Morningstar DBRS Assigns Credit Rating to Red & Black Home Loans France 3

DBRS Ratings GmbH (Morningstar DBRS) assigned a credit rating to the residential mortgage-backed notes to be issued by Red & Black Home Loans France 3 (the Issuer) as follows:

-- Class A Notes at AA (high) (sf)

The credit rating on the Class A notes addresses the timely payment of interest and the ultimate repayment of principal.

Morningstar DBRS does not rate the Class B notes and the Residual Units also issued in this transaction.

CREDIT RATING RATIONALE
The Issuer will use the proceeds of the Class A Notes, Class B Notes, and Residual Units to purchase a portfolio of home loans and certain ancillary rights at closing, which have been originated by Société Générale Réseau France and Crédit du Nord (CdN) before the recent merger into a single entity as part of Société Générale (SG; the Originator, Seller, Servicer, Account Bank).

This is the third transaction of the Red & Black Home Loans series from SG. The mortgage portfolio as of September 2024 consists of EUR 8,182 million of fixed-rate home loans collateralised by owner-occupied and buy-to-let properties in France. The pool has a seasoning of 4.6 years and yields a weighted-average (WA) coupon of 1.5%. Furthermore, about 71% of the portfolio consists of home loans guaranteed by Crédit Logement and the remaining portion of first-ranking mortgages secured over residential properties located in France.

As of the issue date, the Class A notes benefit from a credit enhancement of 5.0% (calculated as a percentage of the portfolio), consisting of the subordination of the Class B notes.

The transaction structure benefits from a general reserve account, fully funded by the Seller, which provides liquidity support to the Class A notes in the event of a liquidity shortfall. The general reserve account is sized at 0.5% of the Class A notes principal balance as of closing and shall amortise together with the Class A notes principal balance. The reserve is replenished at each interest payment date during the normal amortisation period of the notes, as per the applicable priority of payments and shall have a floor of EUR 500,000.

In addition, the transaction shall also feature a Commingling Reserve Account, which shall be funded within 60 days upon breach of the Servicer's rating trigger, which has been set at BBB (low). This reserve is sized at 1.5% of the Class A notes outstanding principal balance on such date, subject to a floor of EUR 5,000,000.

All borrower collections in relation to the portfolio are swept to an operating account held with the Account Bank. Moreover, the Account Bank shall also be responsible for the general reserve account and the commingling reserve account. SG serves as the Account Bank and is currently rated by Morningstar DBRS with a long-term Critical Obligations Rating (COR) of AA with a Stable trend. As per the transaction documentation, the Account Bank shall have a Morningstar DBRS COR of at least A (low), or a long-term IR of at least BBB (high). Based on the Account Bank's ratings and the replacement provisions included in the transaction documents, Morningstar DBRS considers the risk of such a counterparty to be consistent with the credit ratings assigned, in accordance with the "Legal Criteria for Structured Finance Transactions" methodology.

Considering that both the assets backing the portfolio as well as the issued notes pay a fixed-rate coupon, there is no interest rate mismatch, and therefore no hedge is envisaged in the transaction.

Regarding the amortisation of the notes, the structure initially follows a pro rata amortisation until a Sequential Amortisation Event occurs. This event is defined as the occurrence of a positive principal deficiency amount for the fifth consecutive payment date or, when the amount to credit the general reserve is less than its required amount. In addition, an Issuer Liquidation Event will occur when the current pool balance falls below 10% of the initial pool balance. This shall also trigger the post-enforcement priority of payments (i.e., Accelerated Amortisation).

Morningstar DBRS based its credit ratings on a review of the following analytical considerations:
-- The transaction capital structure and form and sufficiency of available credit enhancement.
-- The credit quality of the mortgage portfolio and the ability of the servicer to perform collection and resolution activities. Morningstar DBRS calculated probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio. Morningstar DBRS uses the PD, LGD, and ELs as inputs into the cash flow tool. Morningstar DBRS analysed the mortgage portfolio in accordance with Morningstar DBRS' "European RMBS Insight Methodology: French Addendum".
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A notes according to the terms of the transaction documents. Morningstar DBRS analysed the transaction structure using Intex DealMaker.
-- The sovereign rating of AA (high) with a Stable trend (as of the date of this press release) on the Republic of France.
-- The consistency of the legal structure with Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

Morningstar DBRS' credit rating on the rated 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, or 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 at https://dbrs.morningstar.com/research/437781.

Morningstar DBRS analysed the transaction structure in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: "European RMBS Insight Methodology" (18 September 2024), https://dbrs.morningstar.com/research/439573 and "European RMBS Insight: French Addendum" (29 May 2024), https://dbrs.morningstar.com/research/433382.

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.

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 those provided by Société Générale and its representatives. Morningstar DBRS was provided with loan-level data for the home loans as of September 2024 and historical performance data which included dynamic delinquencies, static defaults and prepayment data, segregated by BDDF and CdN originations, covering the period 2013 to 2023.

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 https://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):

-- In respect of the Class A notes, a PD of 16.1% and an LGD of 12.4% corresponding to the AA (high) (sf) credit rating scenario, was stressed assuming a 25% and 50% increase in the PD and LGD.

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (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: André Soutinho, Senior Analyst
Rating Committee Chair: Rehanna Sameja, Senior Vice President
Initial Rating Date: 23 October 2024

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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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.

-- European RMBS Insight Methodology (18 September 2024) and European RMBS Insight model v 10.0.0.0, https://dbrs.morningstar.com/research/439573
-- European RMBS Insight: French Addendum (29 May 2024), https://dbrs.morningstar.com/research/433382
-- Legal Criteria for European Structured Finance Transactions (28 June 2024), https://dbrs.morningstar.com/research/435165
-- Operational Risk Assessment for European Structured Finance Originators and Servicers (18 September 2024),
https://dbrs.morningstar.com/research/439571
-- 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.