SapphireOne Mortgages FCT

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1 Presale: SapphireOne Mortgages FCT This presale report is based on information as of Oct. 20, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings Assigned Class Prelim. rating* Class size (%) Available credit enhancement (%) Interest A AAA (sf) Three-month B AA (sf) Three-month C A (sf) Three-month D BBB (sf) Three-month E BB (sf) Three-month F NR 8.85 (3.45) Three-month Step-up interest Three-month Three-month Three-month Three-month Three-month Three-month Step-up date December 2020 December 2020 December 2020 December 2020 December 2020 Legal final maturity date June 2061 June 2061 June 2061 June 2061 June 2061 N/A June 2061 *The rating on each class of securities is preliminary as of Oct. 20, 2016, and subject to change at any time. We expect to assign final credit ratings on the closing date subject to a satisfactory review of the transaction documents and legal opinion. Our preliminary ratings address timely payment of interest and ultimate payment of principal for all classes of notes. The credit enhancement figures are based on our methodology and include subordination and the non-liquidity portion of the reserve fund, but exclude assets that we consider as defaulted in our analysis (see "Transaction Key Features" and "Collateral Description"). The class F notes balance also includes the reserve fund (2.5%). --Euro Interbank Offered Rate. NR--Not rated. Primary Credit Analyst: Rory O'Faherty, London +44 (0) ; rory.ofaherty@spglobal.com Secondary Contact: Feliciano P Pereira, London 44 (0) ; feliciano.pereira@spglobal.com See complete contact list on last page(s) OCTOBER 20,

2 Transaction Participants Originator GE Money Bank S.C.A. Sellers GE Money Bank S.C.A. and GE Societe de Credit Foncier Servicer GE Money Bank S.C.A. Back-up servicer facilitator Eurotitrisation Paying agent Societe Generale Custodian Societe Generale Account bank provider Societe Generale Swap provider HSBC Bank PLC Management company Eurotitrisation Collection accounts Societe Generale and La Banque Postale Cash/bond administrator Eurotitrisation Arranger Morgan Stanley Supporting Ratings Institution/role Societe Generale as account bank provider HSBC Bank PLC as swap provider Rating A/Stable/A-1 AA-/Negative/A-1+ Transaction Key Features* Expected closing date November 2016 Notes payment frequency Quarterly (25th day of March, June, September, and December) Collateral French debt consolidation mortgage loans Principal outstanding of the pool (bil. ) Weighted-average seasoning (months) 56.5 Arrears exceeding one month (%) 2.83 Number of borrowers 20,811 Concentration Paris, 13.72% Weighted-average debt-to-income ratio (%) Transaction structure Amortizing Redemption profile Fully sequential *Data is based on a pool as of Aug. 31, Transaction Summary S&P Global Ratings has assigned preliminary credit ratings to SapphireOne Mortgages FCT 's (SapphireOne) class A to E notes. At closing, the issuer will also issue unrated class F notes. SapphireOne is the second true sale securitization of residential loan receivables originated by GE Money Bank S.C.A. (GEMB). GEMB and GE Societe de Credit Foncier (GE SCF) are the sellers of the loans to be securitized. The collateral is similar to what we observed in the SapphireOne Mortgages FCT transaction and is in our view atypical for the French market as the pool comprises entirely debt consolidation residential mortgage loan receivables OCTOBER 20,

