Press Release

DBRS Morningstar Assigns Ratings to Weser Funding S.A., Compartment No. 4

Structured Credit

April 20, 2023

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings of BBB (sf) to the Compartment No. 4 Floating Rate Notes due 15 May 2058 and the Compartment No. 4 Fixed Rate Notes due 15 May 2058 (the Rated Notes) issued by Weser Funding S.A., Compartment No. 4 (the Issuer).

The ratings on the Rated Notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2058.

The transaction is a revolving cash securitisation backed by a portfolio of euro-denominated loans to small and medium-sized 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 770 million and was selected in accordance with the loan eligibility criteria and concentration limits. As per the transaction documentation, the issuer can increase the portfolio par balance to EUR 1 billion by issuing additional rated notes, junior notes, and subordinated notes. The capital structure of such increases is not clearly defined and was not considered in the analysis. Any increase is subject to rating agency confirmation that such increase will not negatively impact the current ratings on the Rated Notes.

The transaction has a three-year revolving period ending in May 2026, 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 the concentration limits are met. The revolving period will end prematurely if certain early amortisation events occur, including if the monthly default ratio exceeds 1.0%, the monthly delinquency ratio exceeds 4.0%, or the gross cumulative default rate exceeds 1.0% of the initial balance. A shortfall of more than EUR 1 million in the required replenishment fund or required set-off reserve, or a shortfall in the cash reserve or expected collections reserve will also lead to an early amortisation event.

The portfolio consists of loans governed by German and Dutch law which are transferred via a true sale to the issuer as well as a portfolio of loan receivables governed by English law. The loans under English law relate to loans granted to certain borrowers in the context of acquisition finance transactions which will not be sold to the issuer but assigned via collateralised pass-through note (the CPTN) to the Issuer. The terms and conditions of the CPTN and associated cash flow agreement between the Issuer and OLB will, effectively, give the Issuer the right to receive payments made by CPTN debtors. In addition, following the occurrence of a servicer termination event, OLB will instruct the CPTN debtors to make payments of any loan instalments directly into the Issuer´s account.

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.

Set-off risk exposure is mitigated through the set-off risk reserve which is adjusted monthly to account for the changes in the set-off exposure during the reinvestment period exceeding 5% of the portfolio balance. However, if the rating of OLB is downgraded below investment grade, then OLB will fund the set-off reserve to an amount equal to 50% of the set-off risk exposure at that moment which will be the new set-off reserve floor. DBRS Morningstar considered this mechanism in its analysis.

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 obligor concentrations compared with the current portfolio. The limits also allow up to 100% of the portfolio balance be granted to borrowers in other European Union (EU) countries. However, the eligibility criteria and concentration limits provide tight quality tests regarding the portfolio’s overall probability of default (PD) and maximum weighted-average life (WAL) and exclude borrowers with a low internal rating.

The Floating Rates Notes pay a floating interest rate while the Fixed Rate Notes pay a fixed interest rate. The portfolio generates interest based on a mix of floating- and fixed-rate loans. The resulting interest risk is mitigated by several factors: concentration limits in place to guarantee (1) a minimum WA fixed rate of 2.7%, (2) a WA floating-rate margin of 3.0%, and (3) a minimum share of floating-rate loans in the portfolio, floored at 60% of the transaction amount. 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.

DBRS Morningstar assumed senior unsecured recovery rates for the majority of the portfolio in its analysis. DBRS Morningstar used an unsecured recovery rate of 22.0% at the BBB (sf) rating level to account for the potential exposures to borrowers in EU countries with an expected recovery tier 2, tier 3, and tier 4, respectively. The concentration limits also allow for the inclusion of up to 30% of SME leasing borrowers (nonbank financial institutions) for which OLB has security under the underlying SME leasing contracts. DBRS Morningstar assumed a senior secured recovery rate of 61% at the BBB (sf) rating level for this share of the portfolio. The combined WA recovery rate for the stressed portfolio was of 39.9% at the BBB (sf) rating level.

DBRS Morningstar assumed an annualised base-case PD of 1.65% for SME obligors, 4.95% for SME acquisition finance projects, and 4.85% for SME leasing companies based on an analysis of OLB’s rating systems, historical migration data, and the maximum portfolio WA internal PD covenant of 1.1% for SME obligors and 2.2% for SME acquisition finance projects allowed in the replenishment criteria.

DBRS Morningstar assumed a stressed WAL of the portfolio of 4.25 years in its analysis based on the maximum allowed under the concentration limits and the initial portfolio. DBRS Morningstar used the PD assumptions and WAL in the DBRS Morningstar Diversity Model to generate the hurdle rate for the ratings.

At closing, the Rated Notes benefit from total credit enhancement of 26.2%. DBRS Morningstar considered the initial capital structure in its analysis.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

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” (10 June 2022), https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.

Other methodologies referenced in this transaction are listed at the end of this press release.

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/401817/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 QuantFS GmbH and OLB.

DBRS Morningstar received annual migration data for OLB’s rating systems from 2018 to 2022, static historical monthly cumulative default and recovery data from 2018 to 2022, and historical monthly delinquency statistics from 2018 to 2022 for acquisition finance and SME leasing borrowers (from 2012 to 2020 for SME borrowers). OLB further provided balance sheet information of a subsample of its acquisition finance borrower universe and supplemental information on its SME leasing business. Stratification and pool information was provided as of the initial cut-off date of 6 January 2023 and included the related contractual amortisation profile.

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

DBRS Morningstar was not supplied with one or more 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.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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 with the parameters used to determine the rating (the base case):

-- PD rates used: A base case PD of 1.65% for SME obligors, 4.85% for SME leasing companies, and 4.95% for SME acquisition finance projects, and a 10% and 20% increase on the base case PD.
-- Recovery rates used: A base case recovery rate of 39.9% 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%, ceteris paribus, would lead to a downgrade of the Rated Notes to BB (high) (sf). A hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the Rated Notes to BB (high). 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 Rated Notes to 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Stephan Rompf, Vice President, Credit Ratings
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 20 April 2023

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: https://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.

Download This Press Release