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May 13 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Mercurius Funding N.V./S.A. Compartment Mercurius-1’s notes the following final rating: EUR3,200m class A notes (ISIN BE0002469444): ‘A+sf’; Outlook Stable EUR924m class B notes (ISIN BE6265766517): not rated
The transaction is a granular cash flow securitisation of a EUR4.0bn static portfolio of loans granted to Belgian small and medium-sized enterprises (SMEs) and self-employed individuals originated by Belfius Bank NV/SA (Belfius, A-/Negative/F1).
Counterparty Exposure Caps Rating
The rating is limited by the rating of the account bank (Belfius), and by the account bank’s replacement rating triggers, set at ‘BBB+'/‘F2’. The account bank provides credit support to the transaction and is therefore a direct support counterparty. Hence, according to Fitch’s counterparty criteria, the notes’ rating is capped at ‘A+sf’.
Default Probability and Positive Selection
The three borrower segments (S10, S15, S20) of Belfius’s retail and commercial banking book show a 90 days past due probability of default (PD) rate in line with Fitch’s expectation for the Belgian SME sector (2.5% per year). Fitch applied a PD mapping for each borrower segment on the basis of Belfius’s internal rating scales. The average annual PD for the transaction is 2.01%, which is a result of the portfolio’s positive selection.
Unsecured Recovery Rate Multiple
Fitch gave credit in its analysis only to first-lien mortgage inscriptions. However, given the high level of mortgage mandates, pledges and guarantees (all considered as unsecured), and after having reviewed the historical recovery rates of Belfius’s loan book, Fitch applied a multiple of 1.5 to the unsecured recovery rate in all rating scenarios.
Expected Loss PDL
Principal deficiency ledgers (PDL) have been established on behalf of the issuer in respect of the class A and B notes (PDL A and PDL B, respectively). The specific PDL mechanism records the expected loss amounts early in the structure, when a loan becomes 90 days in arrears. The mechanism retains all funds applied to reduce the PDL balance in a cash buffer that will be utilised to write down the full exposure of the loan (outstanding balance) at the time it is written-off.
Servicing Continuity Risk
Belfius is the portfolio’s servicer. While no back-up servicer was appointed at closing, servicing continuity risks are mitigated by operational features (notification and servicer termination triggers), as well as structural features (a reserve fund that provides liquidity to the class A notes; a commingling reserve; and the principal available funds, which can be diverted in case of a shortfall in interest available for the class A notes).
As part of its analysis, Fitch considered the sensitivity of the notes’ ratings to the stresses on defaults, recovery rates and correlation to assess the impact on the expected ratings.
While an increase of 25% in the expected default rates or decrease of 25% in expected recovery rates would not lead to a downgrade of the class A notes, a joint stress combining both scenarios plus a doubled correlation would lead to a downgrade of two notches.