3 that pay a fixed instalment. The instalment on the floating-rate loans in the pool can be revised annually. We consider the specific nature of the assets in our analysis below. SapphireOne is a French securitization fund ("Fonds Commun de Titrisation" or FCT), which is bankruptcy remote by law. The transaction will amortize sequentially, with one tranche repaying at a time, starting with the most senior. A combination of subordination, a non-liquidity reserve, and excess spread will provide credit enhancement for the notes. Our preliminary ratings on the class A to E notes address the timely payment of interest and ultimate payment of principal. Potential Effects Of Proposed Criteria Changes Our preliminary ratings are based on our applicable criteria, including our French residential mortgage-backed securities (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"). Rating Rationale Economic outlook We expect GDP to grow by 1.5% in 2016 and to slow marginally to 1.2% in Business investment should also continue to benefit from fiscal incentives and very low interest rates. The unemployment rate is likely to decline steadily to 9.3% in 2017, a still elevated level by historical standards. Against that backdrop, activity in the housing market will remain heavily dependent on trends in interest rates. Household indebtedness has been steadily increasing to 71% of incomes at the end of 2015, a level that appears still moderate by European standards. House prices could, in our view, increase by as much as 2% in 2016 and in Credit analysis We 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, and "Methodology And Assumptions: Update To The Criteria For Rating French Residential Mortgage-Backed Securities," published on Jan. 6, 2009). The portfolio is in our experience atypical for the French market for a number of reasons. It comprises solely debt consolidation loans and all of the floating-rate loans are subject to "borrower protection mechanisms" (BPM), which limit the potential increase in instalments payable by borrowers. This feature, as well as a more detailed analysis of the OCTOBER 20,

4 collateral being securitized, is discussed in the "Transaction Structure" section below. The loans are amortizing loans. However, should interest rates increase sufficiently, the loans that fall under the BPM may in effect become interest-only loans as a greater proportion of the borrower's instalment is allocated to interest. If interest rates increase to the extent that the fixed instalment is insufficient to meet the borrower's obligation, then the excess above the instalment will be capitalized. This can result in negative amortization on the loan and the borrower can end up owing more than the initial balance of the loan. We believe there is a potential legal risk regarding this practice and have considered this in our cash flow analysis. Another feature of the portfolio, which is in our view relatively unique in the French RMBS market, is that 3.87% of the pool is flagged as either having had a restructuring under the Banque de France or as defaulted. We excluded these loans from our analysis and we modeled the transaction as undercollateralized. We have given benefit to the recoveries on these loans after 36 months, in line with our French RMBS criteria. Operational risk GEMB is an experienced player in residential financing in France. It also has previous home loan securitization experience through its existing covered bond program. We have assessed GEMB's origination policies, by conducting an on-site visit in August 2015 and, although the products offered are in our view atypical of the French residential mortgage market, we were satisfied with the review. GEMB will also act as the servicer of the loans in the pool and we reviewed its servicing capabilities as part of our on-site review in August We have, under our operational risk criteria assessed the role of GEMB as servicer (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published on Oct. 9, 2014). Given the debt consolidation nature of the assets in the pool, they are not the traditional type of assets we see in the French RMBS market. Under our operational risk criteria, we therefore see this transaction as having moderate severity risk. The next step when applying our operational risk criteria is to assess the portability risk in the transaction. We consider that this transaction has moderate portability risk as there are a limited number of servicers in the market capable of servicing assets such as these. Finally, we assessed the servicer in the context of disruption risk, which we consider to be low. Our operational risk criteria do not cap the maximum potential rating achievable in this transaction on account of the servicer. In this transaction, we have also assessed the role of the cash manager as a key transaction party (KTP) under our operational risk criteria. Typically, we do not consider cash managers as a KTP. However, in this transaction--due to the role that the reclassification of collections has on the structure--we have applied our operational risk criteria to the cash manager, Eurotitrisation. As before, we view the level of severity risk as being moderate, but consider the level of portability risk and disruption risk to be low. Our operational risk criteria do not cap the maximum potential rating achievable in this transaction on account of the cash manager. Legal risk The issuer is an FCT, which is considered bankruptcy remote under French law, in line with our European legal criteria (see "Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept. 13, 2013). We have received a legal opinion confirming that the sale of the assets would survive the seller's insolvency. OCTOBER 20,

