S&P: Rating Assigned At 'AAA (sf)' To French Prime RMBS Transaction BPCE Master Home Loans' Class A-2016-01 Notes
BPCE Master Home Loans is a securitization of a pool of up to €50 billion of French prime residential mortgage loans, which the BPCE group originated.
The issuer is a French securitization fund ("Fonds Commun de Titrisation" or FCT), which is bankruptcy remote by law. BPCE Master Home Loans is a multiple-issuance French residential mortgage-backed securities (RMBS) program originally issued in 2014 with a 10-year revolving period (see "Ratings Assigned To French Prime RMBS Transaction BPCE Master Home Loans," published on May 28, 2014).
Our rating reflects our analysis of the transaction's main features, as well as its exposure to counterparty and operational risks. Our analysis indicates that the available credit enhancement for the rated notes is sufficient to mitigate their exposure to credit and cash flow risks at the 'AAA (sf)' rating level. A combination of subordination, a cash reserve, and excess spread provides credit enhancement for the notes.
BPCE is one of the largest participants in the French mortgage market. The receivables have been originated by participating "Caisses d'Epargne" and "Banques Populaires" part of the BPCE group for French private individuals.
Under the transaction documents, at least 95% of the pool pay a fixed interest rate and the notes pay fixed coupons. The transaction did not have a hedging mechanism at closing.
RATING RATIONALE
Originator AssessmentIn our view, the BPCE group has strong, well-established underwriting and servicing procedures. It has previous securitization experience through its existing covered bond programs. We met the originator in April 2014 and were satisfied with its processes and its ability to undertake origination and servicing under good operational conditions. Our rating reflects our assessment of its origination policies and our evaluation of its ability to fulfil its role as the portfolio's servicer.
Economic Outlook We expect the current upswing in the French economy to gather a bit more momentum this year and next. Consumer sentiment in December remained close to its eight-year peak. Low inflation will further boost real disposable income, especially with the renewed plunge in oil prices, while improvements in the labor market will bolster earnings more significantly from 2017.
The ECB's monetary stance will remain highly accommodative this year and next as its ability to reach its inflation target (close to but slightly below 2%) continues to be challenged by weak commodity prices and depressed emerging market currencies. We do not expect the French 10-year sovereign bond rate (tied with mortgage rate) will go much beyond its current level in the coming quarters. Borrowing conditions for home buyers will therefore remain quite favorable. On the whole, we expect the residential market to stabilize this year, with the number of transactions still increasing but with prices staying essentially flat. A more tangible surge in prices can be expected in 2017 as the economy continues to strengthen (see "European Housing Markets Continue To Heal As Mortgage Rates Stay Low," published on March 2, 2016).
Credit AnalysisWe have conducted a loan-level analysis to assess the mortgage pool's credit quality by applying our French RMBS criteria (see "Criteria for Rating French Residential Mortgage-Backed Securities," published on July 16, 2003). The portfolio comprises plain vanilla loan products, including mostly fixed-rate, amortizing loans that pay fixed installments. All of the loans are either secured on a first lien mortgage or benefit from a guarantee granted from a caution.
During the revolving period, the issuer can add new mortgage loans to the pool, or substitute maturing loans. As a result, the pool's credit quality could deteriorate. In order to capture the pool's potential deterioration over the replenishment period, a stressed weighted-average foreclosure (WAFF) and weighted-average loss severity (WALS) level of 6.20% (credit coverage) is in place. This level is significantly higher than our current WAFF and WALS calculation on the portfolio. Furthermore, the transaction's eligibility criteria limit the inclusion of certain types of loans during the revolving period. The documentation includes an annual test to ensure that each year, the then-current WAFF and WALS are below the stressed WAFF and WALS at closing. Under the transaction documents, if they increase above this level, the revolving period stops--unless its continuation does not affect our ratings in the transaction.
Cash Flow AnalysisWe conducted our credit and cash flow analysis by applying our French RMBS and European cash flow criteria (see "Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions," published on Jan. 6, 2009). Our analysis shows that the available credit enhancement for the rated notes is consistent with a 'AAA (sf)' rating in light of the final extended legal maturity date. A combination of subordination, a cash reserve, and excess spread provides credit enhancement for the notes. A reserve fund provides liquidity for the rated notes at all times.
Under the transaction's eligibility criteria, at least 95% of the pool pay a fixed rate of interest, whereas the notes pay fixed coupons. Therefore, the transaction does not include any hedging mechanisms.
The issuer may issue further class A notes at a higher coupon, which could reduce available excess spread. The issuer net margin ensures that the revolving period ends if excess spread is insufficient to pay liabilities, including newly defaulted loans over the period. We have factored this in our cash flow analysis.
Counterparty Risk The transaction's documented replacement language for all of its relevant counterparties is in line with our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). Our analysis shows that counterparty risk does not constrain our rating on the class A notes.
Legal Risk The issuer is an FCT and is considered bankruptcy remote under French law. We have reviewed the transaction documents and received French legal opinions.
Ratings Stability We conducted our scenario analysis, in which we tested our rating under two scenarios and examined the transaction's performance by applying our credit stability criteria (see "Methodology: Credit Stability Criteria," published on May 3, 2010). In both assumed scenarios, the rated notes would most likely remain in the 'AAA' rating category.
We have affirmed our 'AAA (sf)' ratings on the outstanding class A-2014-02 to A-2014-08 notes as we consider the available credit enhancement for these classes of notes to be commensurate with the currently assigned ratings. We have withdrawn our 'AAA (sf)' rating on the class A-2014-01 notes following their redemption.
POTENTIAL EFFECTS OF PROPOSED CRITERIA CHANGES
Our ratings are based on our applicable criteria, including our French RMBS criteria. However, these criteria are under review (see "Request For Comment: RMBS Methodology And Assumptions For France, Belgium, And Germany," published on March 21, 2016).
As a result of this review, our future criteria applicable to rating transactions backed by French mortgage assets may differ from our current criteria. These criteria changes may affect the rating on the outstanding notes in this transaction. Until such time that we adopt new criteria, we will continue to rate and surveil this transaction using our existing criteria (see "Related Criteria").
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