Press Release

DBRS Morningstar Upgrades Credit Rating on abc SME Lease Germany S.A., acting in respect of its Compartment 7

Consumer/Commercial Leases

October 04, 2023

DBRS Ratings GmbH (DBRS Morningstar) upgraded its credit rating on the Class A Notes issued by abc SME Lease Germany S.A., acting in respect of its Compartment 7 (the Issuer) to AAA (sf) from AA (high) (sf).

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

The upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the September 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) credit rating level.

The transaction is a revolving securitisation of receivables related to commercial leases extended to small and medium-size enterprises and self-employed individuals in Germany. abcfinance GmbH (abcfinance), ETL Finance GmbH & Co. KG, milon financial services GmbH, Hako Finance GmbH, and Schneidereit Finance GmbH (all either majority- or fully owned subsidiaries of abcfinance) originated and subservice the leases while abcbank GmbH (abcbank) acts as the master servicer. The transaction closed in October 2020 with an initial portfolio of EUR 462.9 million and included a 24-month revolving period, which ended on the October 2022 payment date.

PORTFOLIO PERFORMANCE
As of the September 2023 payment date, receivables that were 0 to 30 days, 30 to 60 days, and 60 to 90 days delinquent represented 0.7%, 0.0%, and 0.4% of the outstanding collateral balance, respectively, while receivables more than 90 days delinquent represented 0.3%. Gross cumulative defaults, including receivables at least 180 days in arrears per the transaction documentation, represented 0.9% of the aggregate initial portfolio balance, 44.8% of which has been recovered to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions to 3.6% and 50.1%, respectively, based on updated historical data provided by the originator in the course of its latest securitisation.

CREDIT ENHANCEMENT
The subordination of the junior obligations provides credit enhancement to the Class A Notes. As of the September 2023 payment date, credit enhancement to the Class A Notes increased to 21.6% from 12.6% at the time of the latest annual review 12 months ago, following the end of the revolving period in October 2022.

The transaction benefits from liquidity support provided by a cash reserve, available to cover senior expenses and interest payments due on the Class A and Class B Notes. The reserve was funded to EUR 1.50 million at closing through a subordinated loan granted by abcbank, and has a target balance equal to 0.324% of the outstanding principal balance of the notes, subject to a floor of EUR 750,000. As of the September 2023 payment date, the reserve was at its target balance of EUR 0.92 million.

The Bank of New York Mellon - Frankfurt branch (BNYM Frankfurt) acts as the account bank for the transaction. Based on DBRS Morningstar’s private credit rating on BNYM Frankfurt, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar’s credit ratings on the rated notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of defaults to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the term under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is the “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

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.

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

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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.

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.

The sources of data and information used for this credit rating include investor reports and information provided by abcbank as well as loan-level data provided by the European DataWarehouse GmbH. In the context of a new transaction from the same originator, DBRS Morningstar was also provided with the following updated historical performance data:
-- Quarterly static default data from Q1 2012 to Q2 2023;
-- Quarterly static recovery data from Q1 2012 to Q2 2023; and
-- Monthly dynamic delinquency data from January 2012 to May 2023;

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

At the time of the initial credit rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 4 October 2022, when DBRS Morningstar upgraded its credit rating on the Class A Notes to AA (high) (sf) from AA (low) (sf).

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available at www.dbrsmorningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of receivables for the Issuer are 3.6% and 50.1%, respectively.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the credit rating on the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. If the PD increases by 50%, the credit rating on the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to decrease to AA (high) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (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://registers.esma.europa.eu/cerep-publication. 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 credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
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 credit 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.

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