5 We have also reviewed an external legal memorandum regarding the issuer's potential exposure to future setoff in relation to the fact that the BPM loans may be subject to negative amortization. We have considered this potential risk in our analysis. Counterparty risk The transaction is exposed to Societe Generale as the account bank provider and HSBC Bank PLC as the swap counterparty. 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 preliminary ratings on the notes. The dynamic nature of the replacement trigger in the swap documentation could, if we lowered our ratings on the notes for performance reasons, potentially constrain the maximum potential ratings on the notes. Cash flow analysis The notes will amortize sequentially. A combination of subordination, the non-liquidity reserve, and excess spread will provide credit enhancement for the notes. The transaction benefits from a fully funded, nonamortizing general reserve fund that is divided into a liquidity reserve and a non-liquidity reserve. We have assessed the transaction's documented payment structure, which in our experience is unique in the Europe, Middle East, and Africa (EMEA) RMBS market (with the exception of the previous SapphireOne issuance--sapphireone Mortgages FCT ) as all of the collections on the assets are pooled together and reclassified according to documented conditions. We discuss this feature and the cash flow specific points in more detail in the "Transaction Structure" section below. We have based our cash flow analysis on the application of our French RMBS criteria and our European cash flow criteria (see "Update To The Cash Flow Criteria For European RMBS Transactions," published on Jan. 6, 2009). It indicates that the notes' available credit enhancement is sufficient to withstand the credit and cash flow stresses that we apply at the assigned preliminary rating levels. Ratings stability We conducted our scenario analysis, in which we tested our preliminary ratings 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). Country risk We have assigned a preliminary rating to the class A notes, which is above our long-term unsolicited 'AA' rating on France. Under our structured finance ratings above the sovereign criteria (RAS criteria), as we rate the sovereign in the 'AA' category, we do not apply a formal sovereign default stress test (see "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016, and "France 'AA/A-1+' Ratings Affirmed; Outlook Remains Negative," published on April 22, 2016). OCTOBER 20,

6 Transaction Structure Terms and conditions of the notes SapphireOne will pay interest quarterly in arrears on the 25th of March, June, September, and December of each year, beginning in March The legal final maturity date for all classes of notes will be in June The class A to E notes accrue interest at a rate of three-month (Euro Interbank Offered Rate) plus a class-specific margin. The class-specific margin for each class of notes will step up in December Although, under the transaction documents, all but the most senior tranche outstanding can defer interest payments, our ratings do not take this into account as the deferral--once a class of notes becomes the most senior class--can result in an event of default. Our preliminary ratings on all classes of notes therefore address the timely payment of interest and the ultimate payment of principal. OCTOBER 20,

7 Collateral description The preliminary pool, which is based on the cut-off date of Aug. 31, 2016, amounts to 1,559,047,960 and comprises 25,620 loans. Before closing, we expect to receive a final pool, on which we will also conduct our credit analysis. In our credit analysis, we have not included loans with a total of 60.4 million outstanding as, in our view, they have already defaulted (thereof, the vast majority of these loans have been through a Banque de France restructuring and have not in practice defaulted). We have given benefit to the recoveries on these loans after 36 months, in line with our French RMBS criteria. Borrower protection mechanisms The pool contains a mixture of fixed-rate for life (33.65%), fixed-rate with a conversion to floating-rate (5.33%), and variable-rate (61.02%) loans. All of the variable-rate loans contain provisions that aim to protect the borrower from interest rate increases. These provisions are typically either in the form of an "instalment protection mechanism" (IPM loan) or, in a small number of cases, a "corridor protection mechanism" (corridor loan). IPM loans make up 99% of the variable-rate mortgages. Borrowers with this product on Day 1 have a predefined, fixed-instalment-payment schedule based on the applicable rate of the day. However, as rates increase (or decrease), a greater (or lesser) proportion of the instalment will be assigned to interest as opposed to principal. On each loan's anniversary, the borrower's outstanding balance is compared against their initial schedule and the borrower's instalment may be revised. For example, if interest rates have decreased and therefore a greater proportion of the instalment was assigned to principal during the year, it is likely that the borrower will be ahead of the schedule (all else being equal). In this case, the instalment payable will remain the same for the next 12 months. However, if interest rates have increased during the year, it is likely that a greater proportion of the borrower's instalment will have been devoted to interest payments. This will result in the borrower falling behind the projected amortization schedule. Should this second scenario occur, then GEMB will notify the borrower of an increase in their instalment for the next 12 months. There is the possibility, in this second scenario, that if interest rates increase to the extent that the fixed instalment is insufficient to meet the borrower's obligation, then the excess above the instalment will be capitalized. This can result in negative amortization on the loan and the borrower can end up owing more than the initial balance of the loan. In such cases, the loan maturity can be extended by up to a third of the loan term. We believe there is a potential legal risk regarding this practice and have considered this in our analysis. Any such potential increase in the instalment is limited, based on a function of inflation and either 1% or 3%. If the borrower is less than 3% (or 5% depending on the loan contract) behind their initial contractual schedule, then the instalment will increase by at least 1%. If the borrower has fallen behind by 3% (or 5% depending on the loan contract) or more, their instalment will then increase by at least 3% for the next 12 months. The maximum potential increase in the instalment is a function of inflation, thereby providing the borrower with a degree of protection against a significant increase in their instalment. We do not model inflation in our analysis, so we have not given any benefit to this. The revised balance cannot, on subsequent annual revision dates, be lowered (except in the event of a prepayment). Given the fixed instalment feature of the IPM loans, GEMB may extend the initial maturity of a loan by up to one third to allow a borrower additional time to amortize their loan. Upon reaching the extended maturity of the loan, any OCTOBER 20,

