Morningstar DBRS Assigns Credit Rating to Ophelia Master SME FCT

DBRS Ratings GmbH (Morningstar DBRS) assigned a AAA (sf) credit rating to the EUR 800,000,000 Class A2024-01 Notes due June 2029 (the Class A2024-01 Notes or the Class A Notes) issued by Ophelia Master SME FCT (the Issuer).

The credit rating addresses the timely payment of interest and the ultimate repayment of principal by the programme legal final maturity date in December 2099. The Issuer will also issue Class B Notes, which Morningstar DBRS will not rate.

The transaction is a master trust cash flow securitisation collateralised by a portfolio of mortgage and unsecured loans (some of them benefitting from guarantees) to French small and medium-size enterprises (SMEs), including professionals and corporates. Several different Banques Populaires and Caisses d'Epargne, part of BPCE Group (the sellers or originators), granted the loans. Each Banque Populaire and Caisse d'Epargne will also service the respective subportfolio (the servicers).

As of the initial selection date of 12 July 2024, the portfolio comprised 15,258 loans extended to 13,677 borrowers, with an aggregate outstanding principal balance of EUR 1,126.26 million. The initial pool is mainly composed of fixed-rate loans (98.4%), paying with a French amortisation profile (99.1%) and a monthly frequency (93.8%). As of the initial selection date, the initial portfolio did not include any loans in arrears.

The transaction is structured with a perpetual revolving period, during which the originators may sell new receivables to the Issuer subject to certain eligibility criteria and concentration limits. Additionally, the revolving period will terminate early if certain performance and nonperformance-based trigger events are breached. During the revolving period, the purchase of new receivables will be funded through portfolio collections and, optionally, via additional note issuances. The issuance of the notes will be subject to the maintenance of minimum subordination levels and confirmation that the outstanding credit ratings on the Class A Notes will not be downgraded or withdrawn, as per the transaction documents.

During the revolving period, the Issuer can issue additional series of Class A Notes (the Class A20xx-yy Notes), which could bear a different interest rate and have different payment dates and expected maturity dates. All series of Class A20xx-yy Notes will rank pari passu and pro rata with respect to the payment of interest and principal. The notes are backed by the same portfolio of receivables, and cross-collateralisation and commingling of collections from different series is permitted under the programme terms. Morningstar DBRS may assign credit ratings to additional notes in other series that will be published on https://dbrs.morningstar.com.

The Class A2024-01 Notes are to be repaid on their respective expected maturity date, which is on the payment date in June 2029. If they are not fully repaid on the payment date after such date, the transaction enters into the amortisation period and the Class A Notes are redeemed in a pass-through and sequential order. The failure to fully redeem the Class A Notes on the payment date after their expected maturity date does not constitute an event of default under the programme terms; however, it does cause the end of the revolving period. The credit rating on the Class A Notes addresses the ultimate payment of principal by the programme legal final maturity date in December 2099.

The transaction features a general reserve, which will be available to the Issuer to cover shortfalls in expenses, senior fees, swap payments, and interest payments on the Class A Notes. The reserve providers (the sellers) fully funded the general reserve at transaction closing, and its target amount is equal to the greater of (1) three times the monthly interest payments on the Class A Notes (floored at zero) minus the difference between the swap floating leg that the Issuer receives and the swap fixed leg that the Issuer pays, plus 0.11% of the outstanding balance of the notes; and (2) 0.09% of the outstanding balance of the Class A Notes (the floor). The reserve providers will directly fund any increase in the general reserve during the revolving period.

At transaction closing, total credit enhancement available to the Class A Notes was 29.0%, provided by the asset portfolio. If additional Class A Notes are issued, the transaction is structured in such a way that minimum credit enhancement levels must be maintained to ensure that the outstanding credit ratings on the Class A Notes are not withdrawn or downgraded. If the Issuer does not use portfolio collections to purchase additional assets during the revolving period, these proceeds will be instead directed toward the amortisation of the notes when they exceed 20.0% of the notes for three payment dates.

The initial portfolio shows a moderate level of industry concentration, with real estate as the top sector per Morningstar DBRS' industry classifications (38.6% of the initial pool). The real estate sector includes companies classified as sociétés civiles immobilières, which are constituted for the ownership and management of real estate assets rented to the underlying professional and corporate borrowers. The pool is sufficiently granular with low borrower concentration. The top one, 10, and 50 borrowers account for 0.2%, 1.4%, and 5.6% of the outstanding principal balance, respectively. Purchase conditions are in place to mitigate industry and borrower concentrations during the revolving period.

Morningstar DBRS based its analysis on a stressed portfolio created considering the initial portfolio, the scheduled amortisation plan of the initial portfolio, and the purchase conditions on the aggregate portfolio (including further portfolios purchased during the revolving period). Considering the master trust nature of the transaction and the expectation that the Issuer will issue new Class A Notes on a frequent basis during the revolving period, Morningstar DBRS considered the scheduled amortisation plan of the initial portfolio and assumed that 30.0% of the initial portfolio will be replaced by additional portfolios in one year.

