DBRS Confirms Rating of Class A Notes Issued by Rosenkavalier 2015 UG Following Transaction Restructuring

DBRS Ratings Limited (DBRS) confirmed its A (high) (sf) rating of the Class A Notes issued by Rosenkavalier 2015 UG (Issuer) following the transaction amendment which includes the purchase of an additional portfolio funded via an increase of the Class A and Class B Notes. The outstanding balance of the Class A and Class B Notes increased to EUR 2,103,500,000 and EUR 1,396,500,000 from EUR 1,728,400,000 and EUR 788,600,000, respectively. The total portfolio has increased to EUR 3,500,000,000 from EUR 2,517,000,000.

The restructuring, which occurred on 30 November 2018, introduced a number of changes to the transaction which include:
-- Extension of the replenishment period until the payment date falling in December 2021.
-- Changes to the note structure: The Issuer has issued EUR 3.751 million further Class A Notes due in 2045 and EUR 607.9 million further Class B Notes due in 2045. The credit enhancement of the Class A Notes via subordination has increased to 39.9% (from 31.3% pre-restructuring).
-- Increase of the total portfolio by EUR 983 million to EUR 3.500 billion from EUR 2.517 billion, which was funded by additional issuance of the Class A and Class B Notes.
-- The exclusion of the set-off reserve account and of the commingling risk reserve.
-- Changes to certain pool limits and the wind-down events definition (see the summary in an updated version of the rating report describing the DBRS analysis following the amendments which will be available on dbrs.com).
-- Reduction on the fixed coupon of the Notes: For the Class A Notes to 0.35% per annum from 0.80%, and for the Class B Notes to 3.25% per annum from 3.50%.
-- If the rating of the Account Bank is either withdrawn or downgraded below BBB, and the Issuer or the Note Trustee does not appoint a guarantor or provide adequate collateral, it will have 60 days (30 days pre-restructuring) to open the Issuer operating accounts with a successor account bank that has a DBRS public rating or a DBRS private rating of at least BBB.
-- Establishment of an unfunded liquidity reserve of EUR 100,000, to be funded upon the loss of a BBB (low) rating that will serve as security for the payment obligations of the Servicer.
-- Implementation of a principal borrowing mechanism to avoid interest shortfalls on the Class A Notes.

Rosenkavalier is a cash flow securitisation transaction backed by a portfolio of loans originated and serviced by UniCredit Bank AG (UCB) to large corporations, small and medium-sized enterprises, entrepreneurs and self-employed individuals based in Germany. The transaction includes a three-year revolving period, which is scheduled to end in December 2021 (December 2018 at closing but the revolving period has been extended following the restructuring) 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. However, the revolving period could end prematurely based on the occurrence of certain events (Replenishment Termination Events), including if the cumulative default rate exceeds 1.0% of the initial portfolio balance or if the cumulative delinquency rate exceeds 5.5% of the initial portfolio balance. To date, no Replenishment Termination Events have occurred.

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

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. Principal collections can also be used to cover interest shortfalls. DBRS’s rating of the Class A Notes addresses the likelihood of ultimate payment of interest and 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 (WA) 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, DBRS does not expect the recovery rates to be higher than the senior unsecured recovery rate assumption which, at the A (high) (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 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 the 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 the “A” rating level was reduced to 23.21% from 26.25%.

-- Commingling Risk is mitigated through the unfunded liquidity reserve of EUR 100,000 that will be funded upon loss of a BBB (low) rating that will serve as security for the senior payment obligations of the Servicer (tax, costs, fees and expenses). In addition, the outgoing Servicer will bear the upfront cost of the Substitute Servicer in connection with the transfer of the servicing.

-- Following the restructuring, the Class A Notes now benefit from a total credit enhancement of 39.9%, which DBRS considers to be sufficient to support the A (high) (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 5.0 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 assigned rating.
-- The recovery rate used was the unsecured recovery rate for Germany at the A (high) (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 23.21%.
-- The Break-Even Default Rates for the interest rate stresses and default timings were determined using the DBRS Cash Flow Engine.

PORTFOLIO ASSUMPTIONS
-- DBRS maintained its annualised PD assumption at 1.90%, considering the historical data supplied.
-- DBRS conducted an analysis on the worst-case portfolio created based on the Eligibility Criteria and Replenishment Criteria and updated its portfolio default and recovery assumptions on the outstanding portfolio to 33.6% and 23.2%, respectively, at the A (high) (sf) rating level.

CREDIT ENHANCEMENT
The credit enhancement (CE) available to the Class A Notes has increased to 39.9% following the restructuring. The CE is provided through the subordinated Class B Notes.

UCB is the main Account Bank provider of the transaction. Based on the DBRS private rating of UCB, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS considers the risk arising from the exposure to UCB to be consistent with the Minimum Institution Rating given the rating assigned to the Class A 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: “Rating CLOs Backed by Loans to European SMEs.”

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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 be based on the worst-case replenishment criteria set forth in the transaction legal documents.

DBRS has conducted a review of the transaction’s legal documents provided in the context of the aforementioned Restructuring. A review of any other transaction’s legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of data and information used for this rating include reports and information received from UniCredit Bank AG.

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 13 July 2018, when DBRS confirmed its rating of the Class A Notes at A (high) (sf).

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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 to the parameters used to determine the rating (the “Base Case”):
-- Probability of Default Rates Used: base case PD of 1.9%, a 10% increase of the base case and a 20% increase of the base case PD.
-- Recovery Rates Used: base case recovery rates of 23.21% at the A (high) (sf) stress level for the Class A Notes, a 10% and 20% decrease in the base case recovery rates. 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 lead to a confirmation of the Class A Notes at A (high) (sf). A scenario combining both an increase in the base case PD by 10% and a decrease in the base case recovery rate by 10%, ceteris paribus, would also lead to a confirmation of the Class A Notes at A (high) (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 and US regulations only.

Lead Analyst: Francesco Amato, Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 18 December 2015

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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
-- Rating CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- Legal Criteria for European Structured Finance Transactions
-- Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Structured Finance Transactions
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions

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.

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