DBRS Confirms Ratings on Belgian Lion NV / SA (Belgian Lion SME II)

DBRS Ratings Limited (DBRS) has today confirmed the ratings on the following notes issued by Belgian Lion NV / SA (Belgian Lion SME II or the Issuer):

-- EUR 2,074,788,392.00 Class A1 at AAA (sf)
-- EUR 2,489,500,000.00 Class A2 at AAA (sf)

The transaction is a cash flow securitisation collateralised by a portfolio of loans granted to self-employed, small and medium-sized enterprises (SMEs) and corporate borrowers based in Belgium. The loans were originated by ING Belgium SA/NV (ING or the Originator). The transaction was amended on 5 May 2015 (the Amendment) including, among other changes, an extension of the replenishment period, the next redemption date being in May 2017. Please refer to http://www.dbrs.com/research/279685/dbrs-confirms-ratings-on-belgian-lion-nv-sa-belgian-lion-sme-ii.html for more information.
The ratings on the Class A1 and Class A2 notes (the Notes) address the timely payment of interest and the ultimate payment of principal on or before the Maturity Date in November 2039.

The confirmation of the ratings reflects an annual review of the transaction and is based on the following analytical considerations, as described more fully below:

-- Portfolio performance, in terms of delinquencies and defaults, as of February 2016 payment date.
-- The annualised probability of default (PD) for the Originator was determined using the updated historical performance information supplied during the Amendment and has been maintained. For this transaction, DBRS assumed an annualised PD of 1.60%.
-- Recovery Rate of 25.24% at the AAA (sf) stress level, based on the worst-case portfolio given by the replenishment criteria limits.
-- The assumed weighted-average life (WAL) of the portfolio was 4.5 years.
-- The PD and portfolio WAL were used in the DBRS Diversity Model to generate the hurdle rates for the current worst-case portfolio.
-- Current available credit enhancement to the Notes to cover the expected losses at the AAA (sf) rating level.

The transaction is performing in line with DBRS’s expectations. As of the February 2016 payment date, the aggregate current balances of the defaulted loans were at 0.57% of the outstanding balance in the Amendment date, far from the 2.5% stop replenishment limit. In the context of the Amendment, certain assets including assets in arrears, defaulted or under liquidation were bought by ING at arm’s-length sale.

ING serves the role of Account Bank and is the swap counterparty of the transaction. The rating of ING is above the Minimum Institution Rating given the ratings assigned to the Notes as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and above the First Rating Threshold for a derivative counterparty as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

There is a Principal Deficiency Ledger (PDL) for the Class B notes, covered by a subordinated funding loan. Under the Swap Agreement, the Swap Counterparty (ING) receives all collected proceeds minus the senior expenses and returns the interest due and payable on the notes, minus the PDL balances, to the Issuer in that period. This structural feature eliminates the possibility of trapping any excess cash in the interest waterfall and therefore curing the current PDL. DBRS does not rate the Class B notes.

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)”. DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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

Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

This may 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’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include investor, servicer reports and information provided by ING.

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

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

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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.

The last rating action on this transaction took place on 11 May 2015, when the ratings of the Notes were confirmed at AAA (sf).

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):
-- Probability of default (PD) rates used: base case PD of 1.60%, and a 10% and 20% increase in the base case PD.
-- Recovery rates used: base case recovery rates, corresponding to a recovery rate of 25.24% at the AAA (sf) stress level, a 10% and 20% decrease in the base case recovery rates.

DBRS concludes that a hypothetical increase of the base PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would produce model results suggesting a downgrade of the Notes to AA (high) (sf). A scenario combining both a hypothetical increase in the PD by 10% and a hypothetical decrease in the recovery rate by 10% would also lead to model results suggesting a downgrade of the Notes to AA (high) (sf).

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

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

Initial Lead Analyst: Mudasar Chaudhry
Initial Rating Date: 14 August 2012
Initial Rating Committee Chair: Jerry Van Koolbergen

Lead Surveillance Analyst: Alfonso Candelas, Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960.

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

-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structure Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs)
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Unified Interest Rate Model for European Securitisations
-- 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

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