DBRS Rates Class A Notes Issued by Wendelstein 2015-1 UG (haftungsbeschränkt)

DBRS Ratings Limited (DBRS) has today assigned ratings on the following notes issued by Wendelstein 2015-1 UG (haftungsbeschränkt) (Wendelstein 2015-1, issuer):

-- AA (sf) to Class A notes

The Class A notes have been issued for an amount of €17.05 billion and the total issuance amounts to €20.30 billion. The ratings assigned to the Class A notes address timely payment of interest and ultimate payment of principal.

Wendelstein 2015-1 represents the securitisation of mortgage loans originated in Germany with majority of the loans originated by Deutsche Bank Privat und Geschäftskunden Aktiengesellschaft (DB Private) and the rest by the erstwhile Berliner Bank KGaA which merged into DB Private in January 2010. The mortgage portfolio has an aggregate current balance of approximately €20.30 billion. DB Private is a wholly owned subsidiary of Deutsche Bank AG (DB AG) and lends to private and business clients in Germany. Mortgage loans are part of the retail business focus of DB Private.

Wendelstein 2015-1 will issue two classes of mortgage-backed notes, Class A notes subordinated by Class B notes (together the Notes). The Class A notes will have a 16% credit support from the subordinated Class B notes. The proceeds of the Notes and an upfront payment €1.93 billion under the swap will be used by the issuer to purchase the mortgage loans as of closing of the transaction.

The mortgage portfolio under Wendelstein 2015-1 will be revolving for a period of five years from closing of the transaction. All loans sold to the issuer, at closing and during the revolving period, will satisfy eligibility criteria. Additionally, new loans sold to the issuer during the revolving period would need to satisfy specific portfolio-level conditions to mitigate the risk of any deterioration in the credit risk profile of the mortgage portfolio as a result of sale of the new loans. The revolving period may be terminated irreversibly upon breach of cumulative loss trigger conditions and breach of BBB (low) rating for DB AG (currently rated A (high) UR-Neg./R-1 (middle) UR-Neg. by DBRS), amongst other conditions. DBRS has stressed the closing mortgage portfolio in accordance with the conditions applicable for the purchase of new loans during the revolving period.

The Class A notes will receive liquidity support from a liquidity facility of €200 million and principal receipts from the mortgage loans. These sources of funds will be used in the event that the revenue receipts of the issuer are insufficient to pay interest on the Class A notes. The principal receipts would be applied first before draw down of any funds from the liquidity facility. Although a missed interest payment on the Class A notes on an interest payment date is not an event of default, DBRS has tested the cash flows of the Class A notes for timely payment of interest.

Almost all the loans in the mortgage portfolio pay a fixed rate of interest (with most of them having resets at ten or a longer number of years’ intervals since origination). In comparison, the notes are paid a variable rate of interest linked to one month Euribor. The interest rate risk is mitigated by a fixed-floating swap provided by DB Private. Additionally the swap rate paid by the swap provider, one month Euribor plus 0.82%, mitigates the risk of a negative interest rate by applying a floor of minus 0.55% on the one month Euribor rate. This effectively means a pay-off of at least 0.27% for the issuer under the swap notwithstanding negative one month Euribor rates. DBRS tested the cash flows of the transaction in a declining interest rate scenario where the one month Euribor is assumed to go below minus 0.55%. In this scenario of negative interest rates, the terms and conditions for Class A notes apply a floor of 0% on the interest payable on the Class A notes.

The borrowers in the mortgage portfolio have deposits with DB AG and/or DB Private and will potentially have the right of set-off wherever the deposit amount exceeds the protected deposit amount of €100,000 provided by Entschädigungseinrichtung deutscher Banken GmbH. Such risk of set-off by a borrower is mitigated in the transaction. The transaction envisages that within fourteen days upon a breach of the DB AG’s rating of BBB (low), DB Private will provide an amount to the issuer equal to the aggregate of all deposits of the borrowers in excess of the statutory deposit insurance. Such amount, the set-off reserve amount, will be reckoned on a monthly basis.

The collections from the mortgage loans will be credited to the collection account in the name of DB Private and the collected funds will be transferred to the issuer’s account on a monthly basis. In order to mitigate co-mingling risk the transaction envisages a reserve amount to be provided by DB Private. Such a reserve will be created in the event that the rating of DB AG or the servicer (if the servicer is other than DB Private) falls below A (low); DB Private will provide an amount equal to the actual aggregate collections in the preceding collection period to the issuer. DBRS considers the above co-mingling reserve to mitigate the co-mingling risk exposure for the issuer.

