Press Release

DBRS Morningstar Upgrades Credit Rating on FCT Bpifrance SME 2019-1 Following Amendment

Structured Credit

October 19, 2023

DBRS Ratings GmbH (DBRS Morningstar) upgraded its credit rating on the Class A Notes issued by FCT Bpifrance SME 2019-1 (the Issuer) to AAA (sf) from AA (high) (sf).

The credit 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 transaction is a securitisation of mortgage and nonmortgage loans originated by Bpifrance S.A. (Bpifrance, formerly Bpifrance Financement) to small and medium-size enterprises based in France.

The transaction is currently in its revolving period, during which Bpifrance 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 upgrade 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 2023;
-- 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 AAA (sf) rating level; and
-- No revolving termination events; and
-- An amendment to the transaction signed and effective on 18 October 2023.

AMENDMENT
The amendment to the transaction involves the following:
-- An extension of the revolving period by two years to 25 November 2025 from 27 November 2023.
-- A modification of the cumulative default ratio trigger to 3.5% before 1 October 2024 and to 4.5% after that date from 2.8% before 1 October 2022 and 4.1% after that date.
-- Changes to the portfolio eligibility criteria.
-- An increase in the minimum interest rate and weighted-average interest rate of the performing portfolio balance to 1.6% from 1.3% following loan renegotiations.
-- An increase in the maximum maturity date for a loan extension to the last day of September in 2045 from the last day of September in 2043.

The transaction was previously 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 2023, two- to three-month arrears and the 90+-day delinquency ratio both represented 0.1%. The cumulative defaults are low, representing 1.7% 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 3.5% (4.1% prior to this amendment), both ending the revolving period upon a breach. The delinquency ratio and the cumulative default ratio trigger of 0.2% and 1.7%, respectively, were well within their respective triggers as of 31 August 2023. As of the same date, the defaulted loans amounting to EUR 59.9 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 maintained the one-year base case PD at 0.8%. Following the present amendment, DBRS Morningstar’s lifetime default rate assumption at the AAA (sf) rating level is 29.0%. DBRS Morningstar’s recovery rate assumption at the AAA (sf) rating level is 18.0% for the unsecured portion and 20.7% for the secured portion.

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 latest payment date in July 2023.

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 credit rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) 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 with its proprietary cash flow engine.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: “Rating CLOs Backed by Loans to European SMEs” (6 October 2023), https://www.dbrsmorningstar.com/research/421602/rating-clos-backed-by-loans-to-european-smes.

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 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.

DBRS Morningstar has conducted a review of the amended transaction legal documents provided in the context of the aforementioned amendment. A review of the remaining transaction legal documents was not conducted as the documents have remained unchanged since the most recent 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/421590/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.

The sources of data and information used for this credit rating include loan-level data and investor reports provided by Eurotitrisation, and the following historical data provided by Bpifrance:
-- Quarterly historical vintage default data, covering the years 2007 to 2022 and based on a 180-day definition in line with the transaction’s definition of default, in amounts and numbers.
-- Monthly delinquency data from June 2007 to October 2022, in amounts.

DBRS Morningstar did not rely upon third-party due diligence in order 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 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 20 October 2022, when DBRS Morningstar confirmed its AA (high) (sf) credit rating on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Helvia Meana Ramon.

Information regarding DBRS Morningstar credit 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 credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit 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 18.0% for the unsecured portion and 20.7% for the secured portion at the AAA (sf) credit rating level, and 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%, ceteris paribus, would not have an impact on the credit rating on the Class A Notes. A hypothetical decrease of the recovery rate by 20%, ceteris paribus, would not have an impact on the credit rating on 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 credit rating on 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://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.

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

Lead Analyst: Helvia Meana Ramon, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 17 October 2019

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The credit rating methodologies used in the analysis of this transaction can be found at: https://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: 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].

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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