DBRS Assigns Rating to Rosenkavalier 2015 UG

DBRS Ratings Limited (DBRS) has today assigned a rating to the Class A Notes issued by Rosenkavalier 2015 UG (the Issuer) as follows:

-- EUR 1,728,400,000 Class A Notes due 2045 rated A (sf)

The transaction is a cash flow securitisation transaction backed by a portfolio of loans originated by UniCredit Bank AG (UCB or the Originator) to large corporates, small and medium-sized enterprises, entrepreneurs and self-employed individuals based in Germany. The initial portfolio with an aggregate par balance of EUR 2,517 million has been selected in accordance with the loan Eligibility Criteria.

The transaction has a three-year revolving period, during which UCB has the option to sell new loans at par to the Issuer so long as the eligibility criteria and replenishment criteria are complied with. The revolving period will end prematurely after the occurrence of certain events (Replenishment Termination Events) including the cumulative default rate or cumulative delinquency rate exceeding 1.0% and 5.5% of the initial portfolio balance, respectively.

The transaction cash flow structure resembles that of a typical synthetic rather than a cash securitisation as principal collections cannot be used to cover senior expenses and/or interest shortfalls and 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).

The interest of the Class A notes is allowed to defer and is ultimately extinguishable without resulting in an event of default under the agreements. DBRS’s rating for the Class A notes addresses the likelihood of ultimate payment of interest and ultimate payment of principal on or before the maturity date.

The rating of the Class A Notes is based on DBRS’s review of the following items:

-- The Eligibility Criteria and Replenishment Criteria, based on which DBRS has created a worst-case portfolio. The loose limits on the borrower and industry concentrations are risk factors that negatively affected the DBRS analysis. On the other hand, limits on the maximum weighted-average internal probability of default (PD) for the portfolio of 1.90% and minimum obligor rating of 6 are positive factors in DBRS’s analysis.

-- At least 25% of the portfolio will be backed by mortgage collateral but this is likely to be all second lien and below and given the loan-to-value covenants we do not expect the recovery rates to be higher than the senior unsecured recovery rate assumption which at the A (sf) rating is 26.25% for Germany. As such, DBRS assumed the portfolio to be 100% unsecured.

-- The strong Replenishment Termination Events, which adequately mitigate the credit-quality deterioration of the transaction during the revolving period and also mitigate the operational and credit-risk exposures to UCB.

-- The soundness of the transaction structure, which resembles that typical of a synthetic rather than a cash transaction as principal collections cannot be used to cover interest shortfalls and excess spread cannot be used to cover principal defaults. Interest payments on the Class A Notes will be made monthly.

-- DBRS has adjusted its unsecured recovery rate assumptions to account for fact that a portion of recovery proceeds from defaulted loans will flow to the interest waterfall which will reduce the amounts available to cover principal shortfalls. The senior unsecured recovery rate assumption at A rating level was reduced from 26.25% to 23.13%.

-- Commingling Risk is mitigated through a commingling risk reserve to be deposited in the issuer account bank if the DBRS long-term rating of UCB is downgraded below BBB (low) rating.

-- Set-off Risk is mitigated through the set-off risk reserve to be deposited in the issuer account bank if the DBRS long-term rating of UCB is downgraded below BBB (low) rating.

-- At closing, the Class A Notes benefit from a total credit enhancement of 31%, which DBRS considers to be sufficient to support the A (sf) rating. Credit enhancement is provided by subordination only.

-- The adequacy of the transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting and servicing practices.

-- The soundness of the legal structure and the presence of legal opinions which address the true sale of the assets to the trust and the non-consolidation of the Issuer as well as consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS determined the rating of the Class A Notes as follows, as per the principal methodology specified below:
-- The annualised probability of default (PD) assumed for the securitised portfolio, was 1.90% which was based on the maximum portfolio WA PD covenant of 1.90% allowed in the replenishment criteria.
-- The assumed weighted-average life (WAL) of the portfolio was 6.0 years based on the maximum allowed under the replenishment criteria.
--The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target rating.
-- The recovery rate used was the unsecured recovery rate for Germany at the A (sf) rating level adjusted down to account for the fact that recovery proceeds distributed under the interest waterfall will not be available to pay down principal. The recovery rate used for the A (sf) rating level was 23.13%.
-- The Break-Even Default Rates for the interest rate stresses and default timings were determined using the DBRS Cash Flow Model.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating CLOs Backed by Loans to European Small and Medium-Sized Enterprises (SMEs). DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. Due to the inclusion of a revolving period in the transaction, the collateral was initially modelled based on the worst-case replenishment criteria set forth in the transaction legal documents.
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.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating were supplied by UniCredit Bank AG, the Arranger. A mapping analysis was conducted based on data provided regarding the historical performance of Unicredit’s internal rating system with respect to rating transitions and defaults.

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 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 the transaction parameters on the rating, DBRS 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 1.90%, a 10% and 20% increase on the base-case PD.
-- Recovery rates used: Base-case recovery rate of 23.13% at the A (sf) stress level, 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 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 each lead to a downgrade of the transaction to A (low) (sf). 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 Class A Notes to A (low) (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: Carlos Silva
Initial Rating Date: 18 December 2015
Initial Rating Committee Chair: Jerry van Koolbergen

DBRS Ratings Limited
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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.

-- Rating CLOs Backed by Loans to European Small and Medium Sized Enterprises (SMEs)
-- Rating CLOs and CDOs of Large Corporate Credit
-- Legal Criteria for European Structured Finance Transactions
-- Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions
-- Unified Interest Rate Model European Securitisations
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers

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.