8 remaining outstanding balance would be written off and the borrower would be discharged from their obligation. We have also considered this feature in our cash flow analysis. Corridor loans comprise 0.73% of the collateral pool and function largely in a similar way to the IPM loans, but the movement in instalments is restricted to a greater extent. In addition, the maturity date for corridor loans can be extended without any restrictions. All borrowers who are currently on a variable rate can at any time make a permanent switch to a fixed-rate product. We have considered this possibility in our analysis. Pool characteristics As chart 2 shows, the pool is well-seasoned with a weighted-average seasoning of 56.6 months. In our view, well-seasoned loans have a lower risk and we have considered this in our credit analysis. Chart 2 The pool also contains loans (3.87%) that have either had a Banque de France restructuring or have been classified as defaulted. We excluded these loans from our analysis and we modeled the transaction as undercollateralized. We have given benefit to the recoveries on these loans after 36 months, in line with our French RMBS criteria. OCTOBER 20,

9 The majority of the loans in the pool are owner-occupied properties, although there is about 0.86% of buy-to-let (BTL) loans. We consider BTL loans as carrying a higher risk and have applied an additional adjustment for these loans in our weighted-average foreclosure frequency (WAFF) calculation. Of the portfolio analyzed, 2.83% are in arrears of one month or more. Arrears of this level are, in our view, particularly high in the context of the French RMBS market. Under our French RMBS criteria, one of the fields that contributes to our calculation of our loss severities is the value of the loan to purchase price. Given that these loans are originated as refinancing mortgage loans, the property being secured is not being purchased at the point of loan origination, but was instead purchased by the borrower at an earlier point in time. We have factored this into our analysis by applying conservative adjustments to the valuations provided, in order to approximate the original purchase price of the property. The weighted-average debt-to-income (DTI) ratio of the pool is 30.52% (see chart 3). We consider borrowers with a high DTI ratio to have a higher probability of default. We have applied an adjustment in our analysis to account for loans with a high DTI ratio. Chart 3 OCTOBER 20,

