DBRS Takes Rating Actions on the Notes Issued by KMU Portfolio S.A., Compartment 2015-1

DBRS Ratings Limited (DBRS) has today taken the following rating actions on the Class A, Class B and Class C Notes (the rated Notes; together with Class D Notes, the Notes) issued by KMU Portfolio S.A., Compartment 2015-1 (the Issuer), following a full review of the transaction and considering a transaction restructuring (the Amendment):

-- EUR 285,000,000 Class A Notes confirmed at AAA (sf);
-- EUR 44,000,000 Class B Notes upgraded to AA (low) (sf) from A (sf);
-- EUR 21,900,000 Class C Notes upgraded to A (low) (sf) from BBB (sf).

DBRS does not rate the EUR 22,100,000 Class D Notes of the Issuer.

The above-mentioned rating actions are based on the following analytical considerations, as described more fully below:
-- Updated base case assumptions that additionally consider the most recent vintage data received.
-- The conservative changes to the Concentration Limits.
-- The overall portfolio performance as of the April 2017 payment date, in particular with regard to low levels of cumulative net defaults and delinquencies.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms and conditions of the Notes.
-- The current levels of credit enhancement (CE) available to the rated Notes to cover expected losses assumed in line with their respective rating levels.
-- No Early Amortisation Event has occurred.

The ratings of the Notes address the timely payment of interest and the ultimate payment of principal on or before the Legal Final Maturity Date in March 2031, extended from July 2029.

KMU Portfolio S.A., Compartment 2015-1 is a securitisation of German commercial loans originated by akf bank GmbH & Co. KG (akf bank). The EUR 373.0 million portfolio, as of the April 2017 payment date, consists of auto loans (29.9%), commercial vehicle loans (30.5%), machinery loans (11.5%), other equipment loans (26.9%) and ship loans (1.3%). The pool contains 30.1% of loans that include a balloon payment element. The current outstanding principal balance of the balloon part is 14.8% and the concentration limit further stipulates that this must remain below 15.0%.

The following amendments, executed on 10 April 2017, will become effective on the 12 April 2017 payment date:

-- An extension of the revolving period by 20 months to 56 months, to terminate in May 2020; combined with an extension of the Legal Final Maturity to March 2031.
-- A further increase in the portfolio size to EUR 400.0 million, financed by issuing EUR 150.0 million of new Notes. This increase in portfolio size can take place over a maximum period of one year until March 2018, and the Notes will undergo no negative change in their respective CE levels. As of the April 2017 payment date, only an additional EUR 90.0 million of Class A Notes have been issued.
-- The Cash Reserve required amount will be increased to EUR 4.0 million to maintain at least the same level of credit support to the Notes.
-- Increase of the Commingling Reserve by EUR 12.0 million, to EUR 32.0 million to cover the risk of the increased portfolio.
-- Guarantee on the Class B and C Notes by the European Investment Fund and a reduction in coupon due on both of these notes and the Class D Notes.
-- The Concentration Limits have been adjusted to provide more conservative controls on the portfolio composition.

BASE CASE ASSUMPTIONS
DBRS has received updated vintage performance data, split by product type. With the updated data, DBRS recalibrated its base case assumptions of gross default and recovery for each loan type. The Probability of Default (PD) assumption has been updated to 5.3%, and the Recovery Rate assumption to 18.9%.

REVOLVING PERIOD & CONCENTRATION LIMITS
As of the April 2017 payment date, no performance triggers have been breached, which if breached would cause the revolving period to mature early. To further mitigate the deterioration of the pool, the transaction permits certain Concentration Limits on the additional portfolios purchased on each payment date. The amendment also envisaged several more limits on the portfolio composition. DBRS considered an updated worst-case portfolio composition in the cash flow analysis.

PORTFOLIO PERFORMANCE
The portfolio is performing in line with DBRS’s expectations. The gross cumulative default ratio (as a percentage of the original portfolio plus all additional receivables) is 0.5% as of April 2017, of which 51.2% has been recovered. The 30+ delinquency ratio is 0.2%.

