Morningstar DBRS Confirms Credit Rating on FCT Pyramides 2022 Following Amendment

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AA (high) (sf) credit rating on the Class A Notes issued by FCT Pyramides 2022 (the Issuer), following a transaction amendment (the Amendment).

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in July 2058 (amended from July 2056 previously).

CREDIT RATING RATIONALE
The confirmation is based on the following analytical considerations:
-- The Amendment to the transaction, which includes an extension of the revolving period by 24 months to April 2026 from April 2024;
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the January 2024 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the receivables, considering the updated vintage default and recovery data received in the context of the Amendment;
-- The current available credit enhancement to the Class A Notes to cover the expected losses at the AA (high) (sf) credit rating level; and
-- No purchase termination events or breach of transfer limits to date.

The transaction is a securitisation of French home loans and their ancillary rights originated and serviced by BNP Paribas SA (BNPP, the Seller or the Servicer). The transaction closed in April 2022 and originally featured a 24-month revolving period, which was expected to end in April 2024. The revolving period has been extended by an additional 24 months and is now expected to end in April 2026. During this time, the Issuer may acquire additional home loans and their ancillary rights from BNPP subject to the availability of principal collections and eligibility criteria. To date, no revolving period termination event has occurred. Once the revolving period ends, the Class A Notes will amortise sequentially. France Titrisation is the management company of the transaction.

The home loans in the portfolio are secured by either a Crédit Logement, SA (CL) guarantee (59.7%), a mortgage over the relevant property (32.0%), or other guarantees including personal and combined guarantees.

AMENDMENT
The Amendment to the transaction took effect on 16 April 2024 and consists of:
-- Extension of the revolving period by 24 months to April 2026 from April 2024 earlier;
-- Extension of the final legal maturity to July 2058 from July 2056;
-- Amendment to the revolving period termination event by extending the cumulative default ratio trigger vector as follows:
• Months 24-36:1.9%,
• Months 36-48: 2.2%;
-- Increase the percentage of CL guarantees and/or mortgage guarantees to 100% for each subsequent portfolio, from at least 75% of the subsequent portfolio previously; and
-- Increase of the account bank replacement period to 60 days, from 30 days previously, in case of an account bank replacement event.

PORTFOLIO PERFORMANCE
As of the 31 December 2023 portfolio cut-off date, delinquencies were low, with total arrears representing 0.2% of the outstanding portfolio balance. The gross cumulative default ratio stood at 0.4% of the initial portfolio, up from 0.1% in December 2022.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS updated its base-case PD and LGD assumptions to 3.3% and 22.5%, respectively, down from 3.6% and 24.7%, respectively, based on updated historical default and recovery data received from BNPP and the transaction’s performance since closing. Morningstar DBRS continues to base its analysis on worst-case portfolios constructed to address potential migration toward the riskiest products during the revolving period.

CREDIT ENHANCEMENT
The Class A Notes benefit from 5.0% credit enhancement, which consists of subordination of the unrated Class B Notes. Additionally, the Class A Notes benefit from an amortising liquidity reserve fund (LRF), which was fully funded at closing for an amount equal to 0.5% of the Class A Notes’ outstanding balance, or EUR 38.0 million. The LRF has a floor of 0.25% of the Class A Notes’ initial balance. The LRF will amortise in line with the Class A Notes’ outstanding balance and will be available to cover shortfall in senior fees and Class A interest.

Furthermore, the transaction benefits from a commingling reserve, which the Servicer will fund in case of a commingling reserve rating trigger event (i.e., a Servicer long-term credit rating below BBB (low)). The commingling reserve required amount will be equal to 2.5% of the outstanding principal amount of the performing home loans. In addition, the seller has agreed to make a cash deposit following a set-off reserve rating trigger event (i.e., a seller credit long-term rating below BBB (low)). The set-off reserve required amount will be the aggregate amount equal to the sum for each home loan, of the minimum between (1) the aggregate amount exceeding EUR 100,000 and (2) the outstanding amount of such home loans. As of January 2024 payment date, both reserves were not funded.

BNPP acts as the account bank for the transaction. Based on the account bank reference rating of AA (which is one notch below Morningstar DBRS’ Long Term Critical Obligations Rating of AA (high) on BNPP), 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 credit rating assigned to the Class A Notes, as described in Morningstar DBRS’ "Legal Criteria for European Structured Finance Transactions" methodology.

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 does not address non-payment 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”, https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies applicable to the credit rating are “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” (French Addendum) (13 September 2023), https://dbrs.morningstar.com/research/420575, and “Master European Structured Finance Surveillance Methodology” (7 March 2024), https://dbrs.morningstar.com/research/429051.

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

Morningstar DBRS has applied the principal methodologies consistently and conducted a review of the transaction in accordance with the principal methodologies.

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.

Morningstar DBRS has conducted a review of the transaction’s legal documents provided in the context of the Amendment. A review of any other 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 reports provided by France Titrisation, loan-level data provided by the European DataWarehouse GmbH, as well as additional information and the following historical performance data provided by BNPP on the whole originator book and by product type:
-- Cumulative defaults from 2001 to 2022
-- Cumulative recoveries from 2003 to 2022

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 affect 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 25 April 2023 when Morningstar DBRS confirmed its AA (high) (sf) credit rating on the Class A Notes.

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 rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Morningstar DBRS 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 3.3% and 22.5%, respectively.
-- The Risk Sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base case assumption.

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AA (sf)
-- 50% increase in LGD, expected credit rating of AA (low) (sf)
-- 25% increase in PD, expected credit rating of AA (sf)
-- 50% increase in PD, expected credit rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of A (low) (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: Pascale Kallas, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit Rating Date: 25 April 2022

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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.

-- Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (13 September 2023) and EU RMBS Credit Model v.1.0.0.0, https://dbrs.morningstar.com/research/420575
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024), https://dbrs.morningstar.com/research/429054
-- 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].