10 Payment Structure And Transaction Features Credit enhancement for the notes is provided through subordination, the non-liquidity reserve fund, and excess spread. Table 1 Credit Enhancement For The Notes Class Preliminary rating Class size (%)* Initial credit enhancement (%) A AAA (sf) B AA (sf) C A (sf) D BBB (sf) E BB (sf) F NR 8.85 (3.45) *The tranche size may change prior to closing. Credit enhancement at closing. The size of the class F notes reflects the fact that they partially fund the reserve fund (2.5%) NR--Not rated. Reclassification of collections One of the unique features of this transaction is that all of the collections that SapphireOne receives on the floating-rate assets will be grouped together before being classified as either adjusted revenue or adjusted principal. As a result of this reclassification, the assets and liabilities may amortize at different rates. The collections on the fixed-rate assets will be assigned to available revenue and available principal, as we would more typically see. Under this structure, interest receipts may be classified as principal and vice versa. When reclassifying collections, the first step is to assign amounts to adjusted revenue collections. This is based on the lesser of the prevailing interest rate on the loan at the cut-off date (Aug. 31, 2016) and the prevailing interest rate on the loan at the relevant determination date. Secondly, amounts will be assigned to principal to the extent the adjusted principal balance exceeds the lesser of the target schedule of amortization and the actual principal balance of the assets (excluding prepayments). The target schedule balance is the estimate outlined on Day 1 for each loan. The third and fourth steps involve assigning collections to clear any unpaid interest and then to pay principal that was due but unpaid in prior periods. Fifthly, to adjusted principal in order to reduce the adjusted principal balance to bring it to its target. This step will reflect the effect of prepayments. Any remaining collections will be applied as adjusted revenue and will, in effect, become excess spread. Liquidity and reserve fund At closing, part of the proceeds from the issuance of the class F notes will be used to fund the reserve fund to 2.5% of the collateralized portion of the class A to F notes' closing balance. The reserve fund is nonamortizing. At closing, the reserve will be split into a liquidity reserve and a non-liquidity reserve. The liquidity reserve will be sized at 2.5% of the outstanding balance of the class A notes, subject to a floor of 1.0% of the initial balance of the class A notes. The OCTOBER 20,

11 non-liquidity reserve will be equal to the overall reserve fund minus the liquidity reserve. As a result, as the class A notes amortize over time, the non-liquidity reserve will increase, providing the transaction with additional credit enhancement. The issuer can only use the liquidity reserve to pay senior fees or interest on the class A to E notes, and only after fully depleting the non-liquidity reserve. The use of the liquidity reserve to pay interest on the class B to E notes is conditional on the principal deficiency ledger (PDL) for that particular class not exceeding 10%. There is no restriction on the use of the liquidity reserve for the class A notes. The reserve fund is topped up from available revenue above the class F notes' PDL, in the interest priority of payments. In high-delinquency scenarios, there may be liquidity stresses on the transaction, whereby the issuer would not have sufficient revenue receipts to pay interest due on the notes. To mitigate this risk--and if there is no balance in the liquidity reserve or the non-liquidity reserve--the issuer can, as long as the relevant class of notes (with the exception of class A notes, which has no such restriction) does not currently have a balance of 10% or more on its PDL, use any existing principal receipts to cover interest shortfalls on the class A to E notes, in addition to senior expenses. The use of principal to pay interest would result in the registering of a PDL and may reduce the credit enhancement available to the notes. Principal deficiency ledger The PDL in this transaction is relatively unusual in that it is a hybrid of a loss-based and default-based PDL. As we typically see in transactions, once a loss has been realized on a loan, a corresponding balance will be booked to the appropriate PDL. In addition, a PDL will typically be recorded if the transaction uses principal as available revenue receipts. Under the default-based element of the PDL, a PDL will be recorded if no payment on a loan has been received for 36 months, if a borrower is classified as bankrupt, or if the transaction uses principal as available revenue receipts. In our analysis, we only give credit to the loss-based part of the PDL. The PDL will comprise six subledgers, one for each rated class of notes, as well as for the class F notes (i.e., each of the collateralized classes of notes). The class F notes' PDL will be sized up to the collateralized portion, so the reserve fund will not be included. PDL amounts will first be recorded in the class F notes' PDL up to the class F notes' collateralized outstanding amount (the reserve fund portion of the class F notes will not be included). The amounts will then be debited sequentially upward. Commingling risk Borrowers make their payments to one of two collection accounts, Societe Generale and La Banque Postale. All amounts are held in the name of the servicer and are commingled with other amounts belonging to the servicer. There is no security granted to the issuer over such amounts, so in the event of servicer insolvency there is a risk of collections being lost. OCTOBER 20,

