Morningstar DBRS Confirms Credit Rating on Rosenkavalier 2015 UG Following Amendment

DBRS Ratings GmbH (Morningstar DBRS) confirmed its A (high) (sf) credit rating on the Class A Notes issued by Rosenkavalier 2015 UG (the Issuer) following a transaction amendment.

The interest on 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. Morningstar DBRS’ credit rating on the Class A Notes addresses the likelihood of ultimate payment of interest and principal on or before the maturity date in November 2045.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The changes to the transaction that will become effective on 31 January 2024 (the Amendment);
-- The portfolio performance, in terms of level of delinquencies and defaults, as of the December 2023 payment date;
-- The base-case assumptions as well as the probability of default (PD), recovery rate, and expected loss assumptions considering the worst-case portfolio composition allowed under the eligibility criteria;
-- The fact that no early amortisation event has occurred; and
-- The current available credit enhancement to the Class A Notes to cover the expected losses assumed in line with the A (high) (sf) credit rating level.

The transaction is a revolving cash flow securitisation backed by a portfolio of euro-denominated loans to large corporates, small and medium-size enterprises (SMEs), entrepreneurs, and self-employed individuals based in Germany. The loans are originated and serviced by UniCredit Bank GmbH (UCB; the Originator, Seller, and Servicer).

AMENDMENT
The Amendment, signed on 24 January and which will be effective on 31 January 2024, introduced a number of changes to the transaction including:
-- An extension of the replenishment period until the payment date falling in January 2027;
-- The redemption of the Class A and Class B Notes (together, the Notes) in the amount of EUR 500 million and EUR 300 million, respectively. The credit enhancement to the Class A Notes via subordination remains unchanged at 37.5%;
-- A decrease of the total portfolio by EUR 800 million to EUR 3.0 billion from EUR 3.8 billion;
-- The inclusion of the Replenishment Shortfall Account;
-- The Cumulative Delinquency Ratio trigger that stops the revolving period was changed to 2.0% from 5.5%;
-- Changes to certain pool limits;
-- The Minimum Weighted-Average portfolio interest was increased to 1.40% from 1.25%;
-- The 55% maximum for variable rate loans was deleted;
-- The 65% maximum for bullet loans was deleted; and
-- The limit for loans with an interest payment frequency of at least once a month was reduced to 20% from 45%.

Under the terms of the Amendment, the following concentration limits are modified:
-- Largest industry (four-digit Nomenclature of Economic Activities (NACE) code) to increase to 35% from 30%;
-- Largest industry category (one-level NACE code): 37% from 35%; and
-- Top three industry categories (one-level NACE code): 77% from 70%.

The transaction is a cash flow securitisation backed by a portfolio of loans originated and serviced by UCB to large corporations, SMEs, entrepreneurs, and self-employed individuals based in Germany. The transaction includes a three-year revolving period, which was originally scheduled to end in December 2021, was extended to 30 November 2024 following a transaction restructuring executed on 30 November 2021, and will be extended again to 31 January 2027 as part of the aforementioned Amendment. 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 met. 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 2.0% of the initial portfolio balance. To date, no replenishment termination events have occurred.

The transaction cash flow structure resembles that of a typical synthetic securitisation 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).

PORTFOLIO PERFORMANCE
The portfolio is performing within Morningstar DBRS’ expectations. As of December 2023, no cumulative defaults were reported and the cumulative delinquency ratio remained low at 0.3%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS maintained its base-case PD assumption at 1.9%. Morningstar DBRS 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 32.8% and 22.9%, respectively, at the A (high) (sf) credit rating level.

CREDIT ENHANCEMENT
As of the December 2023 payment date, credit enhancement to the Class A Notes was 37.5%, unchanged because of the revolving period in place. Credit enhancement to the Class A Notes considers the subordination of the Class B Notes and remained unchanged in the context of this restructuring.

UCB is the main account bank provider of the transaction. Based on Morningstar DBRS’ private credit rating on UCB, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction, Morningstar DBRS considers the risk arising from the exposure to UCB to be consistent with the credit rating assigned to the Class A Notes, as described in Morningstar DBRS’ "Legal Criteria for European Structured Finance Transactions" methodology.

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

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

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

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/416784.

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: Rating CLOs Backed by Loans to European SMEs (22 October 2023), https://dbrs.morningstar.com/research/422274.

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

Morningstar DBRS 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 continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

Morningstar DBRS conducted a review of the amended transaction documents, including, inter alia, the Amendment Agreement.

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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include investor reports and additional information provided by UCB, including the following data:
-- Annual credit rating migration matrices for three business segments (small business customers, medium-size enterprises, and large corporates) from 2010 to 2022;
-- Annual static default and net loss data from 2014 to 2022;
-- Performance track record of Rosenkavalier 2015 UG since 2015; and
-- Loan-by-loan portfolio and amortisation schedule as of 31 October 2023.

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

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

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

Morningstar DBRS 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 30 November 2022, when Morningstar DBRS confirmed the credit rating on the Class A Notes at A (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to Helvia Meana.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

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

-- Probability of Default Rates Used: Base-case PD of 1.9%, and a 10% and 20% increase on the base-case PD.
-- Recovery Rates Used: Base -case recovery rate of 22.9% at the A (high) (sf) credit 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.

Morningstar DBRS 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 not have an impact on the credit rating on the Class A Notes. A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would not have an impact on the credit rating on the Class A Notes.

For further information on Morningstar DBRS 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 Morningstar DBRS 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: Helvia Meana, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 18 December 2015

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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Rating CLOs Backed by Loans to European SMEs (22 October 2023) and DBRS Morningstar SME Diversity Model v2.6.1.4, https://dbrs.morningstar.com/research/422274
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://dbrs.morningstar.com/research/425148.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602.
--Global Methodology for Rating CLOs and Corporate CDOs (22 October 2023), https://dbrs.morningstar.com/research/422269
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023), https://dbrs.morningstar.com/research/420573
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://dbrs.morningstar.com/research/416784

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-dbrs@morningstar.com.