The initial portfolio consists of secured and unsecured loans with a weighted-average life (WAL) of 3.5 years. The WA of the originators' internal probability of default (PD) estimates for the initial portfolio is 2.5%. The purchase conditions during the revolving period limit the maximum WAL of the aggregate portfolio to 5.5 years and the maximum WA internal PD of the aggregate portfolio to 3.5%. The stressed portfolio was built considering the characteristics of the initial portfolio on the portion of the total balance scheduled to be outstanding after one year and the characteristics of the replaced portfolio in line with the purchase conditions for the remainder of the total balance.

The transaction is exposed to set-off risk; however, a set-off reserve will be funded if the Long Term Critical Obligations Rating (COR) on BPCE S.A. (BPCE) is downgraded below BBB (or the long-term credit rating is downgraded below BBB (low)) for an amount equal to the minimum between (1) the amount exceeding EUR 100,000 of the deposits made by the borrowers and (2) the outstanding amount of their receivables, mitigating set-off risk. Morningstar DBRS privately rates BPCE.

The transaction is exposed to commingling risk; however, a commingling reserve will be funded if the long-term COR on BPCE is downgraded below BBB (or the long-term credit rating is downgraded below BBB (low)) for an amount equal to the instalments that each servicer expects to collect during the next collection period (in accordance with the amortisation schedule) and the monthly prepayment rate on the portfolio outstanding principal, mitigating commingling risk. The monthly prepayment rate is calculated as the greater of 0.33% and the average monthly prepayment rate observed in the previous 12 months.

BPCE Group is a dominant counterparty for the transaction as the Banques Populaires and Caisses d'Epargne (sellers, servicers, and reserve providers) are all part of BPCE Group. In addition, BPCE acts as account bank and specially dedicated account bank and holds the general account, interest account, principal account, general reserve account, revolving account, and, if applicable, commingling reserve account, set-off reserve, and securities account. The hedging counterparty, Natixis S.A., is part of the BPCE Group. Based on the account bank's and hedging counterparty's private credit ratings and the replacement provisions included in the transaction documents, Morningstar DBRS considers the risk of such counterparties to be consistent with the credit rating assigned to the Class A Notes, in accordance with Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" and "Derivative Criteria for European Structured Finance Transactions" methodologies.

Morningstar DBRS determined its credit rating based on the principal methodology and the following analytical considerations:
-- The PD for the portfolio, determined using the sellers' internal PD estimates and the historical performance information supplied. Morningstar DBRS assumed an annualised PD of 2.5% for the outstanding portfolio and an annualised PD of 3.5% for the replenished portfolio.
-- The assumed WAL of the outstanding portfolio and the replenished portfolio at 3.5 years and 5.5 years, respectively.
-- The PDs and WAL used in the Morningstar DBRS Diversity Model to generate the hurdle rate for the assigned credit rating.
-- The recovery rate, determined by considering the market value declines for Europe, the security level, and the collateral type. Morningstar DBRS determined the final recovery rate by giving partial credit to the Bpifrance and Compagnie Européenne de Garanties et Cautions guarantees. Morningstar DBRS used a recovery rate of 35.7% at the AAA (sf) credit rating level.

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. The associated financial obligations are the related interest payment amounts and the related class balances.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) 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 (23 January 2024) at 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 methodology applicable to the credit rating is: Rating CLOs Backed by Loans to European SMEs (20 June 2024), https://dbrs.morningstar.com/research/434775.

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 considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for this credit rating include performance data relating to the receivables provided by the sellers directly or through the arranger, BPCE S.A.

Morningstar DBRS received the following data information:
-- Quarterly static default data from Q1 2014 to Q1 2024,
-- Quarterly static recovery data from Q1 2014 to Q1 2024,
-- Quarterly dynamic delinquency data from Q1 2014 to Q1 2024,
-- Quarterly dynamic prepayment data from Q1 2017 to Q1 2024, and
-- Migration matrices from 2015 to 2023, split by NIO model for retail borrowers and NIE model for corporate borrowers.

In addition, Morningstar DBRS received loan-level characteristics, stratification data and contractual amortisation profile as of 12 July 2024 and borrowers' set-off exposure as at 30 April 2024.

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

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.

This credit rating concerns a newly issued financial instrument. This is the first Morningstar DBRS credit rating on this financial instrument.

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):

-- PD Rates Used: Base case PDs of 2.5% and 3.5%, for outstanding portfolio and replaced portfolio, respectively, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 35.7% at the AAA (sf) credit rating level, a 10% and 20% decrease in the base case recovery rate.

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 of the Class A Notes at AAA (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would also lead to a confirmation of the Class A 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: Ilaria Maschietto, Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 22 July 2024

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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 (20 June 2024) and Morningstar DBRS SME Diversity Model 2.7.1.4, https://dbrs.morningstar.com/research/434775
-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165
-- European RMBS Insight Methodology (25 March 2024), https://dbrs.morningstar.com/research/430103
-- European RMBS Insight: French Addendum (29 May 2024), https://dbrs.morningstar.com/research/433382
-- Interest Rate Stresses for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435278
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024), https://dbrs.morningstar.com/research/428544
-- Derivative Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435260
-- 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 info-DBRS@morningstar.com.