12 We have considered this risk in our analysis and, as there are no structural mitigants in place, we have stressed a loss of one month's collections. Priority of payments The redemption of the notes is fully sequential with no pro rata triggers present in the transaction. Once the reclassification of collections has taken place, adjusted revenue will be applied in the revenue priority of payments while adjusted principal will be applied in the principal priority of payments. Table 2 Revenue Priority Of Payments 1 Senior fees, including payments to the servicer and management company (including senior servicing fees). 2 Payments to the swap counterparty (excluding termination payments if the swap counterparty is the defaulting party). 3 The class A notes' interest. 4 The class A notes' PDL. 5 The class B notes' interest. 6 The class B notes' PDL. 7 The class C notes' interest. 8 The class C notes' PDL. 9 The class D notes' interest. 10 The class D notes' PDL. 11 The class E notes' interest. 12 The class E notes' PDL. 13 Top-up of the reserve fund, up to its required amount under the documentation.* 14 The class F notes' PDL. 15 The class F notes' interest. 16 Payments to the swap counterparty not paid above. 17 Any leftovers to the residual units. *Equal to 2.5% of the initial principal amount of the collateralized portion of the class A to F notes. Table 3 Principal Priority Of Payments 1 Payment of any shortfall to items 1-3, 5, 7, 9, and 11 in the revenue priority of payments. 2 Liquidity reserve fund replenishment. 3 The class A notes' principal. 4 The class B notes' principal. 5 The class C notes' principal. 6 The class D notes' principal. 7 The class E notes' principal. 8 The class F notes' principal. 9 Subordinated swap payments. 10 Payments on the residual units. Hedging At closing, there will be both fixed-rate and variable-rate loans in the pool. In order to hedge both the interest rate risk OCTOBER 20,

13 between the fixed-rate assets and the floating-rate liabilities, and the basis risk on the variable rate assets, the issuer has entered into a balance guaranteed swap agreement with HSBC Bank. Under the swap, the issuer will pay to the swap provider a fixed swap charge times the notional and will receive back three-month. The notional is defined as the outstanding balance of the class A to E notes. The notional will decrease if the class immediately senior to an outstanding class has a PDL balance in excess of 50%, i.e., in the event of a PDL of 60% on the class C notes, then the class D and E notes will be excluded from the notional. There will be a floor at minus 1.5% on the floating leg of the swap. In effect, this means that in negative interest rate environments, the issuer will end up paying out twice--on both the fixed and the floating leg. We have considered this risk in our cash flow analysis. Credit And Cash Flow Analysis We stressed the transaction's cash flows to test the credit and liquidity support from the assets, the subordinated tranches, and the cash reserve. We implement these stresses to the transaction's cash flows at all relevant rating levels. For example, we subject a transaction that incorporates 'AAA', 'A', and 'BBB' rated tranches of notes to three separate sets of cash flow stresses. Under the 'AAA' stresses, all 'AAA' rated notes must pay full and timely principal and interest, but this would not necessarily be the case for the 'A' or 'BBB' rated tranches as they are subordinated in the priority of payments. In the 'A' scenario, all 'AAA' and 'A' rated notes must receive full and timely principal and interest. However, this need not be the case for the 'BBB' rated notes, as they are subordinated to both the 'AAA' and 'A' rated tranches. Default and recovery amounts For each loan in the pool, we estimate the likelihood that the borrower defaults on their mortgage payments under each respective rating scenario (the foreclosure frequency) and the loss that we expect on the subsequent sale of the property under that scenario (the loss severity, expressed as a percentage of the outstanding loan). We assume the total mortgage balance to default and determine the total amount of this defaulted balance that is not recovered for the entire pool by calculating the WAFF and the weighted-average loss severity (WALS). The WAFF and WALS estimates increase as the required rating level increases because the higher the rating on the notes, the higher the level of loan defaults and loss severity that the notes should be able to withstand. We base our credit analysis on the characteristics of the loans and the associated borrowers. We applied market-specific criteria in our assessment of the WAFF and the WALS for this portfolio (see "Related criteria"). The WAFF and WALS shown below reflect our assessment of the portfolio's credit quality. Table 4 Portfolio WAFF And WALS WAFF (%) WALS (%) AAA AA A OCTOBER 20,

