Morningstar DBRS Confirms Credit Ratings on FCT FE Durable 2023

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the notes issued by FCT FE Durable 2023 (the Issuer) as follows:

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date in April 2060. The credit rating on the Class B Notes addresses the ultimate payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date, in accordance with the transaction documentation (the credit rating addresses the timely payment of interest once the Class B Notes become the most senior class of notes outstanding).

CREDIT RATING RATIONALE
The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- The portfolio performance, in terms of delinquencies, defaults, and losses, as of the January 2024 payment date;
-- The updated probability of default (PD) and recovery rates on the remaining pool of receivables; and
-- Current available credit enhancement to the rated notes to cover the expected losses at the respective credit rating levels.

The transaction is a cash flow securitisation collateralised by a portfolio of social housing loans to French social and affordable housing providers (SAHP) that were granted by Caisse des Dépôts et Consignations (CDC or the originator) through its savings fund division (Fonds d’Epargne).

PORTFOLIO PERFORMANCE
The portfolio is currently performing within Morningstar DBRS’ expectations. No delinquencies were reported in the December 2023 pool-cut. No loans have defaulted to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pools of receivables and updated its base-case PD and loss given default assumptions as follows:
-- 13.8% and 21.4%, respectively, at the AAA (sf) credit rating level;
-- 11.0% and 20.6%, respectively, at the AA (sf) credit rating level.

CREDIT ENHANCEMENT
Credit enhancement to the rated notes is provided by the overcollateralisation of the outstanding portfolio balance.

As of the January 2024 payment date, credit enhancement levels were as follows compared with the Initial Rating Date:
-- Class A Notes: 20.2%, slightly up from 19.2%;
-- Class B Notes: 2.3%, slightly up from 2.2%.

The transaction is static and the structure includes separate waterfalls for the payment of interest and principal on the notes, with the Class A Notes ranking in priority to the Class B Notes on both interest and principal payments.

The transaction includes a general reserve, which provides liquidity support and is available to cover expenses, senior fees, and interest on the Class A and Class B Notes. The target cash reserve is equal to 1.0% of the principal outstanding of the Class A and Class B Notes, subject to a floor of EUR 1.0 million. It was at its target of EUR 9.3 million as of the January 2024 payment date. In addition, principal funds are available to cover any additional shortfalls in expenses, senior fees, swap payments, and interest on the Class A Notes.

The portfolio consists of floating-rate loans, indexed at the Livret A rate. It shows a relatively high SAHP borrower concentration, as the largest and the top five and top 10 largest borrower groups account for 1.8%, 8.8%, and 17.1% of the outstanding portfolio balance, respectively. The portfolio benefits from the guarantees extended by local authorities (collectivités locales). The covered amount is 100% of the outstanding principal balance.

CDC acts as the servicer for this transaction and will remain the servicer until the liquidation of the Issuer. Only CDC is authorised to originate, manage, and collect regulated social housing loans. The management company ensures that the loans are duly managed and collected in accordance with the terms of the servicing agreement.

CDC covers several key roles in the transaction including that of seller, servicer, account bank, general reserve deposit provider, and swap counterparty. Based on the account bank’s private credit rating and the replacement provisions included in the transaction documents, Morningstar DBRS considers the counterparty risk to be consistent with the credit ratings assigned to the Class A and Class B Notes, in accordance with its “Legal Criteria for European Structured Finance Transactions” methodology.

The transaction is exposed to basis and repricing risk because of the mismatch between the floating-rate assets indexed to the Livret A rate and the floating-rate liabilities indexed to three-month Euribor. This risk is mitigated by an interest rate swap with an eligible counterparty. CDC is the swap counterparty for the transaction. Based on the swap counterparty’s private credit rating, Morningstar DBRS concluded that CDC meets the minimum requirements to act in this capacity in relation to the credit ratings assigned. The transaction documents feature downgrade provisions consistent with Morningstar DBRS’ “Derivative Criteria for European Structured Finance Transactions”.

Morningstar DBRS’ credit ratings on the notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

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

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS 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 credit ratings is: Global Methodology for Rating CLOs and Corporate CDOs (22 October 2023), https://dbrs.morningstar.com/research/422269.

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

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include management reports provided by EuroTitrisation and loan-level data provided by the European DataWarehouse GmbH.

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

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

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

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

This is the first credit rating action since the Initial Rating Date.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):
-- Probability of Default Rates Used: Base-case PD of 13.8% and 11.0% at the AAA (sf) and AA (sf) stress levels, a downgrade of the Republic of France to AA and AA (low) to increase the base-case default rate.
-- Recovery Rates Used: Base-case recovery rate of 78.6% and 79.4% at the AAA (sf) and AA (sf) stress levels, 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.

Morningstar DBRS concludes that a hypothetical downgrade of the sovereign rating of France to AA or a hypothetical decrease of the recovery rate by 10% would lead to a confirmation of the Class A and Class B Notes at AAA (sf) and AA (sf), respectively. A hypothetical downgrade of the sovereign rating of France to AA (low) would lead to a downgrade of the Class A and Class B Notes to AA (high) (sf) and A (high) (sf), respectively. A hypothetical decrease of the recovery rate by 20% would lead to a confirmation of the Class A Notes at AAA (sf) and a downgrade of the Class B Notes to A (high) (sf). A scenario combining both a downgrade of the sovereign rating of France to AA and a decrease in the recovery rate by 10% would lead to a confirmation of the Class A Notes at AAA (sf) and a downgrade of the Class B Notes to A (high) (sf).

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Pascale Kallas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 17 February 2023

DBRS Ratings GmbH
Neue Mainzer Straße 75
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://dbrs.morningstar.com/about/methodologies.

-- Global Methodology for Rating CLOs and Corporate CDOs (22 October 2023), https://dbrs.morningstar.com/research/422269
-- Modelling Assumptions for Portfolios of Public Sector Exposures and Morningstar DBRS Public Sector Exposure Model version 0.2.1 (12 July 2023), https://dbrs.morningstar.com/research/417064
-- Rating European Social and Affordable Housing Providers (SAHPs) (6 June 2023), https://dbrs.morningstar.com/research/415453
-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].