Press Release

DBRS Morningstar Confirms Rating of Class A Notes Issued by Rosenkavalier 2015 UG

Structured Credit

November 26, 2020

DBRS Ratings GmbH (DBRS Morningstar) confirmed its rating of the Class A Notes issued by Rosenkavalier 2015 UG (the Issuer) at A (high) (sf).

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the October 2020 payment date.
-- The one-year base case probability of default (PD) and default and recovery rates on the receivables.
-- The fact that no early amortisation event has occurred.
-- The current available credit enhancement to the Class A Notes to cover the expected losses assumed in line with the A (high) (sf) rating level.
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Rosenkavalier is a cash flow securitisation transaction backed by a portfolio of loans originated and serviced by UniCredit Bank AG (UCB) to large corporations, small and medium-size enterprises (SMEs), entrepreneurs and self-employed individuals based in Germany. The transaction includes a three-year revolving period, which is scheduled to end in December 2021 (it was initially scheduled to end in December 2018 but was extended following a transaction restructuring executed on 30 November 2018). During the revolving period, UCB has the option to sell new loans at par to the Issuer so long as the eligibility criteria and replenishment criteria are complied with. However, the revolving period could end prematurely based on the occurrence of replenishment termination events, including if the cumulative default rate exceeds 1.0% of the initial portfolio balance or the cumulative delinquency rate exceeds 5.5% of the initial portfolio balance. To date, no replenishment termination events have occurred.

The transaction cash flow structure resembles that of a typical synthetic rather than a cash securitisation as excess spread cannot be used to cover principal defaults. Once a loan loss has been realised, it will be allocated to reduce the principal balance of the notes in reverse order of priority (i.e., starting from the most junior to the most senior).

The interest of the Class A Notes can defer and is ultimately extinguishable without resulting in an event of default under the agreements. Principal collections can also be used to cover interest shortfalls. DBRS Morningstar’s rating of the Class A Notes addresses the likelihood of ultimate payment of interest and principal on or before the maturity date in November 2045.

PORTFOLIO PERFORMANCE
The portfolio is performing within DBRS Morningstar’s expectations. As of October 2020, no cumulative defaults were reported, and the cumulative delinquency ratio remained low at 0.5%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated the portfolio’s one-year base case PD assumption to 2.2%, following coronavirus-related adjustments. DBRS Morningstar conducted an analysis on the worst-case portfolio based on the eligibility and replenishment criteria and updated its portfolio default and recovery assumptions on the outstanding portfolio to 36.3% and 23.2%, respectively, at the A (high) (sf) rating level.

The increased base case PD assumption reflects the adjustments applied because of the coronavirus pandemic. As per DBRS Morningstar’s assessment, 2.3% and 16.7% of the outstanding portfolio balance represented industries classified in mid-high and high risk economic sectors, respectively, which led to the underlying one-year PDs to be multiplied by 1.5 and 2.0 times, respectively, as per the relevant commentaries mentioned below.

On 18 May 2020, DBRS Morningstar released its commentary, “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” where DBRS Morningstar discussed the overall risk exposure of the SME sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and likely to be affected by the fallout of the pandemic on the economy. For more details, please see: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

CREDIT ENHANCEMENT
As of the October 2020 payment date, credit enhancement to the Class A Notes was 39.9%, unchanged from the last surveillance review because of the revolving period. Credit enhancement of the Class A Notes considers the subordination of the Class B Notes.

UCB is the main account bank provider of the transaction. Based on DBRS Morningstar’s private rating of UCB, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS Morningstar considers the risk arising from the exposure to UCB 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.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

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 payment holidays and delinquencies may continue to increase 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 coronavirus.

For this transaction, DBRS Morningstar increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions 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 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 CLOs Backed by Loans to European SMEs” (30 September 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the surveillance section of 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 continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

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: 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 investor reports and additional information provided by UCB, and loan-level data provided by 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 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 27 November 2019, when DBRS Morningstar confirmed its rating of the Class A Notes at A (high) (sf).

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):
-- PD Rates Used: Base case PD of 2.2%, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rates of 23.2% at the A (high) (sf) stress level for the Class A Notes, a 10% and 20% decrease in the base case recovery rates. 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 confirmation of the Class A Notes at A (high) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Class A Notes at A (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:
https://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: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 18 December 2015

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.

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 info@dbrsmorningstar.com.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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