Rating action

The ratings are as follows:

Class A (FR0013452117): EUR 1.550.9m: assigned a final rating of AAA_SF

Class B (FR0013454212): EUR 450.3m: non-rated

The latest information on the rating, including rating reports and related methodologies are available on this LINK.

Transaction overview

FCT Bpifrance SME 2019-1 is a true-sale securitisation of a EUR 2.0bn revolving portfolio of loans granted to SMEs in France by Bpifrance Financement. The entity acts as Seller and Servicer in the context of this transaction. BNP Paribas Securities Services is the issuer account bank as well as the paying agent. The transaction features a three-year replenishment period, subject to performance and asset-eligibility covenants.

The structure comprises two classes of notes (A and B) which finance the EUR 2.0bn securitised portfolio, along with residual units amounting to EUR 0.1m. Bpifrance Financement, the originator, has funded a EUR 4m reserve fund, namely 0.2% of the class A notes. The fixed-rates notes will follow a fully sequential amortisation. Both classes benefit from the interconnected principal and interest priorities of payment. The reserve fund provides liquidity and credit enhancement for classes A and B. Credit enhancement for the rated notes is provided via subordination and the reserve fund, as well as excess spread. The notes pay quarterly and have legal maturity on 25 October 2052.

Rating rationale

The rating reflects: i) the legal and financial structure of the transaction; ii) the quality of the underlying collateral in the context of the robust French macroeconomic environment; iii) the ability of the originator and servicer, Bpifrance Financement; and iv) the counterparty exposure to BNP Paribas Securities Services, as account bank and paying agent.

The class A notes benefit from 22.7% credit enhancement at closing as well as protection against losses from the portfolio provided by excess asset interest of at least 1.03% annually. The rated notes are expected to amortize over a weighted average life of 4 years from the end of the three-year revolving period. After the revolving period, class A will benefit from sequential amortisation.

Furthermore, interest and principal priorities of payment are interconnected, ensuring liquidity support beyond the reserve fund for the payment of interest to class A notes. The latter also benefits from a mechanism linked to portfolio defaults, which traps excess spread to ensure sufficient collateralisation. The risk of portfolio performance deterioration is mitigated by early-amortisation triggers. Asset- and portfolio-level covenants limit qualitative changes to the portfolio’s composition.

The performance of the assets benefits from the relatively large, resilient and diversified French economy, along with the consistent and proven track record of Bpifrance Financement, a state-owned bank with considerable experience in domestic SME lending.

The rating also factors in the transaction’s counterparty risk. In addition to Bpifrance Financement acting as a servicer, BNP Paribas Securities Services will act as account bank and paying agent, while the specially dedicated account will be held by BNP Paribas. Counterparty risk is mitigated by the credit quality of the counterparties and mechanisms in the structure such as replacement triggers upon a deterioration of BNP Paribas credit quality. We have assessed the credit quality of BNP Paribas at AA-, Stable Outlook, while public information was used for Bpifrance Financement, taking into consideration the institutional role of the bank as well as its shareholders, along with the available public credit ratings.

Key rating drivers

Credit enhancement (positive). Class A benefits from 22.7% credit enhancement resulting from subordination as well as a EUR 4m cash reserve.

High recovery rate (positive). We assume a base case recovery rate of 80%, materialising 24-36 months after a default. This driven by Bpifrance Financement’s historical performance, resulting from both recoveries and cures

Natural hedge of interest rates (positive). The transaction is protected from interest rate mismatch by an eligibility criteria that limits the share of floating-rate loans to 7%, while the issued notes pay fixed interest coupons.

Robust French economy (positive). The French economy will have a positive effect on portfolio performance and thus the rated notes. The solid economic environment is demonstrated by continued GDP growth, stable private and public investment, further boosted by a fiscal stimulus.

Relatively high default rate (negative). We assume a point-in-time default rate of 6%, a relatively high level derived from the historical performance of the bank’s loan book. This is mitigated by the large amount of loans curing during the initial period following a default.

Revolving portfolio (negative). The characteristics and credit quality of the portfolio may migrate during the replenishment period, i.e. three years after the closing date. This risk is mitigated by the originator’s expertise and the adequate single-asset, portfolio and performance covenants in the structure

Back-up servicer (negative). No back-up servicer was appointed at the closing of the transaction. Operational risk arising from servicer default is mitigated by the ownership structure of Bpifrance Financement’s partial ownership by the French state.

Negative rating-change driver

Worse-than-expected asset performance exemplified by a higher-than-expected default rate or lower-than-expected recovery upon asset default would negatively impact the ratings.

Quantitative analysis and assumptions

A cash flow analysis was performed considering the collateral portfolio’s characteristics and the transaction’s main structural features. Scope applied a large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over the expected amortisation period. The cash flow analysis used a probability distribution of the portfolio’s default rate, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provides the expected weighted average life of each tranche.

A portfolio mean default rate of 6.0% and a coefficient of variation of 62.0% were applied over the portfolio’s expected weighted average life of 5.6 years. Scope adjusted default rates using the cure rates observed from historical data, which reflect BPI’s business model (focus on helping defaulted obligors to resume making regular payments). For the class A analysis, Scope considered a base case recovery rate of 80.0%, which, after a 40% haircut on the AAA level is applied, gives a rating-conditional recovery rate of 48.0%. A 1.35% portfolio yield was assumed, considering the minimum level defined by the portfolio eligibility criteria. In addition, for the analysis of the class A notes, the maximum allowance for the 3.5% dynamic delinquency ratio (corresponding to the early-amortisation trigger linked to the dynamic delinquency ratio) is considered to default three months after the amortisation period begins,

Scope has taken into account default rate and recovery vintage data on the securitised portfolio, which cover the periods 2007-18, and reflect the historical performance of the loan book originated by Bpifrance Financement. Scope made no long-term adjustments to the default rate and coefficient of variation, given the historically stable economic expansion in France.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations of the main input parameters: the mean-default rate and the recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results change when the portfolio’s expected mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• Class A: sensitivity to default rate, zero notches; sensitivity to recovery rate, zero notches

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope performed a cash flow analysis of the transaction with the use of Scope Cash Flow SF EL Model Version 1.0.0, incorporating default and recovery rate assumptions over the portfolio’s amortisation period, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for the ratings, the ‘SME ABS Rating Methodology’, the ‘General Structured Finance Rating Methodology’ and the ‘Methodology for Counterparty Risk in Structured Finance’ ’are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has received a third-party asset audit. The external asset audit was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Cyrus Mohadjer, Analyst
Person responsible for approval of the rating: David Bergman, Managing Director
The preliminary rating was first released by Scope on 17 October 2019. The final rating was first release by Scope on 25 October 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Directors: Torsten Hinrichs and Guillaume Jolivet.