Morningstar DBRS Confirms Credit Rating on Notes Issued by Loan Invest NV/SA. Compartment SME Loan Invest 2017

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA (sf) credit rating on the Notes issued by Loan Invest NV/SA. Compartment SME Loan Invest 2017 (the Issuer).

The credit rating addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in April 2051.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the February 2024 payment date.
-- The one-year base case probability of default (PD) and default and recovery rates on the remaining receivables.
-- The credit enhancement available to the Notes to cover the expected losses at the AAA (sf) credit rating level.

The transaction is a cash flow securitisation collateralised by a portfolio of loans originated and serviced by KBC Bank NV (KBC) within the framework of small and medium-size enterprises (SMEs) in Belgium.

PORTFOLIO PERFORMANCE
As of the 15 February 2024 payment date, the overall portfolio consisted of 11,312 loans with an aggregate principal balance of EUR 1,194 million. The portfolio is performing within Morningstar DBRS’ expectations. As of the payment date, cumulative defaulted loans represented 1.1% of the initial portfolio balance, up from 1.0% one year ago. Delinquent loans represented 0.3% of the portfolio balance, up from 0.1% observed one year ago.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS maintained the portfolio’s one-year base case PD assumption at 1.8%. Morningstar DBRS conducted a loan-by-loan analysis on the remaining pool and updated its PD and recovery assumptions to 32.2% and 43.4%, respectively, at the AAA (sf) credit rating level.

CREDIT ENHANCEMENT
As of February 2024, the credit enhancement on the Notes was 47.8%, up from 36.5% at the last annual review, driven by the transaction’s switch to sequential amortisation after the occurrence of a sequential trigger event. A sequential trigger event happened after the outstanding balance of the subordinated loan fell below 33.0% of its original balance.

A part of the subordinated loan’s proceeds funded the reserve fund. The reserve fund does not amortise and is available to cover interest shortfalls on the Notes. The reserve fund is currently at its target level of EUR 56 million, which is 1% of the total initial portfolio.

KBC acts as the account bank and the swap counterparty for the transaction. Based on the account bank reference rating of AA (which is one notch below the Morningstar DBRS public Long Term Critical Obligations Rating (COR) of AA (high) on KBC), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Notes, as described in Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology. KBC’s COR is consistent with the first rating threshold as described in Morningstar DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

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

Morningstar DBRS’ credit rating on the 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, AND 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 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 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 the investor report provided by KBC and loan-by-loan data from 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 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 10 March 2023, when Morningstar DBRS confirmed its AAA (sf) credit rating on the Notes.

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

Sensitivity Analysis: 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 1.8%, a 10% increase of the base case and a 20% increase of the base-case PD.
-- Recovery Rates Used: Base-case recovery rate of 43.4% at the AAA (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% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a confirmation on the Notes at AAA (sf). A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would also lead to a confirmation on the Notes at AAA (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: 7 April 2017

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://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
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (13 September 2023),
https://dbrs.morningstar.com/research/420575
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024), https://dbrs.morningstar.com/research/428544
-- 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
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- 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/27837.

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