DBRS Morningstar Confirms Credit Rating on FCT Pulse France 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) credit rating on the Class A Notes issued by FCT Pulse France 2022 (the Issuer).

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date in January 2035.

The credit rating action 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 the September 2023 payment date;
-- Updated probability of default (PD), loss given default (LGD), and expected loss assumptions for the aggregate collateral pool; and
-- Current available credit enhancement to rated notes to cover the expected losses at their credit rating level.

The transaction is a securitisation of a portfolio of receivables related to long-term operating leases granted by Arval Service Lease SA (Arval or the Seller) to small and medium-size enterprises (SME) and corporate lessees residing or incorporated in the Republic of France. The residual value (RV) component of the operating leases is excluded, therefore the Issuer is not exposed to RV risk.

The Seller granted a pledge without dispossession (gage sans dépossession) over the leased vehicles in the Issuer’s favour to guarantee any and all of Arval’s (in its capacity as Seller, Servicer, and maintenance co-ordinator) present and future payment obligations. The transaction is managed by France Titrisation and the receivables are serviced by Arval, an ultimate subsidiary of BNP Paribas SA (BNP Paribas or BNPP).

The transaction includes a one-year revolving period, during which the originator may offer additional receivables that the Issuer may purchase, subject to eligibility and portfolio criteria set out in the transaction documents. The revolving period may end earlier than scheduled if certain events occur, such as a breach of performance triggers, the termination of the servicer or maintenance co-ordinator, a Seller event of default, or the reserve balances not being funded to their required levels. The revolving period is expected to end in one payment date in October 2023. After the end of the revolving period, the repayment of principal on the Class A Notes will be fully sequential with no payment of principal on the Class B Notes until the Class A Notes are redeemed in full.

PORTFOLIO PERFORMANCE
As of the August 2023 cut-off date, loans that were one to two months in arrears and two to three months in arrears represented 0.2% and 0.1% of the outstanding portfolio balance, respectively. Loans more than three months in arrears represented 0.1% of the outstanding portfolio balance. The gross cumulative default ratio was equal to 0.6% of the initial portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
As the revolving period is about to end, DBRS Morningstar updated its base case PD and LGD assumptions to 2.8% and 40.0%, respectively, based on its loan-by-loan analysis on the remaining pool of receivables.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding performing collateral portfolio provides credit enhancement to the rated notes. As of the September 2023 payment date, credit enhancement to the Class A Notes was 14.5%, stable since DBRS Morningstar’s initial credit rating date.

The Class A Notes are supported by a liquidity reserve, which covers senior fees, net swap payments, and interest payments on the Class A Notes. The liquidity reserve was funded at closing to its required level of EUR 5.3 million and remains at this target level. It amortises subject to a target required amount, which is the higher of 1.5% of the outstanding balance of the Class A Notes and EUR 500,000.

All lease receivables are sold using a fixed discount rate of 5.0% and the Class A Notes are indexed to one-month Euribor. Interest rate risk for the Class A Notes is mitigated through an interest rate swap provided by BNP Paribas. DBRS Morningstar's public Long-Term Issuer Rating of AA (low) with a Stable trend on BNPP meets DBRS Morningstar’s criteria to act in this capacity. The hedging documents contain downgrade provisions consistent with DBRS Morningstar criteria.

BNP Paribas has been appointed as the Issuer’s account bank for the transaction. DBRS Morningstar's public Long-Term Issuer Rating of AA (low) with a Stable trend on BNPP meets DBRS Morningstar’s criteria to act in this capacity. The transaction documents contain downgrade provisions relating to the account bank consistent with DBRS Morningstar’s legal criteria. The Issuer's accounts include the general account, the liquidity reserve account, the commingling reserve account, the set-off reserve account, the swap collateral account, and the maintenance reserve account.

DBRS Morningstar’s credit rating on the rated notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784/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 methodology applicable to the credit ratings is the “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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.

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.

The sources of data and information used for this credit rating include investor reports provided by BNP Paribas and additional information provided by Arval.

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

At the time of the initial credit rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 6 October 2022, when DBRS Morningstar finalised its provisional credit rating on the Class A Notes at AAA (sf).

The lead analyst responsibilities for this transaction have been transferred to Pascale Kallas.

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

Sensitivity Analysis: To assess the impact of changing the transactions parameters on the credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool 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.
-- The base case PD and LGD of the current pool of loans for the Issuer are 2.8% and 40.0%, 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, if the LGD increases by 50%, the credit rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the credit rating on the Class A Notes would be expected to fall to AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the credit rating on the Class A Notes would be expected to fall to AA (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (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://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 6 September 2022

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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.

-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://www.dbrsmorningstar.com/research/420602/interest-rate-stresses-for-european-structured-finance-transactions.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.
--Rating CLOs Backed by Loans to European SMEs (10 June 2022) and SME Diversity Model v.2.6.1.2, https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.
-- Rating European Structured Finance Transactions Methodology (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://www.dbrsmorningstar.com/research/420754/derivative-criteria-for-european-structured-finance-transactions.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/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].