CREDIT ENHANCEMENT
CE is provided by the subordination of the respective junior obligations. Considering the balance of the Notes following the amendment, the CE for the Class A Notes is 24.7%, the CE for the Class B Notes is 12.9% and the CE for the Class C Notes is 7.0%. DBRS’s analysis considered the maximum balance of the Class A Notes, at which the CE for the Class A Notes is 23.0%, the CE for the Class B Notes is 12.0% and the CE for the Class C Notes is 6.53%.

At closing, EUR 95.0 million of Class A Notes were issued, with the transaction documents allowing a ramp-up to a maximum Class A balance of EUR 195.0 million, which was subsequently reached on the March 2016 payment date. The amendment permits a similar ramp-up mechanism, where an additional EUR 90.0 million will be issued on the April 2017 payment date. The maximum balance of Class A Notes of EUR 312.0 million was considered in DBRS’s analysis, along with the respective portfolio size of EUR 400.0 million.

The transaction closed with the support of a EUR 2.5 million Cash Reserve, available to cover shortfalls on senior fees and the interest on the rated Notes. In order to maintain the same proportional amount of CE to the Notes, this reserve was increased to EUR 4.0 million. It will amortise with the Notes at the end of the revolving period when it will have a target level equal to 1.0% of the aggregated balance of all rated and unrated Notes with a floor of EUR 0.5 million. Currently, this account stands at its required amount and has not registered any shortfalls since closing.

To mitigate any loss resulting from Servicer insolvency, a Commingling Reserve is also available. To ensure the increased risk from the larger portfolio is covered, this reserve was increased to EUR 32.0 million, from EUR 20.0 million. It has been at its target amount since closing and will amortise following the revolving period with a target amount equal to the sum of the principal collections scheduled to be received over the two succeeding months plus 2.5% of the aggregate principal balance.

Should the amount of any potential set-off claims exceed 0.1% of the aggregate principal balance, or the unsecured, unsubordinated and unguaranteed obligations of akf bank breach specified rating thresholds, akf bank shall deposit cash collateral equal to the Set-Off Risk Amount. As of the April 2017 payment date, none of the securitised receivables have any associated set-off risk.

Since the portfolio receivables and the Notes pay a fixed coupon, there is a natural hedge in the transaction structure. Further, the eligibility criteria permit only fixed-rate-paying loan receivables to be purchased in each subsequent portfolio.

The Bank of New York Mellon, Frankfurt Branch (BNY Mellon, Frankfurt Branch) serves as Account Bank for the transaction. The DBRS private rating of BNY Mellon, Frankfurt Branch complies with the Minimum Institution Rating, given the ratings assigned to the Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

An asset and a cashflow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

DBRS has reviewed the amended transaction documents including the Amendment Agreement, Subscription Agreement, and the Incoporated Terms Memorandum.

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

These 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 commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of data and information used for this rating include monthly investor reports provided by akf bank. DBRS received historical cumulative gross loss and recovery performance data relating to akf bank’s originations by quarterly vintage from Q1 2004 to Q3 2016. Related delinquency and prepaymanent data as well as portfolio stratification tables as at 31 March 2017 were also provided.

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

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

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

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

The last rating action on this transaction took place on 10 August 2016, when DBRS confirmed the Class A Notes at AAA (sf), the Class B Notes at A (sf) and the Class C Notes at BBB (sf).

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

To assess the impact of the changing the 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 expected a Base Case probability of default (PD) and loss given default (LGD) for the portfolio based on a review of the current assets and the transaction’s replenishment criteria. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

-- The Base Case of PD and LGD of the current pool of assets of receivables are 5.3% and 81.1%, respectively.

-- The Risk Sensitivity overview below illustrates the ratings expected for the Notes if the PD and LGD increase by a certain percentage over the base case assumptions. For example, if the LGD increases by 50%, the ratings for the Class A, Class B and Class C Notes would be expected to decrease to AA (high) (sf), A (sf) and BBB (high) (sf), respectively, ceteris paribus. If the PD increases by 50%, the ratings for the Class A, Class B and Class C Notes would be expected to decrease to AA (sf), A (low) (sf) and BBB (low) (sf), respectively, ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the ratings for the Class A, Class B and Class C Notes would be expected to decrease to A (high) (sf), BBB (sf) and BB (low) (sf), respectively, ceteris paribus.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Class B Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (sf)

Class C Notes risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (sf)

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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.

Lead Analyst: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 August 2015

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

-- Master European Structured Finance Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed 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