Morningstar DBRS Confirms Credit Rating on FCT Lafayette 2021

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA (sf) credit rating on the Class A Notes issued by FCT Lafayette 2021 (the Issuer).

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 January 2051. Morningstar DBRS does not rate the Class B Notes (together with the Class A Notes, the Notes) also issued in the transaction.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of the level of delinquencies and defaults, as of the November 2023 payment date.
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables.
-- The current available credit enhancement to the Class A Notes to cover the expected losses at the AA (sf) credit rating level.
-- The absence of purchase termination events, breach of concentration limits, or trigger events to date.

FCT Lafayette 2021 is a revolving cash flow securitisation collateralised by a portfolio of performing secured and unsecured loans to French micro, small, or medium-size enterprises by BNP Paribas S.A. (BNPP or the originator). The transaction closed in February 2021 and was structured with an 18-month revolving period that was scheduled to end in August 2022 but was extended until November 2022 (included). Following a restructuring in February 2023, the revolving period was further extended by 24 months and is now scheduled to end in February 2025 (included).

During the revolving period, the originator may sell new receivables (i.e., further portfolios) to the Issuer subject to certain conditions and limitations. The revolving period will end prematurely if certain events occur, including the cumulative gross default rate exceeding 7.0% and the insolvency of the originator. During the revolving period, the purchase of new receivables will be funded through principal collections.

Morningstar DBRS based its analysis on a stressed portfolio created considering the scheduled amortisation plan of the initial portfolio at the restructuring and the purchase conditions on the aggregate and the further portfolios.

PORTFOLIO PERFORMANCE
As of the November 2023 payment date, one- to two-month arrears represented 0.1% of the outstanding portfolio balance, stable from 0.1% in November 2022, and 60- to 90-day arrears were 0.06%. As of the November 2023 payment date, the gross cumulative default ratio was equal to 2.2% of the aggregate portfolio balance (initial plus subsequent portfolios), up from 1.8% in November 2022, with recoveries standing at 18.2% of the cumulative defaulted loans.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS updated its one-year base case PD assumptions to 2.5% and 1.9% on retail and corporate borrowers, respectively. The purchase conditions during the revolving period limit the maximum WA internal PD of the aggregate and the further portfolios to 3.5%. Morningstar DBRS updated its lifetime default and recovery assumptions on the outstanding portfolio to 44.4% and 34.5%, respectively, at the AA (sf) credit rating level, based on updated historical default and recovery data received from BNPP. The portfolio assumptions continue to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents. Morningstar DBRS continues to base its analysis on a stressed portfolio created considering the scheduled amortisation plan of the initial portfolio and the updated purchase conditions on the aggregate and the further portfolios.

CREDIT ENHANCEMENT
The Class A Notes benefit from a total credit enhancement of 27.0% (down from 30.0% at closing), which is provided by the overcollateralisation of the portfolio. The credit enhancement is unchanged from last annual review at the transaction´s restructuring given the transaction is still in the revolving period. The transaction includes a non-amortising liquidity reserve, which is available to cover expenses, senior fees, cash swap payments, and interest on the Class A Notes. Any released amount will not be used to redeem the Class A Notes and will therefore not provide any credit enhancement. The target liquidity reserve is equal to 1.0% of the original balance of the Class A Notes.

BNPP is a dominant counterparty for the transaction as it acts as servicer and holds the servicer collection account. It also covers the roles of account bank and paying agent and holds the general account, the principal account, the interest account, the liquidity reserve account, the commingling reserve account, and the set-off reserve deposit account. Based on the account bank’s credit rating and the replacement provisions included in the transaction documents, Morningstar DBRS considers the risk arising from the exposure to BNPP to be consistent with the credit rating assigned to the Class A Notes, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

BNPP is also the cash swap counterparty for this transaction. Morningstar DBRS has not given full credit to the derivative agreement as the swap documentation is not consistent with “DBRS Morningstar’s Derivative Criteria for European Structured Finance Transactions” methodology, given the credit rating assigned to the Class A Notes.

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

Morningstar DBRS’ credit rating on the Class A Notes does 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, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 rating is: “Rating CLOs Backed by Loans to European SMEs” (23 February 2024), https://dbrs.morningstar.com/research/428543.

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 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 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 this credit rating include transaction reports and information provided by the Management Company, France Titrisation (Groupe BNP Paribas), 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 rating, Morningstar DBRS was supplied with third-party assessments. However, this did not impact the credit rating analysis.

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

The last credit rating action on this transaction took place on 28 February 2023, when Morningstar DBRS confirmed its AA (sf) credit rating on the Class A Notes following a transaction restructuring.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available at https://dbrs.morningstar.com/.

To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS 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 2.9%, a 10% and a 20% increase in the base-case PD.
-- Recovery Rates Used: Base-case recovery rate of 34.5% at the AA (sf) credit rating level, and a 10% and 20% decrease in the base-case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery-rate levels.

Morningstar DBRS concludes that a hypothetical increase of the base case PD by 20%, ceteris paribus, would lead to a downgrade on the Class A Notes to AA (low) (sf) and a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade on the Class A Notes to A (high) (sf). A scenario combining both a hypothetical increase in the PD by 10% and a hypothetical decrease in the recovery rate by 10%, would lead to a downgrade on the Class A 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.

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

Lead Analyst: Helvia Meana, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 26 February 2021

DBRS Ratings GmbH
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The credit rating methodologies used in the analysis of this transaction can be found at:
https://dbrs.morningstar.com/about/methodologies.

-- Rating CLOs Backed by Loans to European SMEs (23 February 2024) and DBRS Morningstar SME Diversity Model v2.6.1.4,
https://dbrs.morningstar.com/research/428543.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730.
-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602.
--Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024), https://dbrs.morningstar.com/research/428544.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://dbrs.morningstar.com/research/420573.
-- 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.
-- DBRS Morningstar 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 https://dbrs.morningstar.com/ or contact us at [email protected].