The key counterparty roles in the transaction are to be performed by DB Private. DB Private is the servicer, account bank, swap provider, collections account bank, liquidity facility provider and the cash administrator. The issuer is therefore exposed to the risk of concentration of the key roles in the transaction to a single counterparty. The transaction documents envisage the performance of these roles by other eligible counterparties under DBRS legal criteria in the event that the rating of DB AG, DB Private’s parent, falls below rating triggers in line with DBRS criteria for counterparties in structured finance transactions.

The rating on the Class A notes is based upon the review by DBRS of the analytical considerations as described above. Further details on DBRS analysis on the transaction are given below:

Credit Quality of the Mortgage Portfolio:

• Loan to Value as driver of Default (LTVPD) - Approximately 28.30% of the mortgage portfolio consists of cases where a borrower has been provided multiple loans secured by multiple properties. In most of the cases the first and second charge on the underlying property is with DB Private and in some cases the first or prior charge is with a third party. 15.80% of the mortgage portfolio are cases where prior charges exist. DB Private does not offer a second charge loan product. DB Private assesses the risk of such cases at the borrower unit level which besides considering the key factors like borrower financial situation and loan affordability looks at the aggregate of all loans to the borrower unit secured by the aggregate of all mortgage charges. Therefore DBRS does not treat the borrower with a loan having a prior charge as necessarily vulnerable to a higher risk of default as compared to a borrower with a first charge loan. However, the prior balances have been included in the calculation of loan-to-value ratio (LTV) which in turn drives the default probability (PD) of the loan (such LTV driving PD of a loan referred as LTVPD in this document). The outstanding balances of all mortgage loans to a borrower unit, whether sold to the issuer or retained in DB Private’s mortgage book have been included in the calculation of LTVPD. DBRS was also provided the balances of other loans to the borrower unit, such as consumer or business loans (most of these loans are not secured through any of the mortgage charges on properties). These balances have also been included in the calculation of LTVPD. The aggregate of all the balances of the loans, as described above, was divided by the aggregate of the lending value of the properties. The weighted-average LTVPD (WALTVPD) for the mortgage portfolio stood at 84.02% with 30% of the loans with LTVPD above 100%. The calculation of the WALTVPD, as described above, is conservative. The proportion of loans with LTVPD above 100% would be lower if the unsecured loans were to be ignored. Another layer of a conservative assessment of the LTVPD is that DB Private only considers the lending value of a property which in the last few years has been on average 15% lower than the market value.

• Loan to Value as driver of Losses (LTVLGD) – The LTV calculation related to loss given default (LTVLGD) considered the outstanding balance of a loan divided by the lending value of the underlying property minus any prior charges. For borrowers having more than one loan secured by several properties, the LTVLGD was calculated at the borrower unit level. For this calculation the aggregate balance of all loans to a borrower unit, sold to the issuer, was considered. This aggregate of the loans’ balance was divided by the aggregate of the lending value of properties, linked to a borrower unit, minus the pari passu and prior charges. The treatment of the pari passu charges in the divisor is conservative in comparison to the actual economic value of a pari passu mortgage charge on a property. As already stated in the LTVPD section, another layer of a conservative assessment of the LTVLGD is the lending value of a property. Further, the monies accumulated in the linked principal repayment vehicles, where existing, are not considered for the calculation of LTVLGD. The weighted-average LTVLGD for the mortgage portfolio is 73.71%, with 20.80% of the loans having LTVLGD greater than 100%. DB Private as the seller has covenanted that during and after the revolving period the WALTVLGD will never exceed 85% as a result of any release of any mortgage charge/s or additional loans provided to the borrower unit. The proportion of loans with LTVLGD above 90% of the closing portfolio is 30.31% and this will be restricted to 35% during the revolving period. DBRS has stressed the mortgage portfolio for this condition in the assessment of the overall risk of the mortgage portfolio.

• Loan features and PD adjustments: The mortgage portfolio consists of loans with specific features which in DBRS’s view, influence a borrower’s propensity to default on mortgage repayments. These features are listed below along with DBRS’s treatment of such mortgage features. There are loans in the mortgage portfolio with other features which are not necessarily considered risky. Please see the transaction report for all mortgage loan features:

