DBRS Morningstar Assigns Rating to Red & Black Home Loans France 2

DBRS Ratings GmbH (DBRS Morningstar) assigned a rating of AA (sf) to the Class A Notes issued by Red & Black Home Loans France 2 (the Issuer). The notes are collateralised by a portfolio of French residential loans originated by Société Générale, S.A. (the Originator). Crédit Logement S.A. secures 77.2% of the loans in the portfolio, while the remaining 22.8% is represented by first-lien mortgage loans.

The Issuer issued two tranches of mortgage-backed securities (the Class A and Class B notes) to finance the purchase of the portfolio. DBRS Morningstar does not rate the Class B Notes also issued in this transaction.

The rating assigned to the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the final maturity date in February 2060.

At closing, the Class A Notes benefit from a credit enhancement of 5.0% (calculated as a percentage of the portfolio), consisting of subordination of the Class B Notes.

The transaction structure benefits from a cash reserve, fully funded by the Originator, which provides liquidity support to the Class A Notes in the event of Servicer disruption that results in collections not being available on any payment date. Such a reserve, set at 1.8% of the initial balance of the Class A Notes, will not be replenished after closing and will amortise at any payment date in order to remain at 1.8% of the Class A Notes outstanding balance, subject to a EUR 5 million floor. Any released amounts following amortisation of the reserve will flow through the priority of payments.

Liquidity for the Class A Notes is also supported by the combined waterfall structure, whereby all monthly collections are distributed through a single priority of payments (principal to pay interest).

As of 31 January 2022, the portfolio consisted of 63,241 mortgage loans granted to 59,117 borrowers. The total current balance of the portfolio is EUR 10.6 billion and the average loan balance (per borrower) is EUR 179,721. The weighted-average (WA) seasoning of the portfolio is 3.4 years with a WA time to maturity of 15.9 years. The WA loan-to-value of the portfolio (calculated on the indexed property value) is 74.9%. The portfolio is concentrated in Ile-de-France with 43.8% of the pool balance.

21.0% of the total pool amount was previously securitised in the Red & Black Home Loans France 1 transaction: the Class A Notes issued in that transaction, rated by DBRS Morningstar, were fully repaid on 27 January 2022.

The entire portfolio pays a fixed rate of interest, with a WA interest rate of 1.3%. The coupon on the Class A Notes is also fixed at 0.45%.

The transaction account bank, servicer, cash manager, and paying agent is Société Générale, S.A. Based on DBRS Morningstar’s rating of such entity and the account bank replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such counterparty to be consistent with the ratings assigned, in accordance with its “Legal Criteria for European Structured Finance Transactions”.

The structure initially provides for sequential amortisation of the notes (i.e., the Class B Notes will not amortise while the Class A Notes are outstanding), which should lead to increased subordination for the Class A Notes. When the credit enhancement of the Class A Notes provided by the subordination of the Class B Notes reaches a target level equal to 110% of the initial subordination, the structure will switch to pro rata amortisation, thus maintaining the target credit enhancement. Redemption of the notes is subject to a switch event (linked to the portfolio performance) that will irreversibly trigger sequential amortisation if breached.

DBRS Morningstar based its ratings primarily on the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement and liquidity provisions.
-- The credit quality of the mortgage portfolio and the ability of the Servicer to perform collection and resolution activities. DBRS Morningstar calculated probability of default (PD), loss given default (LGD), and expected loss (EL) outputs on the mortgage portfolio, which DBRS Morningstar uses as inputs into its cash flow tool. DBRS Morningstar analysed the mortgage portfolio in accordance with its “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda".
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors in accordance with the terms and conditions of the notes.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.
-- The sovereign rating of the Republic of France, rated AA (high) with a Stable trend by DBRS Morningstar, as of the date of this press release.

DBRS Morningstar analysed the transaction structure using Intex Dealmaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many RMBS transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar incorporated an increase in PD for self-employed borrowers in its analysis and conducted additional analysis to determine the transaction benefits from sufficient liquidity support in case there is a high level of payment moratoriums in the portfolio. In addition, DBRS Morningstar assumed a moderate decline in residential property prices.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 9 December 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 14 June 2021, DBRS Morningstar updated its 5 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated RMBS transactions in Europe one year on. For more details, please see: https://www.dbrsmorningstar.com/research/380094/the-impact-of-covid-19-on-european-mortgage-performance-one-year-on and https://www.dbrsmorningstar.com/research/360599/european-rmbs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” (29 November 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar 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 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://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include historical performance (static pool defaults and, for the mortgage loans pool only, recoveries data; dynamic delinquencies data; and dynamic prepayments data from 2012 to 2021) and loan-level data as at 31 January 2022 provided by the Originator.

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

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

In respect of the Rated Notes, the PD and LGD at the AA (sf) stress scenario of 16.55% and 19.92%, respectively, were stressed assuming a 25% and 50% increase on both the PD and LGD.

DBRS Morningstar concludes the following impact on the Class A Notes:
-- 25% increase of the PD, ceteris paribus, would not lead to a rating change;
-- 50% increase of the PD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 25% increase of the LGD, ceteris paribus, would not lead to a rating change;
-- 50% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 25% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to AA (low) (sf);
-- 50% increase of the PD and 25% increase of the LGD, ceteris paribus, would lead to a downgrade to A (high) (sf);
-- 25% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (high) (sf);
-- 50% increase of the PD and 50% increase of the LGD, ceteris paribus, would lead to a downgrade to A (low) (sf).

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Antonio Laudani, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 24 February 2022

DBRS Ratings GmbH, Sucursal en España
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28046 Madrid
Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
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60311 Frankfurt am Main
Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (29 November 2021) and European RMBS Credit Model v. 1.0.0.0, https://www.dbrsmorningstar.com/research/388848/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021),
https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.