Morningstar DBRS Assigns Credit Rating to Mercurius Master Issuer, Series 2024-1 Notes

DBRS Ratings GmbH (Morningstar DBRS) assigned a AAA (sf) credit rating to the EUR 5,760,000,000 Class A of Series 2024-1 Notes due July 2058 (the Class A Notes) issued by Mercurius Master Issuer (the Issuer).

The credit rating addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date in July 2058. The Issuer will also issue Class B Notes and Class C Notes (together with the Class A Notes, the Notes), which Morningstar DBRS does not rate.

The transaction is a master trust cash flow securitisation collateralised by a portfolio of secured (mortgages) and unsecured loans granted by Belfius Bank SA/NV (Belfius; the seller or originator) to Belgian small and medium-size enterprises (SMEs), including professionals and corporates. Belfius will also service the portfolio.

As of the initial selection date on 31 July 2024, the portfolio comprised 68,865 loans extended to 41,127 borrowers, with an aggregate outstanding principal balance of EUR 8.0 billion. The initial pool is mainly composed of fixed-rate loans (94.2%), paying with a French amortisation profile (93.5%) monthly (97.2%). The initial portfolio did not include any loans in arrears on the initial selection date. The notes pay interest on a floating rate basis and the resulting interest mismatch is hedged with a senior and a junior interest swap, both provided by Belfius. The senior interest rate swap notional is based on the outstanding balance of the Class A Notes, reduced by the Class A Notes principal deficiency ledger (PDL). The issuer receives the coupon due on the Class A Notes (considering the step-up margin after the step-up date), whereas it pays the product between the hedging amount and the senior swap ratio, as defined in the transaction documentation.

The transaction is structured with a perpetual revolving period, during which the originator 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, including the Class B Notes PDL exceeding 5.0% of the Class B Notes balance for two payment dates, the amount of loans more than 90 days in arrears or in respect of which foreclosure procedures are initiated exceeding 3.75% of the outstanding portfolio and the insolvency of the Originator.

During the revolving period, the purchase of new receivables will be funded through portfolio collections and, optionally, via additional note issuances. The issuance of new Notes will be subject to the maintenance of minimum subordination levels (the issuance test) and confirmation that the outstanding credit ratings on the outstanding Notes will not be downgraded or withdrawn, as per the transaction documents.

During the revolving period, the Issuer can issue additional series or tranches of Notes (Series 20xx-yy Class A, Class B, and Class C Notes), which could bear a different interest rate and have different payment dates and expected maturity dates. All classes of Notes in all series issued will rank pari passu and pro rata with respect to the payment of interest and principal. All notes will be 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.

The Notes will begin amortising on the step-up date on October 2027. If they are not fully repaid on this date, the transaction enters into the amortisation period and the Notes will be 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's terms.

The transaction features a liquidity facility, which will be available to the Issuer to cover shortfalls in expenses, senior fees, senior swap payments, and interest payments on the Class A Notes. The liquidity facility will be equal to EUR 200million for as long as the Class A Notes have not been redeemed in full and zero, thereafter.

The transaction features a general reserve, which will be available to the Issuer to cover shortfalls in expenses, senior fees, senior swap payments, interest payments on the Class A Notes, liquidity facility drawn amounts, other payments or shortfalls reflected in the Class A Notes principal deficiency ledger (PDL), interest payments on the Class B Notes, and other payments or shortfalls reflected in the Class B Notes PDL. The reserve is funded through the Class C Notes issuance. The general reserve will be credited into the reserve account at transaction closing, and its target amount is equal to the sum of (1) the outstanding balance of all reserve fund notes (all Class C Notes) and (2) the amount of loan reduction (i.e., estimated or realised losses of loans in arrears by more than 90 days and in respect of which foreclosure procedures are initiated) related to the entire portfolio.

At transaction closing, total subordination available to the Class A Notes was 29.0%, provided by the Class B Notes. If Mercurius Master Issuer issues new series and therefore additional Class A Notes, the transaction is structured in such a way that a minimum subordination level of 28.0% must be maintained.

The initial portfolio shows a moderate level of industry concentration, with business services as the top sector per Morningstar DBRS' industry classifications (21.9% of the initial pool). The pool is sufficiently granular with low borrower concentration. The top one, 10, and 20 borrowers account for 0.2%, 1.4%, and 2.4% 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 portfolio 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 revolving nature of the transaction, Morningstar DBRS considered the scheduled amortisation plan of the initial portfolio and assumed that 15.0% of the initial portfolio will be replaced by additional portfolios in one year until the step-up date.

The initial portfolio consists of secured and unsecured loans with a weighted-average life (WAL) of 5.4 years. The weighted average (WA) of the originator's internal annual probability of default (PD) estimates for the initial portfolio is 1.3%. The purchase conditions limit the maximum WAL of the aggregate portfolio to seven years and the maximum WA internal PD of the aggregate portfolio to 3.0%. The analysed portfolio considered the characteristics of the initial portfolio on the portion of the total balance scheduled to be outstanding after the step-up date and the characteristics of the replaced portfolios in line with the purchase conditions for the remainder of the total balance.

Belfius as it acts as seller, servicer, swap counterparty, account bank, and liquidity facility provider in the transaction. As account bank, Belfius holds the Issuer collection account, the reserve account, the liquidity facility standby drawing account, and the interest swap collateral account. Based on Morningstar DBRS' Long-Term Issuer Rating of "A" on Belfius and the replacement provisions included in the transaction documents, Morningstar DBRS considers the risk of such counterparty 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 analysed portfolio, determined using the seller's internal PD estimates and the historical performance information supplied. Morningstar DBRS assumed an annualised PD of 1.7%.
-- The assumed WAL of the portfolio and the replenishment portfolios at 6.8 years (according to the eligibility criteria).
-- The recovery rate, determined by considering the market value decline rates for Europe, the security level, and the collateral type. Morningstar DBRS used a recovery rate of 36.3% 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 principal balance.

Morningstar DBRS credit ratings on the Class A Notes also addresses the credit risk associated with the increased rate of interest applicable to the Class A Notes after the step-up date in accordance with the applicable transaction documents.

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 Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

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 DBRS Morningstar 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 seller and arranger Belfius.

Morningstar DBRS received the following data information:
-- Quarterly static default data from Q1 2015 to Q4 2023,
-- Quarterly static recovery data from Q1 2014 to Q4 2023,
-- Monthly dynamic delinquency data from August 2012 to January 2024, and
-- Migration matrices from 2016 to 2023, split by model and Type of borrower.

In addition, Morningstar DBRS received loan-level characteristics, stratification data, and contractual amortisation profile as of 31 July 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 PD of 1.7% a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 36.3% 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 downgrade of the Class A Notes to AA (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a downgrade of the Class A Notes to AA (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: Maria Lopez, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 11 September 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
-- Common RMBS Rating Methodology (14 April 2024), https://dbrs.morningstar.com/research/431219
-- 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 (6 September 2024), https://dbrs.morningstar.com/research/439043
-- Operational Risk Assessment for European Structured Finance Servicers (6 August 2024), https://dbrs.morningstar.com/research/437543
-- Operational Risk Assessment for European Structured Finance Originators (6 August 2024), https://dbrs.morningstar.com/research/437541
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781

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.