DBRS Ratings GmbH (DBRS Morningstar) assigned the following ratings to the notes issued by Weser Funding S.A., acting in the name of its Compartment No. 2 (the issuer):
-- Class A Notes rated A (sf)
-- Class B Notes rated BBB (high) (sf)
The rating of the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the final maturity date in May 2055. The rating of the Class B Notes addresses the ultimate (timely when most senior) payment of interest and ultimate payment of principal on or before the final maturity date in May 2055.
The transaction is a revolving cash securitisation backed by a portfolio of euro-denominated loans to small and medium-size enterprises (SMEs) located in Germany and other European countries. Oldenburgische Landesbank AG (OLB) originated the loans. The initial portfolio has an aggregate par balance of EUR 1.1 billion and was selected in accordance with the loan eligibility criteria and concentration limits. As per the transaction documentation, OLB plans to increase the size of the portfolio to EUR 1.3 billion before 31 December 2020.
The transaction has a three-year revolving period ending in May 2023, during which time OLB has the option to sell additional loan receivables to the issuer on a daily basis as long as the eligibility criteria and concentration limits are complied with. The revolving period will end prematurely if certain early amortisation events occur, including if the monthly default ratio exceeds 2.5%, the monthly delinquency ratio exceeds 6.0%, or the gross cumulative default rate exceeds 4.0% of the initial balance.
Commingling risk is mitigated through the expected collections reserve. During the revolving period, OLB will deposit on a monthly basis the expected interest collections for the next monthly period into the issuer bank account. All principal proceeds will be kept in OLB’s collection accounts for up to three days to purchase additional loans. The purchase of new receivables is on a daily basis. The expected collections during the amortisation period include expected interest and principal to be collected during the next monthly collection period.
The current set-off risk exposure of EUR 109 million is mitigated through an effective overcollateralisation of EUR 110 million, as well as the set-off risk reserve deposited in the issuer account bank, which is adjusted monthly to account for changes in set-off exposure during the reinvestment period. The initial set-off deposit is zero. DBRS Morningstar did not consider the set-off risk OC to provide effective credit enhancement to the notes and applied the full set-off risk as a loss in its cash flow tool.
The transaction does not benefit from any excess spread to cover principal shortfalls that could occur as a result of portfolio defaults.
DBRS Morningstar conducted its analysis based on the worst-case portfolio composition stipulated by the transaction concentration limits. The concentration limits allow the originator significant flexibility, which may result in higher industry and obligor concentrations compared with the current portfolio. It also allows up to 10% of the portfolio balance be granted to borrowers in other European Union (EU) countries. However, the eligibility criteria and concentration limits provide strong quality tests regarding the overall probability of default (PD) of the portfolio and maximum portfolio weighted-average life (WAL), and they also exclude borrowers with a low internal rating.
The notes pay interest on a fixed rate while the portfolio generates interest based on a mix of floating- and fixed-rate loans. The interest risk is mitigated by the portfolio yield floor test that ensures that a minimum average portfolio yield of 1.25% is available to cover the notes coupon. In addition, concentration limits are in place to guarantee a minimum weighted-average fixed rate of 1.0%, a weighted-average floating rate margin of 1.6%, a maximum share of floating-rate loans in the portfolio, capped at 50% of the transaction amount, and a cap of 25% for the share of unfloored floating-rate loans. The cash reserve will also act as a liquidity reserve given that a significant portion of the portfolio can pay interest with a quarterly, semiannual, or annual frequency.
While a portion of the portfolio benefits from security in the form of mortgage collateral, pledges, or guarantees, there is no minimum security covenant. For this reason, DBRS Morningstar assumed senior unsecured recovery rates for the total portfolio in its analysis. The recovery rate used for the A (sf) rating level was 25.8%, resulting from applying the unsecured recovery rate of 26.3% for 90% of the portfolio and 21.3% for the remaining 10% of the portfolio to account for potential exposures to borrowers in EU countries with a lower expected recovery. The recovery rates used for the BBB (high) (sf) rating level was 26.5%, resulting from applying the unsecured recovery rate of 27.0% for 90% of the portfolio and 22.0% for the remaining 10% of the portfolio to account for potential exposures to borrowers in EU countries with a lower expected recovery.
