loan tape (as of 31 December 2022) and performance history information on the residential loans book. This included static pool default and recovery rates (the latter, provided for mortgage loans only), as well as dynamic pool delinquent and prepayment data from 2012 to June 2021.

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. For these rating actions, DBRS Morningstar was not 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 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.

This is the first rating action on the 2022 Class A Notes since the Initial Rating Date.

The rating on the 2023 Class A Notes 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.

Sensitivity Analysis: 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):

In respect of the rated notes, the PD and LGD at the AA (sf) stress scenario of 16.9% and 20.1%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar concludes the following impact on the 2022 Class A Notes and the 2023 Class A Notes:
-- 25% increase of the PD, ceteris paribus, would not lead to a rating change;
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 25% increase of the LGD, ceteris paribus, would not lead to a rating change;
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade 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: 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.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Alvaro Astarloa, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date:
2022 Class A Notes: 24 February 2022
2023 Class A Notes: 27 January 2023

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

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (28 November 2022) and European RMBS Credit Model v 1.0.0.0 (France, Ireland, Portugal), https://www.dbrsmorningstar.com/research/405779/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- 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.
-- Master European Structured Finance Surveillance Methodology (21 December 2022),
https://www.dbrsmorningstar.com/research/407695/master-european-structured-finance-surveillance-methodology.

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].