DBRS Morningstar Confirms Ratings on Notes Issued by KMU Portfolio S.A., Compartment 2015-1 Following Amendment

DBRS Ratings GmbH (DBRS Morningstar) confirmed the following ratings on the Class A, Class B, and Class C Notes (the Rated Notes) issued by KMU Portfolio S.A., Compartment 2015-1 (the Issuer) following an amendment:

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)

The confirmations follow an entire review of the transaction and are based on the following analytical considerations:
-- The amendments to the transaction executed on 31 March 2020 (the Amendment).
-- The portfolio performance, in terms of level of delinquencies and cumulative net losses, as of the March 2020 payment date.
-- Updated probability of default (PD), loss given default (LGD), and expected loss assumptions for the remaining collateral pool, considering the updated quarterly vintage performance data received in the context of the Amendment.
-- No Early Amortisation Event has occurred;
-- The current levels of credit enhancement to the Rated Notes to cover the expected losses at their respective rating levels.

The ratings of the Rated Notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity Date in March 2031.

KMU Portfolio S.A., Compartment 2015-1 is a securitisation of German commercial loans originated and serviced by akf bank GmbH & Co. KG (akf bank). The EUR 400.0 million portfolio, as of the March 2020 payment date, consisted of auto loans (22.6% of the outstanding discounted principal balance), commercial vehicle loans (30.0%), machinery loans (15.1%), other equipment loans (31.6%), and ship loans (0.7%). The pool contains 19.2% of loans that include a balloon payment element. The outstanding discounted principal balance of the balloon part is 11.2% and the concentration limit further stipulates that this must remain below 15.0%.

AMENDMENT
The following amendments were executed and effective from 31 March 2020:
-- An extension of the revolving period for an additional 36 months until the May 2023 payment date.
-- Increase in the coupon of the Class B and Class C Notes to 1.20% and 1.65% from 0.675% and 1.286%, respectively, effective from 14 April 2020.
-- Additional purchases during the last year of the revolving period cannot have an original term longer than 84 months, compared with 96 months prior to the Amendment.

PORTFOLIO PERFORMANCE
As of the March 2020 payment date, gross cumulative defaults amounted to 1.2% of the aggregate initial portfolio balance, with cumulative recoveries of 59.7% to date. Loans more than one-month delinquent represented 0.5%.

PORTFOLIO ASSUMPTIONS AND KEY RATING DRIVERS
DBRS Morningstar received updated vintage performance data, split according to product type. DBRS Morningstar recalibrated its base case assumptions on gross default and recovery rate for each lease type and noted an overall improvement in performance. The updated base case PD and LGD assumptions, based on the worst-case portfolio composition, are 4.5% and 82.5%, respectively.

REVOLVING PERIOD & CONCENTRATION LIMITS
The transaction had an initial 20-month revolving period, which was extended by 36 months following an amendment in April 2017 and has been extended by an additional 36 months following the Amendment. As of the March 2020 payment date, no performance triggers have been breached, which if breached would cause the revolving period to mature prior to the expected termination date in May 2023. To further mitigate the deterioration of the pool, the transaction permits certain concentration limits on the additional portfolios purchased on each payment date. DBRS Morningstar considered a worst-case portfolio composition in its analysis.

CREDIT ENHANCEMENT
The subordination of the respective junior notes provides credit enhancement. Because of the revolving period, the credit enhancement to the Rated Notes remains at 23.0%, 12.0%, and 6.5%, respectively.

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 in April 2017 permitted a similar ramp-up mechanism, and an additional EUR 90.0 million was issued on the April 2017 payment date. The maximum balance of Class A Notes of EUR 312.0 million, along with the respective portfolio size of EUR 400.0 million, was reached in November 2017.

The transaction closed with the support of a EUR 2.5 million cash reserve, available to cover shortfalls on senior fees and interests on the Rated Notes. To maintain the same proportional amount of credit enhancement to the Rated Notes, this reserve was increased to EUR 4.0 million in April 2017. It will amortise with the Rated 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 of EUR 4.0 million and has not registered any shortfalls since closing.

A commingling reserve is also available to mitigate any loss resulting from servicer insolvency. It has been at its target amount of EUR 32.0 million since April 2017, before which its required balance was EUR 20.0 million. The reserve 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 March 2020 payment date, none of the securitised receivables had any associated set-off risk.

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

The Bank of New York Mellon, Frankfurt Branch (BNY Mellon Frankfurt) acts as the Account Bank for the transaction. Based on DBRS Morningstar’s private rating of BNY Mellon Frankfurt, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the Account Bank to be consistent with the ratings assigned to the Rated Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (13 December 2019).

DBRS Morningstar 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. Because of 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 Morningstar conducted a review of the amended transaction documents including the Amendment Agreement and the Incorporated Terms Memorandum. A review of any other transaction’s legal documents was not conducted as the these 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 at: http://www.dbrsmorningstar.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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include monthly investor reports provided by akf bank. In the context of the Amendment, DBRS Morningstar was also provided with updated historical performance data by akf bank.

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

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

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar 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 3 April 2019, when DBRS Morningstar confirmed the ratings of Class A, Class B, and Class C Notes at AAA (sf), AA (low) (sf), and A (low) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Petter Wettestad.

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

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

-- DBRS Morningstar expected a base case probability of default (PD) and loss given default (LGD) for the portfolio based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

-- The Base Case PD and LGD of the current pool of receivables are 4.5% and 82.5%, respectively.

For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A Notes would be expected to decrease to AA (high) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to AA (low) (sf), ceteris paribus.

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)

For further information on DBRS Morningstar 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 GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Petter Wettestad, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 August 2015

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The rating methodologies used in the analysis of this transaction are listed below and can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (13 December 2019) https://www.dbrsmorningstar.com/research/354616/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019) https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020) https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020) https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020) https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (28 February 2020) https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].