OREANDA-NEWS. S&P Global Ratings today assigned its credit ratings to SapphireOne Mortgages FCT 2016-1's class A to E notes. At closing, SapphireOne Mortgages FCT 2016-1 also issued unrated class F notes (see list below).

SapphireOne is the first true sale securitization of residential loan receivables originated by GE Money Bank (GEMB). GEMB is the seller of the securitized loans.

The collateral is in our view atypical for the French market. That is because it comprises entirely debt consolidation residential mortgage loan receivables that pay a fixed instalment, which 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 amortizes sequentially, with one tranche repaying at a time, starting with the most senior. A combination of subordination, a non-liquidity reserve, and excess spread provides credit enhancement for the notes.

Our ratings on the class A to E notes address the timely payment of interest and ultimate payment of principal.

RATING RATIONALE

Economic OutlookWe expect GDP to grow by 1.5% in 2016 and 1.2% in 2017, primarily owing to resilient domestic demand. Growth will be somewhat curtailed by weakness in the external environment in 2016. Despite an expected rise in inflation, household consumption should still find support from the slow improvement in the labor market, an ease in the fiscal stance, and very low borrowing costs. A revival of the housing market, a strengthening in corporate profit margins (mainly owing to corporate tax cuts), and very positive credit conditions should continue to boost fixed investment over the next two years.

Credit AnalysisWe have conducted a loan-level analysis to assess the mortgage pool's credit quality by applying our French residential mortgage-backed securities (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 mortgage 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.

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 is 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 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 5.16% of the pool is flagged as either having had a restructuring under the Banque de France or as defaulted. We have accounted for each of these features in our credit analysis.

Operational RiskGEMB 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 also acts as the servicer of the loans in the pool and we reviewed its servicing capabilities as part of our on-site review in August 2015. 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 RiskThe 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.

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 RiskThe transaction is exposed to Societe Generale as the account bank provider and BNP Paribas 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 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 AnalysisThe notes amortize sequentially. A combination of subordination, the non-liquidity reserve, and excess spread provides 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 as all of the collections on the assets are pooled together and reclassified according to documented conditions.

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). Our analysis indicates that the notes' available credit enhancement is sufficient to withstand the credit and cash flow stresses that we apply at the assigned rating levels.

Ratings StabilityWe conducted our scenario analysis, in which we tested our 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 RiskWe have assigned a rating to the class A notes, which is above our long-term unsolicited 'AA' rating on France. Under our updated criteria for rating single-jurisdiction securitizations above the sovereign foreign currency rating, as we rate the sovereign in the 'AA' category, we do not apply a formal sovereign default stress test (see "Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance," published on May 29, 2015, and "France 'AA/A-1+' Ratings Affirmed; Outlook Remains Negative," published on April 22, 2016).