DBRS Morningstar Assigns Rating to Weser Funding S.A., Compartment No. 3

DBRS Ratings GmbH (DBRS Morningstar) assigned the following rating to the notes issued by Weser Funding S.A., acting in the name of its Compartment No. 3 (the Issuer):

-- Compartment No. 3 Fixed Rate Notes due 2056 (Fixed Rate Notes) rated A (sf)

The rating on the Fixed Rate Notes addresses the timely payment of interest and the ultimate payment of principal on or before the final maturity date in July 2056.

The transaction is a revolving cash securitisation backed by a euro-denominated portfolio of loans to small and medium-size enterprises (SMEs) in Germany and other European countries. Oldenburgische Landesbank AG (OLB) originated the loans. The initial portfolio has an aggregate par balance of EUR 400 million and was selected in accordance with the loan eligibility criteria and concentration limits.

The transaction has a three-year revolving period ending in July 2024, during which time OLB has the option to sell additional loan receivables to the Issuer on a daily basis in accordance with the outlined eligibility criteria and concentration limits. The revolving period is scheduled to end prematurely if certain early amortisation events occur (e.g., if the monthly default ratio exceeds 1.0%, if the monthly delinquency ratio exceeds 4.0%, or if the gross cumulative default rate exceeds 1.0% of the outstanding balance at the relevant cut-off date).

The transaction benefits from an expected collections reserve mechanism to mitigate commingling risk. During the revolving period, OLB will deposit the expected interest collections for the next monthly period into the Issuer bank account on a monthly basis. The principal proceeds to purchase additional loans will be kept in OLB’s collection accounts for up to three days and the Issuer can purchase new receivables 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 is EUR 31.5 million, mitigated through an effective overcollateralisation (OC) of EUR 32 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 a stressed portfolio composition stipulated by the transaction concentration limits. The concentration limits allow the originator significant flexibility, which may result in higher industry and borrower concentrations compared with the current portfolio. The limits also allow up to 20% of the portfolio balance to be granted to borrowers in other European Union (EU) countries; however, the eligibility criteria and concentration limits provide strong quality tests regarding the portfolio’s overall probability of default (PD) and maximum 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 0.6% is available to cover the notes’ coupon. In addition, concentration limits are in place to guarantee a minimum WA fixed rate of 1.0%, a WA floating-rate margin of 1.6%, a maximum share of floating-rate loans in the portfolio capped at 80% of the transaction amount, and a share of unfloored floating-rate loans capped at 25%. 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 for the A (sf) rating level was 24.75%, resulting from applying the unsecured recovery rate of 26.25% for 80% of the portfolio with 21.25% and 16.25% for the remaining 20% 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 1.58% for SME borrowers and 3.6% for SME acquisition finance (AQF) borrowers, based on an analysis of OLB’s internal rating systems, historical migration data, additional balance sheet information of a subsample of OLB’s SME and AQF universe, and the maximum portfolio WA internal PD covenant of 1.1% for SME and 1.6% for AQF borrowers allowed in the replenishment criteria. Based on its analysis of available information, DBRS Morningstar assumed an adjustment factor of 1.44 times (x) for SME and 2.25x for AQF borrowers, respectively.

DBRS Morningstar applied additional adjustments in the context of the current Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar assumed additional default risk adjustment factors for borrowers categorised in the mid-high and high-risk sectors which, combined, represent 33.5% of the total outstanding portfolio balance. When analysing the stressed 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 of 27% in the high and 8% in the mid-high risk sectors.

The assumed WAL of the stressed portfolio was five years based on the maximum allowed under the concentration limits. DBRS Morningstar used the PD assumptions and WAL in its DBRS Morningstar Diversity Model to generate the hurdle rate for the rating assigned.

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 Fixed Rate Notes benefit from a total credit enhancement of 31%.

The coronavirus 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 ratings are based on additional analysis and adjustments 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 18 June 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/380281/global-macroeconomic-scenarios-june-2021-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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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” (28 June 2021).

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.

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 considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 OLB and its subsidiary, QuantFS GmbH, together the joint lead arrangers.

DBRS Morningstar received annual migration data for OLB’s internal rating systems from 2006 to 2019 for SME borrowers and 2018 to 2020 for AQF borrowers, monthly dynamic delinquency data for both SME and AQF borrowers from 2018 to 2020, annual dynamic delinquency data for SME borrowers from 2006 to 2017, and additional balance sheet information for a subsample of OLB’s SME and AQF borrower universe. Additionally, stratification and pool information was also provided as of the cut-off date on June 9 2021.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

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.

Sensitivity Analysis: 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 was 1.58% for SME borrowers and 3.6% for AQF borrowers, and a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 24.75% at the A (sf) rating 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 lead to a downgrade in the Fixed Rate Notes to BBB (high) (sf). Additionally, a scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a downgrade of the Fixed Rate Notes to A (low) (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Stephan Rompf, Assistant Vice President
Rating Committee Chair: Jerry van Koolbergen, Managing Director
Initial Rating Date: 7 July 2021

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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 (28 June 2021) and SME Diversity Model 2.5.0.0, https://www.dbrsmorningstar.com/research/380640/rating-clos-backed-by-loans-to-european-smes.
-- Legal Criteria for European Structured Finance Transactions (6 April 2021), https://www.dbrsmorningstar.com/research/376314/legal-criteria-for-european-structured-finance-transactions.
-- 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 and CDOs of Large Corporate Credit (8 February 2021), https://www.dbrsmorningstar.com/research/373423/rating-clos-and-cdos-of-large-corporate-credit.
-- Cash Flow Assumptions for Corporate Credit Securitizations (8 February 2021), https://www.dbrsmorningstar.com/research/373422/cash-flow-assumptions-for-corporate-credit-securitizations.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
-- Mapping Financial Institution Internal Ratings to DBRS Morningstar Ratings for Global Structured Credit Transactions (1 March 2021), https://www.dbrsmorningstar.com/research/374333/mapping-financial-institution-internal-ratings-to-dbrs-morningstar-ratings-for-global-structured-credit-transactions.

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.