DBRS Rates New Class A Notes Issued by Mercurius Funding NV/SA; Discontinues Rating to Old Notes

DBRS Ratings Limited (“DBRS”) has today taken the following rating actions to the Notes issued by Mercurius Funding N.V. / S.A (Compartment Mercurius-1) (the “Issuer”):

• EUR 1,836.1 million Class A Asset Backed Fixed Rate Notes due April 2035 (ISIN: BE0002414861): Discontinued-Repaid
• EUR 3,200.0 million Class A Asset Backed Fixed Rate Notes due April 2035 (ISIN: BE0002469444): Assigned a rating of A (high) (sf)

The transaction is a cash flow securitisation collateralised by a portfolio of bank loans originated by Belfius Bank N.V. / S.A. (“Belfius” or the “Originator”) to small and medium-sized enterprises (“SMEs”) and self-employed individuals based in Belgium.

Belfius has issued new Class A and Class B Notes (totalling EUR 4,124 million) with the purpose of repurchasing the remaining balance of the existing Class A and Class B Notes (totalling EUR 2,760.1 million) and purchasing an additional portfolio of SME loans to achieve a target total portfolio of EUR 4,000 million. As of 31 March 2014, the transaction’s current portfolio balance was EUR 2,636.7 million and the additional portfolio balance was EUR 1,381.6 million. Given the planned amortisation and expected prepayments on the loans, it is expected that the portfolio balance at closing will be less than the target EUR 4,000 million. The difference between the target amount and the portfolio balance at closing, expected to be between EUR 55 and EUR 80 million, will be held in cash and used in the first payment date to amortise the Class A Notes.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal payable on or before April 2035.

The provisional pool is highly exposed to the “Building & Development” industry, representing 27.3% of the outstanding balance. Such concentration in this sector represents a weakness of the transaction in DBRS’s view. “Business Equipment & Services” (20.4%) and “Healthcare” (12.4%) complete the top three industries based on the DBRS Industry classification. The provisional portfolio exhibits low obligor concentration. The top obligor and the largest ten obligor groups represent 0.4% and 2.5% of the outstanding balance, respectively. The top three provinces for borrower concentration are Brussels, Antwerp and East-Flanders representing approximately 15.7%, 14.2% and 12.3%, of the portfolio balance, respectively.

These ratings are based upon DBRS’s review of the following items:

• The transaction structure, the form, and sufficiency of available credit enhancement, the portfolio characteristics.
-- At closing, the Class A Notes benefit from a total credit enhancement of 23.6%, which DBRS considers to be sufficient to support the A (high) (sf) rating. In addition, the Class A Notes also benefit from available excess spread.
-- The EUR 144 million Reserve Fund is available to cover senior expenses and interest shortfalls on the Class A Notes. Part of the Reserve Fund can also be used to cure or reduce balances outstanding on the PDLs throughout the life of the transaction.
-- The Principal Deficiency Ledgers (“PDLs”) will register losses incurred due to defaults on the loan portfolio. This structural feature is beneficial to the Class A Notes as it enables excess cash to be trapped in the interest priority of payments until such PDL balances are cured.
• The transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting, and servicing practices.
• An assessment of the operational capabilities of key transaction participants.
• The ability of transaction to withstand stressed cash flow assumptions and repay investors according to the approved terms. Interest and principal payments on the Class A Notes will be made monthly on the 24th day of the month. The first payment date is 24 June 2014.
• The soundness of the legal structure and the presence of legal opinions which address the true sale of the assets to the trust and the non-consolidation of the special purpose vehicle, as well as consistency with the DBRS “Legal Criteria for European Structured Finance Transactions”.

DBRS determined these ratings as follows, as per the principal methodology specified below:
• The annualised probability of default (“PD”) for the Originator was determined using the historical performance information supplied. For this transaction DBRS assumed an annualised PD of 2.4%.
• The assumed weighted average life (“WAL”) of the portfolio was 5.0 years.
• The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target rating.
• The recovery rate was determined by considering the market value declines (“MVDs”) for Belgium, the security level and type of the collateral. For the Class A Notes, DBRS applied the following recovery rates: 45.5% for secured loans and 21.3% for unsecured loans.
• The break even rates for the interest rate stresses and default timings were determined using the DBRS cash flow model.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)”. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

All DBRS methodologies can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisation in the EURO Area” at: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include the parties involved in the rating, including but not limited to Belfius and its agents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS determined key inputs used in our analysis based on historical performance data provided for the Originator and Servicer as well as analysis of the current economic environment. Further information on DBRS’s analysis of this transaction will be available in a rating report on http://www.dbrs.com or by contacting us at info@dbrs.com.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

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

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

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):
• Probability of Default Rates Used: Base Case PD of 2.4%, a 10% increase of the base case and a 20% increase of the base case PD.
• Recovery Rates Used: Base Case Recovery Rates of 37.1% at the A (high) (sf) stress level for the Class A Notes, a 10% and 20% decrease in the Base Case Recovery Rates.

DBRS 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 each lead to a downgrade of the Class A Notes to A (low) (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% would lead to a downgrade of the Class A Notes to A (low) (sf).

It should be noted that the interest rates and other parameters that would normally vary with rating level, including the recovery rates, were allowed to change as per the DBRS methodologies and criteria.

The previous rating action on this transaction took place on 16 October 2013, when the rating of the Class A Notes (ISIN: BE0002414861) was placed Under Review with Developing Implications.

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see:
http://cerep.esma.europa.eu/cerepweb/statistics/defaults.xhtml.

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

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Class A Notes (ISIN: BE0002414861)
Initial Lead Analyst: Carlos Silva
Initial Rating Date: 7 May 2012
Initial Rating Committee Chair: Jerry van Koolbergen

Most Recent Rating Update: 16 October 2013
Lead Surveillance Analyst: Alfonso Candelas
Rating Committee Chair: Jerry van Koolbergen

Class A Notes (ISIN: BE0002469444)
Initial Lead Analyst: Carlos Silva
Initial Rating Date: 13 May 2014
Initial Rating Committee Chair: Jerry van Koolbergen

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London, EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960

The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

“Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)”
“Legal Criteria for European Structured Finance Transactions”
“Unified Interest Rate Model for U.S. and European Structured Credit”
“Cash Flow Assumptions for Corporate Credit Securitizations”
“Rating Methodology for CLOs and CDOs of Large Corporate Credit”
“Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”