• Interest-only or Bullet loans: 11.35% of the loans in the mortgage portfolio pay only interest on a monthly basis. 4.99% of these are called savings loans with a linked savings deposit. Besides the monthly interest payment, the borrower also pays a monthly sum to a savings account accumulating the principal to be paid back at the end of maturity of the loan. 4.87% of the loans have a linked life insurance or investment product whose premiums are serviced regularly by a borrower thus accumulating amounts which will be used for repayment of the principal outstanding under the mortgage loan at maturity. The rest of the Bullet loans, 1.49%, do not have any linked principal repayment vehicle. The beneficial interest under each of these principal repayment vehicles has been passed on to the issuer. However, DBRS has not given any credit to the linked principal repayment vehicle as some of these vehicles may mean that the principal amount accumulated at the end of the maturity of such product is not able to cover the entire principal outstanding of the Bullet loan. DBRS has applied a PD penalty to all Bullet loans. During the revolving period, the proportion of bullet/interest-only loans will be restricted to 15% of the mortgage portfolio. A further restriction of 2% will also apply to the proportion of bullet/interest-only loans without a linked principal repayment vehicle. DBRS has stressed the mortgage portfolio for these conditions in the assessment of the overall risk of the mortgage portfolio.

• Investment or Rented Properties: DB Private does not offer a Buy-to-Let (BTL) loan product. However a mortgage loan can be offered to a borrower where the property is expected to be for investment or rental purpose. The affordability of such loans is assessed by DB Private exactly in the same manner as that for an owner-occupied property loan. Any potential rental income is considered only on a proven rental history. While this aspect of DB Private’s origination practice mitigates the risk of the repayment being unaffordable to the borrower, in DBRS’s view such loans are relatively riskier as compared to where the property is owner-occupied as in the event of financial stress a borrower would be expected to prioritise repayments on an owner-occupied property loan. DBRS has applied a PD adjustment on loans where the property is classified BTL or investment property. 25.04% of the properties are BTL properties. 14.43% of the properties in the mortgage portfolio did not have the information on occupancy type. DBRS assumed these properties to be BTL as well and applied the PD penalty on such loans. During the revolving period the proportion of BTL properties may increase and as such there is no condition to restrict such proportion. This is so because, firstly, DB Private does not offer a BTL or investment loan product and secondly the status of a property may change from owner-occupied to BTL or vice-versa during the life of a loan. To stress the mortgage portfolio, DBRS assumed the proportion of such properties to increase to 50% of the mortgage portfolio (39.46% in the closing mortgage portfolio).

• Fixed-rate Loans: 99.41% of the loans in the mortgage portfolio pay a fixed rate of interest with the majority having an interest revision at the end of 10 years or 15 years from date of origination. 4.41% of the loans pay a fixed rate of interest for life without any revision in interest rate. Loans which have the interest reset beyond 10 years from origination are allowed, under German law, to be terminated at the end of year 10 by prepayment of the entire loan outstanding by the borrower. Interest revision may mean a higher rate of interest for the borrower. DBRS has thus applied a PD penalty for such loans.

• Borrower features and PD adjustments: The mortgage portfolio consists of borrowers with specific features which, in DBRS’s view, influence a borrower’s propensity to default on mortgage repayments. The key borrower features are listed below along with DBRS’s treatment of such mortgage features:

• Employment Type: 19.55% of the mortgage portfolio consists of borrowers who are categorised as self-employed or business clients of DB Private. The income of such borrowers can be expected to vary which then has the potential to influence the affordability of the monthly repayments adversely. DBRS has applied a PD penalty to the loans where the borrower is self-employed. During the revolving period the proportion of loans to business clients or self-employed borrowers can increase to 27%. DBRS has stressed the mortgage portfolio for this condition in the assessment of the overall risk of the mortgage portfolio.

• Loan-to-Income ratio (LTI): DB Private assesses the affordability of a loan requested by a borrower. The affordability is also stressed to check for the financial ability of the borrower to meet higher monthly repayments on account of higher interest rates after interest reset. However, there is no criteria which limits the amount of the loan based on the loan-to-income ratio. This aspect of the lending by DB Private is mitigated by the fact that DB Private assesses the riskiness of a loan/borrower using its internal model which consider various borrower and loan features to arrive at an overall risk rating. The loans sold to the issuer at closing and during the revolving period will have a minimum risk rating per DB Private’s internal model. Nevertheless, to be conservative, DBRS has applied a penalty to the loans where the LTI exceeds 3.5 times.

• Two-Year PD: DBRS was provided the historical performance data of loans originated DB Private from first half of 2005 to second half of 2014. The performance period covered the years from 2008 to end of 2014, i.e. around 72 months of historical performance. The Two-Year PD was estimated at 0.4% for the Wendelstein mortgage portfolio based on this historical data.