DBRS Morningstar assumed an annualised base-case PD of 1.35% for SME obligors and 3.63% for SME acquisition finance projects, which was based on analysis of OLB’s rating systems, historical migration data, and the maximum portfolio weighted-average internal PD covenant of 0.9% for SME obligors and 1.44% for SME acquisition finance projects allowed in the replenishment criteria. Additional stresses were applied in the context of the current Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar assumed additional default risk adjustment factors for obligors categorised in the “mid-high’ and “high” risk sectors which, combined, represent 22.9% of the total outstanding portfolio balance. When analysing the worst-case portfolio, DBRS Morningstar assumed that the exposure to “mid-high” and “high” risk sectors would not change significantly during the revolving period and assumed a stressed concentration in these sectors of 25%. For more information on DBRS Morningstar’s approach to the impact of the current coronavirus pandemic, please refer to the details further below.
The assumed WAL of the portfolio was four years based on the maximum allowed under the concentration limits. The PD assumptions and WAL were used in the DBRS Morningstar Diversity Model to generate the hurdle rate for the target rating.
DBRS Morningstar analysed the transaction structure in its proprietary cash flow tool, considering the default rates at which the rated notes did not return all specified cash flows.
At closing, the Class A and Class B notes benefit from a total credit enhancement of 27.2% and 21.9%, respectively. However, the planned top-up of the capital structure foresees an increase of mainly the Class A Notes, thereby diluting the available credit enhancement to 23.0% and 18.5%, respectively. DBRS Morningstar assumed in its cash flow analysis that the respective ratings of the Class A and Class B notes must pass both at the initial and the planned top-up capital structure, effectively assessing the lower level of credit enhancement available in the top-up structure.
ESG factors were not a key driver of this rating action. 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.
INFORMATION ON COVID-19
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.
In conjunction with DBRS Morningstar’s commentary “Global Macroeconomic Scenarios: Implications for Credit Ratings”, published on 16 April 2020, DBRS Morningstar applies adjustments to assumptions for the SME collateralised loan obligation (CLO) asset class that consider the moderate economic scenario outlined in the commentary. The adjustments include a higher default assumption for the weighted-average credit quality of the collateral obligation current portfolio. To derive the higher default assumption, DBRS Morningstar stresses the PD assumptions for obligors in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus. DBRS Morningstar may adjust its default expectations, depending on how the coronavirus pandemic continues to unfold.
In the moderate economic scenario, DBRS Morningstar currently expects that the coronavirus will begin to be contained within the second quarter of 2020, resulting in a gradual relaxation of stay-at-home measures and nonessential business closures, allowing a gradual economic recovery to begin within the third quarter of 2020. 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.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings 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.
An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case concentration limits set forth in the transaction legal documents.
Other methodologies referenced in this transaction are listed at the end of this press release.
These may be found at: http://www.dbrsmorningstar.com/about/methodologies.
The sources of data and information used for these ratings include OLB and its subsidiary QuantFS GmbH, together the joint lead-arrangers.
DBRS Morningstar received annual migration data for OLBs internal rating systems from 2004 to 2019, static historical quarterly cumulative default and recovery data from 2006 to 2019 and historical quarterly delinquency statistics from 2006 to 2019. Stratification and pool information was also provided as of the Cut Off Date April 14 2020 and its related contractual amortization profile.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
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 these ratings 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.
This rating concerns a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.
To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):
-- PD Rates Used: Base case PD of was 1.35% for SME obligors and 3.63% for SME acquisition finance projects, and a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 25.27% at the A (high) (sf) rating level and 26.50% at the BBB (high) (sf) stress level, 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 not lead to a downgrade in the Class A and Class B notes. A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would not lead to a downgrade of the Class A and Class B notes.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.
Lead Analyst: Stephan Rompf, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 7 May 2020
DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.
-- Rating CLOs Backed by Loans to European SMEs (8 July 2019) and SME Diversity Model 220.127.116.11, https://www.dbrsmorningstar.com/research/347780/rating-clos-backed-by-loans-to-european-smes
-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda (10 December 2019) https://www.dbrsmorningstar.com/research/354403/master-european-residential-mortgage-backed-securities-rating-methodology-and-jurisdictional-addenda
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019) https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions
-- Rating CLOs and CDOs of Large Corporate Credit (28 February 2020)
-- Cash Flow Assumptions for Corporate Credit Securitizations (28 February 2020)
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- 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: http://www.dbrsmorningstar.com/research/278375
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.