DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (low) (sf) rating on the Compartment No. 1 Notes (the Senior Notes) issued by Weser Funding S.A. (the Issuer).
The rating addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in December 2028.
The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies and defaults, as of the March 2020 payment date.
-- Base case probability of default (PD), recovery rates, and default rates.
-- The fact that no early amortisation event has occurred; and
-- The credit enhancement available to the Senior Notes to cover the expected losses at the A (low) (sf) rating level.
The transaction is a revolving cash securitisation transaction backed by a portfolio of euro-denominated loans to large corporates and small and medium-size enterprises (SMEs) located in Germany and other countries in Europe. The loans are originated by Oldenburgische Landesbank AG (OLB), which is the legal successor of Bremer Kreditbank AG (BKB).
The transaction included an initial three-year revolving period, scheduled to end in June 2020, during which time OLB has the daily option to sell new loans at par to the Issuer as long as OLB complies with the eligibility and replenishment criteria. The revolving period will end prematurely if an early amortisation event occurs, which could be triggered if the cumulative default rate or the cumulative delinquency rate exceeds 3% and 8% of the initial portfolio balance, respectively. A shortfall of more than EUR 1 million in the replenishment fund would also lead to an early amortisation event. To date, no early amortisation event has occurred. With the revolving period ending in June 2020, DBRS Morningstar has considered the current portfolio composition in its analysis.
As of the March 2020 payment date, the overall portfolio consisted of 576 loan drawings under 176 loans with an aggregate principal balance of EUR 400 million. The portfolio is performing within DBRS Morningstar’s expectations. As of the March 2020 payment date, there are no loans in arrears for more than 90 days and no defaulted loans.
PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis on the current pool and updated its default rate and recovery assumptions. The base case PD was adjusted to 2.7% from 2.1% because of increased stresses on some industry sectors as a result of the Coronavirus Disease (COVID-19).
As of March 2020, the credit enhancement to the Senior Notes was 22.5%, stable since closing because of the revolving period. The credit enhancement to the Senior Notes is provided by the subordinated notes. The transaction also benefits from a cash reserve currently at its target and original balance of EUR 2 million (0.5% of the outstanding portfolio balance). It is subject to a floor of the higher of EUR 1.5 million or 0.5% of the outstanding portfolio balance. The cash reserve is available to cover shortfalls in senior expenses and interest on the Senior Notes during the life of the transaction. Once the outstanding portfolio balance has been reduced to zero, the cash reserve is released through the waterfall and is available to pay down outstanding principal on the notes.
Societe Generale S.A. – Frankfurt Branch is the account bank for the transaction. Based on the DBRS Morningstar private rating of Societe Generale S.A. – Frankfurt Branch, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned to the Senior Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.
DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.
The coronavirus pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many SME transactions, some meaningfully. The rating is based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the disease. On 16 April 2020, the DBRS Morningstar Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 period. For details see the following commentaries: https://www.dbrsmorningstar.com/research/359679/global-macroeconomic-scenarios-implications-for-credit-ratings and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is: “Rating CLOs Backed by Loans to European SMEs” (8 July 2019).
DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found at: https://www.dbrsmorningstar.com/about/methodologies.
For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.
The sources of data and information used for this rating include reports provided by OLB, and loan-by-loan data from the European DataWarehouse GmbH.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
At the time of the initial rating, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.
The last rating action on this transaction took place on 25 April 2019, when DBRS Morningstar confirmed its A (low) (sf) rating on the Senior Notes.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.com.
To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar 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 2.7%, and a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 25.3% at the A (low) (sf) stress level for the Senior Notes, and a 10% and 20% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.
DBRS Morningstar 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 lead to a downgrade of the Senior Notes to BBB (high) (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%, ceteris paribus, would also lead to a downgrade of the Senior Notes to BBB (high) (sf).
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 11 May 2017
DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
-- Rating CLOs Backed by Loans to European SMEs (8 July 2019) and SME Diversity Model v.2.4
-- Rating CLOs and CDOs of Large Corporate Credit (28 February 2020)
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
-- Cash Flow Assumptions for Corporate Credit Securitizations (28 February 2020)
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019)
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020)
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020) https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at https://www.dbrsmorningstar.com/research/278375.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.