14 Table 4 Portfolio WAFF And WALS (cont.) WAFF (%) WALS (%) BBB BB Default timings The WAFF at each rating level specifies the total balance of the mortgage loans assumed to default over the transaction's life. We assume that these defaults occur over a three-year recession. We assess the effect of the timing of this recession on the issuer's ability to repay the liabilities. Generally, we start the recession in the first month of a transaction. However, for 'AAA' scenarios, the recession is delayed by 12 months. We apply the WAFF to the outstanding principal balance at the start of the recession. For example, in a 'AAA' scenario, we apply the WAFF to the balance at the beginning of month 13. We assume defaults to occur periodically in amounts calculated as a percentage of the WAFF. The timing of defaults generally follows two paths, referred to here as "fast" and "slow". Table 5 Default Timings For Fast And Slow Default Curves Recession month Fast default (percentage of WAFF) Slow default (percentage of WAFF) WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. Recovery timings Generally, we assume that the issuer receives recoveries 36 months after a payment default in French transactions. The value of recoveries at the 'AAA' level would be 100% minus the WALS given above. Note that we always base the WALS that we use in our cash flow model on principal loss, including costs. We assume no recovery of any interest accrued on the mortgage loans during the foreclosure period. After we apply the WAFF to the balance of the mortgages, the asset balance is likely to be lower than that of the liabilities (a notable exception is when a transaction relies on overcollateralization). Other features of the transaction must mitigate any reduction in interest receipts over the foreclosure period. Delinquencies We model the liquidity stress resulting from short-term delinquencies, i.e., those mortgages that cease to pay for a period of time but then recover and become current with respect to both interest and principal. To simulate the effect of delinquencies, we assume a proportion of interest receipts equal to one-third of the WAFF to be delayed. We apply OCTOBER 20,

15 this in each month of the recession and assume that full recovery of delinquent interest occurs 18 months after it is removed from the transaction. Thus, if in month five of the recession the total collateral interest expected to be received is 1 million and the WAFF is 30%, 100,000 of interest (one-third of the WAFF) would be delayed until month 23. Interest and prepayment rates We modeled three different interest rate scenarios rising, falling, and stable using both high and low prepayment assumptions. We modeled interest rates to rise or fall by 2% a month to a high of 12% for amounts or a low of 0%. For stable interest rates, we held the interest rate at the current rate throughout the transaction's life. In 'AAA' scenarios, we modeled the interest rate increase not to begin until month 13. Note that we may revise interest rate scenarios if there is sufficient evidence to warrant it. We stress transactions according to two prepayment assumptions, high (24.0%) and low (0.5%). We assume prepayment rates to be static throughout the life of the transaction and apply them monthly to the decreasing mortgage balance. We reserve the right to increase the high prepayment assumption if market conditions suggest it is appropriate to do so or the transaction is particularly sensitive to high prepayments (e.g., if the transaction relies heavily on excess spread). In combination, the default timings, interest rates, and prepayment rates described above give rise to 12 different scenarios (see table 10). The rating we have assigned means that the notes pay timely interest and ultimate principal under each of the 12 scenarios, at the relevant rating level. Table 6 RMBS Stress Scenarios Scenario Prepayment rate Interest rate Default timing 1 Low Flat Fast 2 Low Up Fast 3 Low Down Fast 4 Low Flat Slow 5 Low Up Slow 6 Low Down Slow 7 High Flat Fast 8 High Up Fast 9 High Down Fast 10 High Flat Slow 11 High Up Slow 12 High Down Slow Scenario Analysis House price decline analysis Various factors could cause downgrades on rated RMBS notes, such as increasing foreclosure rates in the securitized OCTOBER 20,

