Rating action

The ratings are as follows:

Class A (FR0014000GV7): EUR 1.551.7m: assigned preliminary rating of (P) AAA_SF

Class B (FR0014000HW3): EUR 450.5m: non-rated

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

Transaction overview

FCT Bpifrance SME 2020-1 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 the transaction’s seller and servicer. BNP Paribas Securities Services is the issuer account bank as well as the paying agent. The transaction features an 18-month 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 4.2m reserve fund equating to 0.27% of the class A notes. The fixed-rate notes will follow 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. The notes pay quarterly and have legal maturity on 25 May 2039.

Rating rationale

The rating reflects: i) the legal and financial structure of the transaction; ii) the ability of the originator and servicer, Bpifrance Financement, as well as the presence of a guarantee operated by the servicer and funded by the French state; and iii) the counterparty exposure to BNP Paribas Securities Services as account bank and paying agent.

The class A notes benefit from 22.7% of credit enhancement at closing, as well as protection against losses from the portfolio, provided by excess asset interest of at least 0.85% annually. The rated notes are expected to amortise over a weighted average life of 1.7 years from the end of the revolving period. After the revolving period, the 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 the 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.

Asset performance benefits from the large 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 servicer, BNP Paribas Securities Services will act as account bank and paying agent, while the 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. Scope has assessed the credit quality of BNP Paribas*, 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% of credit enhancement resulting from subordination as well as a EUR 4.2m cash reserve. This high level of protection limits the sensitivity of the class A rating to default and recovery rates stresses.

Guarantee fund and cash collateral (positive). The loans benefit from two sources of credit risk mitigation: i) a partial guarantee mechanism funded by state resources; and ii) fixed cash collateral representing 5% of the initial loan amount. These elements drive the AAA recovery rate assumption (55%).

No interest rate risk (positive). Floating-rate loans are ineligible for the portfolio while the issued notes pay fixed-interest coupons. This eliminates interest rate risk.

Fast amortisation (positive). The class A benefits from a short weighted average life (1.7 years) after the end of the revolving period, driven by the linear and fast amortisation of the loans.

Macro-economic environment (negative). The French economy has been severely impacted by the pandemic and further deterioration could put SMEs in the pool under substantial pressure. The risk this poses to the rating is mitigated by Scope’s sensitivity analysis, which shows that the class A is resilient to a 100% stress on the mean default rate.

Revolving portfolio (negative). The portfolio’s characteristics and credit quality may migrate during the replenishment period, i.e. one year and a half 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.

No 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 Bpifrance Financement’s partial ownership by the French state.

Indirect link to guarantor creditworthiness (negative). The rating is closely tied to the credit quality of the French state as Bpifrance Financement’s ultimate guarantor and partial shareholder. The risk to the rating is mitigated by Scope’s sensitivity analysis, which shows that the class A is resilient to a hypothetical scenario in which the state cannot honour its guarantee on the loans.

Negative rating-change driver

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

Quantitative analysis and assumptions

A cash flow analysis was performed considering the portfolio collateral’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 4.8% and a coefficient of variation of 50.0% were applied over the portfolio’s expected weighted average life of 2.4 years. Scope adjusted the default rates using cure rates observed on historical data that reflect Bpifrance Financement’s business model (helping defaulted obligors resume making regular payments). For the class A analysis, Scope considered a base case recovery rate of 55.0%, which is also applied at the AAA level. This is because rating-conditional haircuts were not applied as recoveries stem from the fund guarantee and the cash collateral. A 1.50% portfolio yield was assumed, considering the minimum level defined by portfolio eligibility criteria. In addition, for the analysis of the class A notes, the maximum allowance for the 4.0% dynamic delinquency ratio (corresponding to the early-amortisation trigger linked to the dynamic delinquency ratio) is considered to have defaulted 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 2009-19 period 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 in 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 100% 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

For this transaction, Scope also tested rating sensitivity to two scenarios relating to a hypothetical inability of the French state to honour its guarantee: i) a decrease in the recovery rate from 55% to 5%; and ii) the aforementioned recovery rate decrease combined with a 100% increase in the default rate and a 50% decrease in the coefficient of variation.

• Class A: sensitivity to first scenario, zero notches; sensitivity to second scenario, zero notches

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

Cash flow analysis
Scope analysed the transaction’s cash flows using the Scope Cash Flow SF EL Model Version 1.1. This model incorporates default and recovery rate assumptions over the portfolio’s amortisation period and the transaction’s main structural features such as the notes’ priorities of payment, 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 ’ (26 May 2020), the ‘General Structured Finance Rating Methodology’ (18 December 2019) and the ‘Methodology for Counterparty Risk in Structured Finance’ (8 July 2020) are available on https://www.scoperatings.com/#!methodology/list.
The model/s used for this rating(s) Scope Cash Flow SF EL Model Version 1.1. is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

* Editor's note: The original rating action was replaced on 18 November 2020.

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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Cyrus Mohadjer, Senior Analyst
Person responsible for approval of the rating: Antonio Casado, Executive Director
The ratings were first released by Scope on 16 November 2020.

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

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