DBRS Morningstar Assigns Rating to abc SME Lease Germany SA, acting in respect of its Compartment 7

DBRS Ratings GmbH (DBRS Morningstar) assigned a AA (low) (sf) rating to the Class A Notes issued by abc SME Lease Germany SA, acting in respect of its Compartment 7 (the issuer). DBRS Morningstar does not rate the Class B Notes or Class C Notes issued in this transaction.

The rating of the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date of October 2031.

RATING RATIONALE
The rating is based on DBRS Morningstar’s review of the following analytical considerations:
-- The transaction capital structure, including the form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the transaction documents.
-- The seller’s, originators’, and servicers’ capabilities with respect to originations, underwriting, servicing and financial strength.
-- DBRS Morningstar’s operational risk review on abcbank GmbH, which it deemed to be an acceptable servicer.
-- The appointment of akf bank GmbH & Co KG as the transaction’s backup servicer and its capabilities with respect to servicing.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral and historical and projected performance of abcbank GmbH’s (the seller) portfolio.
-- DBRS Morningstar’s sovereign rating of Germany at AAA with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, the presence of legal opinions that address the true sale of the assets to the issuer, and nonconsolidation of the issuer with the seller.

TRANSACTION STRUCTURE
The transaction represents the issuance of EUR 404.8 million of Class A Notes, EUR 20.1 million of Class B Notes, and EUR 38.0 million of Class C Notes backed by a revolving portfolio of EUR 462.86 million of fixed-rate receivables related to leases granted by abcbank GmbH, ETL Finance GmbH & Co. KG, milon financial services GmbH, Hako Finance GmbH and Schneidereit Finance GmbH (collectively, the originators) to small businesses and professional clients residing in Germany.

The portfolio will be serviced by abcbank GmbH (the seller and master servicer).The transaction allocates payments on separate interest and principal payment priorities and benefits from a EUR 1.5 million amortising liquidity reserve, funded at closing through a subordinated loan. The liquidity reserve can be used to cover senior costs and interest on the Class A and Class B Notes, and to the extent that excess can be released, it can be used to offset defaulted receivables through a principal deficiency ledger mechanism, thus providing soft credit enhancement. The transaction documentation foresees a commingling risk reserve that can be funded at any time and drawn in a commingling risk event. This reserve was not funded at closing.

The transaction includes a 24-month revolving period scheduled to end in October 2022. During the revolving period, abcbank may offer additional receivables that the issuer will purchase, provided that the eligibility criteria and concentration limits set out in the transaction documents are satisfied.

The revolving period may end earlier than scheduled if an early amortisation event, such as a breach of pre-defined performance triggers or a purchase shortfall, occurs. At the end of the revolving period or after the occurrence of an early amortisation event, the notes will be repaid on a fully sequential basis.

The transaction is not exposed to interest rate risk since the notes pay a fixed coupon and the portfolio, by way of using a discount rate to value receivables, earns a fixed spread.

The transaction structure was analysed in Intex Dealmaker, considering the default rates at which the rated notes did not return all specified cash flows.

COUNTERPARTIES
The Bank of New York Mellon, Frankfurt branch, acts as the account bank for the transaction. Based on DBRS Morningstar’s AA rating of the Bank of New York Mellon, the downgrade provisions and structural mitigants in the transaction, DBRS Morningstar considers the structure to be consistent with the rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

COVID-19
The Coronavirus Disease (COVID-19) 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 ABS transactions, some meaningfully. The rating is based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update 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 on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360734.

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.

ESG CONSIDERATIONS
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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Rating European Consumer and Commercial Asset-Backed Securitisations” (3 September 2020).

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 based on the worst-case replenishment criteria 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.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include the originators, provided through the joint lead arrangers, abcbank GmbH and Landesbank Baden-Württemberg.

DBRS Morningstar received monthly static default data from Q1 2012 to Q1 2020, monthly static recovery data from Q1 2012 to Q1 2020, monthly dynamic delinquency data from Q1 2012 to Q1 2020, and monthly static prepayment rates from Q4 2018 to Q1 2020. DBRS Morningstar also received a set of stratification tables for the initial portfolio as of 30 September 2020 and the related contractual amortisation profile.

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 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating 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 rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- Probability of default (PD) used: Expected PD of 1.38%
-- Loss given default (LGD) used: Expected LGD of 51.2%

Scenario 1: A 25% increase in the expected PD.
Scenario 2: A 50% increase in the expected PD.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected PD and a 25% increase in the expected LGD.
Scenario 5: A 50% increase in the expected PD and a 25% increase in the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected PD and a 50% increase in the expected LGD.
Scenario 8: A 50% increase in the expected PD and a 50% increase in the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight hypothetic scenarios are
-- Series A Notes: A (low) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BB (high) (sf), BBB (high) (sf), BB (high) (sf), BB (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: 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: 16 October 2020

DBRS Ratings GmbH
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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 European Consumer and Commercial Asset-Backed Securitisations (3 September 2020), https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- 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 (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020), https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
-- Rating CLOs backed by Loans to European SMEs (30 September 2020) and SME Diversity Model v.2.4.1.0, https://www.dbrsmorningstar.com/research/367642/rating-clos-backed-by-loans-to-european-smes

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 info@dbrsmorningstar.com.

This press release was amended on 19 October 2020 to add that ETL Finance GmbH & Co. KG is an originator.