16 pools, house price declines, and changes in the pool's composition. We have chosen to analyze the effect of house price declines by testing the transaction's sensitivity to two different levels of movements. Declining house prices generally lead to increasing LTV ratios and more borrowers entering negative equity. For the French housing market, unlike in other countries, we consider that the LTV ratio is less meaningful in estimating foreclosure frequency. However, we consider that it is key in assessing loss severity. Consequently, this type of stress has no impact on the WAFF and affects only the WALS. The house price decline analysis assumes house price declines that are specific to a jurisdiction rather than being uniform across all European transactions. The levels do not reflect any views of whether these house price declines will materialize in the future. So, for example, the additional haircuts for a country that has experienced significant house price growth over the past few years may be different from those we assume for a country that has experienced stable house prices. We perform our analysis on a loan-by-loan basis. Hence, the effect of applying different levels of house price declines differs between transactions, given differing LTV ratio distributions. Even in these house price decline scenarios, structural features in securitizations may mitigate these declines. Further house price declines of 5% and 10% We conducted our scenario analysis, in which we tested our preliminary ratings 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). Table 7 Assuming An Additional 5% Of House Price Declines Rating level WAFF (%) WALS (%) AAA (sf) AA (sf) A (sf) BBB (sf) BB (sf) WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. Table 8 Assuming An Additional 10% Of House Price Declines Rating level WAFF (%) WALS (%) AAA (sf) AA (sf) A (sf) BBB (sf) BB (sf) WAFF--Weighted-average foreclosure frequency. WALS--Weighted-average loss severity. Under the first scenario, the ratings on the notes in the transaction do not suffer a ratings transition of more than one OCTOBER 20,

17 rating category (for example, the 'AAA (sf)' rated notes would achieve a rating of at least 'AA (sf)'). Under the second scenario, the ratings on the notes do not suffer a rating transition of more than three rating categories (for example, the 'AAA (sf)' rated notes would achieve a rating of at least 'BBB (sf)'). Surveillance We will regularly assess the following as part of our ongoing surveillance of this transaction: The performance of the underlying portfolio, including its composition, defaults and delinquencies; The level, if any, of legal challenges being made regarding the potential negative amortization on the IPM loans; The supporting ratings in the transaction; and The servicer's operations and its ability to maintain minimum servicing standards. Related Criteria And Research Related criteria Legal Criteria: Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance - September 13, 2013 Criteria - Structured Finance - RMBS: Cash Flow Criteria for European RMBS Transactions - November 20, 2003 Criteria - Structured Finance - RMBS: Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions - January 06, 2009 Criteria - Structured Finance - RMBS: Criteria for Rating French Residential Mortgage-Backed Securities - July 16, 2003 Criteria - Structured Finance - RMBS: Methodology And Assumptions: Update To The Criteria For Rating French Residential Mortgage-Backed Securities - January 06, 2009 Criteria - Structured Finance - General: Global Derivative Agreement Criteria - June 24, 2013 Criteria - Structured Finance - General: Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD - March 02, 2015 Criteria - Structured Finance - General: Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions - August 08, 2016 Criteria - Structured Finance - General: Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment - May 28, 2009 Criteria - Structured Finance - General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications - July 12, 2012 Criteria - Structured Finance - General: Global Framework For Assessing Operational Risk In Structured Finance Transactions - October 09, 2014 General Criteria: Methodology: Credit Stability Criteria - May 03, 2010 Criteria - Structured Finance - General: Counterparty Risk Framework Methodology And Assumptions - June 25, 2013 Related research Europe Navigates Brexit Storm--For Now, Oct. 11, 2016 European Economic Snapshots: October 2016, Oct. 10, 2016 Low Lending Rates Keep Europe's Housing Markets' Recovery On Track, Aug. 4, 2016 France 'AA/A-1+' Ratings Affirmed; Outlook Remains Negative, April 22, OCTOBER 20,

18 Request For Comment: RMBS Methodology And Assumptions For France, Belgium, And Germany, March 21, EMEA RMBS Scenario And Sensitivity Analysis, Aug. 6, 2015 European Structured Finance Scenario And Sensitivity Analysis 2014: The Effects Of The Top Five Macroeconomic Factors, July 8, 2014 Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 Analytical Team Primary Credit Analyst: Rory O'Faherty, London +44 (0) ; Secondary Contact: Feliciano P Pereira, London 44 (0) ; feliciano.pereira@spglobal.com OCTOBER 20,

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