Press Release

DBRS Morningstar Confirms Rating on Notes Issued by Loan Invest NV/SA. Compartment SME Loan Invest 2017

Structured Credit

March 10, 2022

DBRS Ratings GmbH (DBRS Morningstar) confirmed its AAA (sf) rating on the Notes issued by Loan Invest NV/SA. Compartment SME Loan Invest 2017 (the Issuer).

The rating on the Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in April 2051.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the February 2022 payment date.
-- The one-year base case probability of default (PD) and default and recovery rates on the remaining receivables.
-- The credit enhancement available to the Notes to cover the expected losses at the AAA (sf) rating level.
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The transaction is a cash flow securitisation collateralised by a portfolio of loans originated and serviced by KBC Bank NV (KBC) within the framework of small and medium-size enterprises (SMEs) in Belgium.

PORTFOLIO PERFORMANCE
As of the 15 February 2022 payment date, the overall portfolio consisted of 17,334 loans with an aggregate principal balance of EUR 2,025 million. The portfolio is performing within DBRS Morningstar’s expectations. As of the payment date, cumulative defaulted loans represented 0.9% of the initial portfolio balance, up from 0.8% one year ago. Delinquent loans represented 0.1% of the portfolio balance, unchanged from levels observed one year ago.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar maintained the portfolio’s one-year base case PD assumption at 1.8% prior to coronavirus-related adjustments. DBRS Morningstar conducted a loan-by-loan analysis on the remaining pool and updated its PD and recovery assumptions to 35.2% and 42.7%, respectively, at the AAA (sf) rating level.

CREDIT ENHANCEMENT
As of February 2022, the credit enhancement of the Notes was 32.7%, stable since the last annual review because of the pro rata amortisation between the Notes and the subordinated loan, which provides credit enhancement. If a sequential trigger event occurs, then amortisation will be applied sequentially.

A part of the subordinated loan’s proceeds was used to fund the reserve fund. The reserve fund does not amortise, and is available to cover interest shortfalls on the Notes. The reserve fund is currently at its target level of EUR 56 million, which is 1% of the total initial portfolio. There is currently pro rata amortisation between the Notes and the subordinated loan.

KBC acts as the account bank and the swap counterparty for the transaction. Based on the account bank reference rating of AA, which is one notch below the DBRS Morningstar public Long Term Critical Obligations Rating (COR) of KBC at AA (high), the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Notes, as described in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

KBC’s COR is consistent with the first rating threshold as described in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

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 SME 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 increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus. As per DBRS Morningstar’s assessment, 8.4% of the outstanding portfolio balance represented industries classified in the high-risk economic sectors. This led the underlying one-year PDs to be multiplied by 1.5 times. DBRS Morningstar also conducted an additional sensitivity analysis to determine that the transaction benefits from sufficient liquidity support to withstand high levels of payment holidays in the portfolio. As of February 2022, 1.7% of the collateral balance had been granted payment moratoriums.

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 10 February 2022, DBRS Morningstar updated its 18 May 2020 commentary outlining the impact of the Coronavirus Disease (COVID-19) crisis on the performance of DBRS Morningstar-rated structured credit transactions in Europe almost two years on. For more details, please see: https://www.dbrsmorningstar.com/research/392167/two-years-into-covid-19-risks-to-european-structured-credit-transactions and https://www.dbrsmorningstar.com/research/361098/european-structured-credit-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: “Rating CLOs Backed by Loans to European SMEs” (28 June 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 surveillance section of the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 this rating include the investor report provided by KBC and loan-by-loan data from the European DataWarehouse GmbH.

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

At the time of the initial rating, 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.

The last rating action on this transaction took place on 10 March 2021, when DBRS Morningstar confirmed its AAA (sf) rating on the Notes.

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

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

-- PD Rates Used: Base-case PD of 1.8%, a 10% increase of the base case and a 20% increase of the base-case PD.
-- Recovery Rates Used: Base-case recovery rate of 42.7% at the AAA (sf) rating level, and a 10% and 20% decrease in the base-case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery-rate levels.

DBRS Morningstar 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 confirmation of the Notes at AAA (sf). A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Notes at AAA (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: Helvia Meana, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 7 April 2017

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

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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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