• Market Value Decline assumptions (MVDs): For the estimation of Market Value Decline assumptions, DBRS based its projections on house price data for owner-occupied residential properties in Germany and published by Verband Deutscher Pfandbriefbanken (vdp) covering the years from 2003 to 2015. The house price decline assumptions computed per rating stress category were 23.7% for AAA (sf), 18.8% for AA (sf), 14.8% for A (sf), 10.5% for BBB (sf), 6.0% for BB (sf) and 2.7% for B (sf). These house price decline assumptions were further adjusted for the observed distressed sale discount (DSD), at 15%, experienced for repossessed properties by DB Private. The effective MVD applied including the DSD was 31.0% in the AA (sf) rating stress scenario and 17.3% in the single B (sf) rating stress scenario.

• Lifetime Defaults, Loss Given Default and Expected Loss estimations: The lifetime default estimation for the mortgage portfolio which includes the stresses applied by DBRS based on the revolving portfolio conditions - in the single B (sf) scenario was estimated at 3.76% and 20.12% in the AA (sf) rating stress scenario. For the same rating stress scenarios, the Loss Given Default (LGD) is 38.31% and 47.30% respectively. And the expected losses for the same rating stress scenarios is 1.44% and 9.52% respectively.

• Stress Assumptions for cash flows analysis: DBRS tested the cash flows of the transaction assuming that the revolving period had ended. DBRS used a combination of default timing curves (front- and back-ended), rising and declining interest rates and low, medium and high prepayment scenarios in accordance with the DBRS rating methodology to stress the cash flows and test the ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the transaction documents. Given the observed prepayments averaging 3% in the last few years in DB Private’s mortgage book, DBRS also tested a scenario with 0% prepayments. However, the prepayments can be expected to rise around the time of interest rate revision (approximately 3.6 years on a weighted-average basis from closing of the transaction). While DBRS’s high prepayment scenario assumption of 20% tests such a possibility, the high prepayments scenarios are amongst the least stressful for the cash flows of the transaction and hence if the actual prepayments are any higher than 20% would result in faster paydown of the Class A notes. Based on a combination of these assumptions, a total of 16 cash flow scenarios were applied to test the capital structure and derive the rating of the Class A notes. In the declining interest rate scenario DBRS tested the cash flows of the transaction where the one month Euribor rate has been assumed to fall below minus 0.55% (the floor rate referenced in the swap rate).

• The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

  Notes:
  All figures are in euros unless otherwise noted. The principal methodology applicable is:
  “Master European Residential Mortgage-Backed Securities Rating Methodology and the Jurisdictional Addendum”

• DBRS has applied the principal methodology consistently. In rating this transaction, DBRS applied the Jurisdictional Addendum of the UK for the purpose of the default analysis. The stresses applied in DBRS asset model are consistent with those outlined in the UK Addendum.

• The legal analysis was based on DBRS’s Legal Commentary for Germany.

Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include DB Private and Verband Deutscher Pfandbriefbanken.

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

• DBRS was supplied with third party assessments. However, this did not impact the rating analysis.

DBRS has been provided the data on the mortgage portfolio, historical performance data, data on recoveries and observed prepayment rates by DB Private. Information on borrower income, employment status and occupancy type of the property was not available for all loans. While such information was available in loan files, these were not captured in the loan systems in DB Private. DBRS made conservative assumptions for such missing data. The information on the historical performance covered the origination vintages 2005 to 2014 for a period approximately of 72 months.
DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of changing transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

DBRS concludes that

• A hypothetical increase of the base case PD by 25% keeping the base case LGD unchanged or
• A hypothetical increase of the base case LGD by 25% keeping the base case PD unchanged
  does not affect the ratings of AA (sf) for the Class A notes.
• A hypothetical increase of the base case PD by 50% keeping the base case LGD unchanged or
• A hypothetical increase of the base case LGD by 50% keeping the base case PD unchanged or
• A hypothetical increase of the base case PD by 25% and a hypothetical increase of the base case LGD by 25% or
  would each lead to a downgrade of the Class A notes to A (high) (sf).
• A hypothetical increase of the base case PD by 50% and a hypothetical increase of the base case LGD by 25% or
• A hypothetical increase of the base case PD by 25% and a hypothetical increase of the base case LGD by 50% would each lead to a downgrade of the Class A notes to A (low) (sf).
• A hypothetical increase of the base case PD by 50% and a hypothetical increase of the base case LGD by 50% would lead a downgrade of the Class A notes to BBB (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Kali Sirugudi, Vice President
Initial Rating Date: 9 July 2015
Initial Rating Committee Chair: Diana Turner, Senior Vice President

Lead Surveillance Analyst: Vito Natale

DBRS Ratings Limited
1 Minster Court, 10th Floor Mincing Lane, London EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960
The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

Legal Criteria for European Structured Finance Transactions
Derivative Criteria for European Structured Finance Transactions
Operational Risk Assessment for European Structured Finance Servicers
Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
Unified Interest Rate Model for European Securitisations

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