Press Release

DBRS Morningstar Confirms and Upgrades Ratings on Weser Funding S.A., Compartment 2 and Weser Funding S.A., Compartment 3

Structured Credit

April 22, 2022

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by Weser Funding S.A., Compartment 2 (Weser 2) and Weser Funding S.A., Compartment 3 (Weser 3):
Weser 2:
-- Class A Notes confirmed at A (high) (sf)
-- Class B Notes confirmed at BBB (high) (sf)

Weser 3:
-- Compartment No. 3 Fixed Rate Notes due 2056 (Fixed Rate Notes) upgraded to A (high) (sf) from A (sf)

The rating of the Weser 2 Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2055. The rating of the Weser 2 Class B Notes addresses the ultimate (timely when most senior) payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2055. The rating on the Weser 3 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 rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- The portfolios performance, in terms of level of delinquencies and defaults, as of the March 2022 payment date of each transaction;
-- The one-year base case probability of default (PD) and default and recovery rates on the outstanding receivables;
-- The fact that no early amortisation event has occurred;
-- The current available credit enhancement to the notes to cover the expected losses at their respective rating levels; and
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Both transactions are revolving cash securitisation transactions backed by a portfolio of euro-denominated loans to large corporates and small and medium-size enterprises (SMEs) located in Germany and other European countries. The loans are originated and serviced by Oldenburgische Landesbank AG (OLB).

Weser 2 closed in May 2020 and has a three-year revolving period scheduled to end in May 2023. During this period, 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.

Weser 3 closed in July 2021 and also 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).

PORTFOLIO PERFORMANCE
As of the March 2022 payment date, the overall Weser 2 portfolio consisted of 1,399 loan drawings under 758 loans with an aggregate principal balance of EUR 1.1 billion. As of the March 2022 payment date, the overall Weser 3 portfolio consisted of 847 loan drawings under 572 loans with an aggregate principal balance of EUR 400.0 million. The portfolios are performing within DBRS Morningstar’s expectations. As of the March 2022 payment date, there were no loans in arrears for more than 90 days and no defaulted loans in both transactions.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated the portfolios’ one-year base case PD assumption to 1.9% for Weser 2 and 2.5% for Weser 3 (including coronavirus-related adjustments). DBRS Morningstar updated its default rate and recovery assumptions to 31.0% and 25.7%, respectively, at the A (high) (sf) rating level and to 24.5% and 26.5%, respectively, at the BBB (high) (sf) rating level for Weser 2; and to 35.3% and 24.7%, respectively, at the A (high) (sf) rating level for Weser 3.

CREDIT ENHANCEMENT
As of March 2022, the credit enhancement to the Class A and Class B notes for Weser 2 is 27.2% and 21.9% respectively, and the credit enhancement to the Fixed Rate Notes for Weser 3 is 31.1%. In both cases, the credit enhancement is unchanged from closing since the transactions are still in the revolving period.

Both transactions also benefit from a cash reserve, currently at its target balance of EUR 6 million for Weser 2 and EUR 2 million for Weser 3. The cash reserves are available to cover shortfalls in senior expenses and interest on the notes during the life of the transactions. 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.

The Bank of New York Mellon, Frankfurt Branch acts as the account bank for both transactions. Based on the DBRS Morningstar private rating of The Bank of New York Mellon, Frankfurt Branch, the downgrade provisions outlined in the transactions’ documents, and other mitigating factors inherent in the transactions’ structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the notes in both transactions, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

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

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many SME transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For these transactions, 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. As per DBRS Morningstar’s assessment, 4.1% and 3.0% of the outstanding portfolio balances for Weser 2 and Weser 3, respectively, represented industries classified in the high-risk economic sectors. This led the underlying one-year PDs to be multiplied by 1.5 times. DBRS Morningstar also conducted an additional sensitivity analysis to determine that the transactions benefit from sufficient liquidity support to withstand high levels of payment holidays in the portfolio.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 24 March 2022. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/394150/baseline-macroeconomic-scenarios-for-rated-sovereigns-march-2022-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 10 February 2022, DBRS Morningstar updated its 18 May 2020 commentary outlining the impact of the Coronavirus Disease (COVID-19) crisis on the performance of DBRS Morningstar-rated structured credit transactions in Europe almost two years on. For more details, please see: https://www.dbrsmorningstar.com/research/392167/two-years-into-covid-19-risks-to-european-structured-credit-transactions and https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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 ratings is: “Rating CLOs Backed by Loans to European SMEs” (28 June 2021).

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 transactions, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transactions legal documents.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action for each transaction.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include investor reports provided by QuantFS GmbH, 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.

For Weser 2, at the time of the initial ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the rating analysis.

For Weser 3, 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 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.

The last rating action on Weser 2 took place on 23 April 2021, when DBRS Morningstar upgraded the rating on the Class A Notes to A (high) (sf) from A (sf) and confirmed the rating on the Class B Notes at BBB (high) (sf),

This is the first rating action since the Initial Rating Date on Weser 3.

The lead analyst responsibilities for Weser 3 have been transferred to Helvia Meana.

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 with the parameters used to determine the rating (the Base Case):

-- PD Rates Used: Base case PD of 1.9% and 2.5% for Weser 2 and Weser 3, respectively, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 25.7% and 26.5% at the A (high) (sf) and BBB (high) (sf) rating levels, respectively, for Weser 2, 24.7% at the A (high) (sf) rating level for Weser 3, 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 confirmation of the Class A and B Notes at A (high) (sf) and BBB (high) (sf), respectively, for Weser 2. For Weser 3, a hypothetical increase of the base case PD by 20% would lead to a confirmation of the Fixed Rate Notes at A (high) (sf) while a hypothetical decrease of the recovery rate by 20%, would also lead to a confirmation of the Fixed Rate Notes at A (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 lead to a confirmation of the ratings on the Class A and B Notes at A (high) (sf) and BBB (high) (sf), respectively, for Weser 2, and to a confirmation on the Fixed Rate Notes at A (high) (sf) for Weser 3.

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.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Helvia Meana, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates:
Weser 2: 7 May 2020
Weser 3: 7 July 2021

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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.

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