Press Release

DBRS Morningstar Upgrades and Confirms Ratings on Weser Funding S.A. – Compartment No. 1 and Compartment No. 2

Structured Credit

April 23, 2021

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the notes issued by Weser Funding S.A. – Compartment No. 1 (Weser 1) and Weser Funding S.A. – Compartment No. 2 (Weser 2):

Weser 1:
-- Compartment No. 1 Notes upgraded to AA (sf) from A (low) (sf)

Weser 2:
-- Class A Notes upgraded to A (high) (sf) from A (sf)
-- Class B Notes confirmed at BBB (high) (sf)

The rating of the Weser 1 Compartment No. 1 Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in December 2028.

The rating of the Weser 2 Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2055. The rating of the Weser 2 Class B Notes addresses the ultimate (timely when most senior) payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2055.

The rating actions follow an annual review of the transactions and are based on the following analytical considerations:
-- The portfolios performance, in terms of level of delinquencies and defaults, as of the March 2021 payment date.
-- The one-year base case probability of default (PD), recovery rates, and updated default rates on the remaining receivables.
-- The fact that no early amortisation event has occurred; and
-- The credit enhancement available to the rated notes to cover the expected losses at their respective rating levels.
-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

Both transactions are revolving cash securitisation transactions backed by a portfolio of euro-denominated loans to large corporates and small and medium-size enterprises (SMEs) located in Germany and other European countries. The loans are originated and serviced by Oldenburgische Landesbank AG (OLB).

Weser 1 closed in May 2017 and included an initial three-year revolving period that ended in June 2020. During this period, OLB had the daily option to sell new loans at par to the Issuer as long as OLB complied with the eligibility and replenishment criteria. No early amortisation event occurred during the revolving period.

Weser 2 closed in May 2020 and also has a three-year revolving period scheduled to end in May 2023. During this period, OLB has the option to sell additional loan receivables to the Issuer on a daily basis as long as the eligibility criteria and concentration limits are complied with. The revolving period will end prematurely if certain early amortisation events occur, including if the monthly default ratio exceeds 2.5%, the monthly delinquency ratio exceeds 6.0%, or the gross cumulative default rate exceeds 4.0% of the initial balance.

The initial portfolio in Weser 2 had an aggregate par balance of EUR 1.1 billion and, as per the transaction documentation, OLB initially planned to increase the size of the portfolio to EUR 1.3 billion before 31 December 2020. However, the portfolio remains at the initial balance and OLB confirmed the portfolio will not be topped up.

PORTFOLIO PERFORMANCE
As of the March 2021 payment date, the overall Weser 1 portfolio consisted of 249 loan drawings under 68 loans with an aggregate principal balance of EUR 207.5 million. As of the March 2021 payment date, the overall Weser 2 portfolio consisted of 2,393 loan drawings under 1,162 loans with an aggregate principal balance of EUR 1.1 billion. The portfolios are performing within DBRS Morningstar’s expectations. As of the March 2021 payment date, there are no loans in arrears for more than 90 days and no defaulted loans in both transactions.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar maintained the portfolios’ one-year base case PD assumption at 2.1% prior to coronavirus-related adjustments for Weser 1 and 1.8% for Weser 2. DBRS Morningstar updated its PD and recovery assumptions to 46.3% and 24.5%, respectively, at the AA (sf) rating level for Weser 1, and to 33.4% and 25.7%, respectively, at the A (high) (sf) rating level, and 26.5% and 26.5%, respectively, at the BBB (high) (sf) rating level for Weser 2.

The updated default assumptions incorporate coronavirus-related adjustments and also reflect the correction of a DBRS Morningstar inconsistency to its SME Diversity Model results. Please refer to https://www.dbrsmorningstar.com/research/376080/dbrs-morningstar-updates-on-european-sme-clo-diversity-model for more information. The inconsistency did not affect the ratings of these transactions.

CREDIT ENHANCEMENT
As of March 2021, the credit enhancement to the Compartment No. 1 Notes for Weser 1 was 43.4%, up from 22.5% at the time of the last annual review since the transaction started amortising following the end of the revolving period in June 2020. The credit enhancement is provided by the subordinated notes. As of March 2021, the credit enhancement to the Class A and Class B notes for Weser 2 is 27.2% and 21.9% respectively, unchanged from closing since the transaction is still in the revolving period. Both transactions also benefit from a cash reserve, currently at its target balance and floor of EUR 1.5 million for Weser 1 and target balance of EUR 6 million for Weser 2. The cash reserves are available to cover shortfalls in senior expenses and interest on the notes during the life of the transactions. Once the outstanding portfolio balance has been reduced to zero, the cash reserve is released through the waterfall and is available to pay down outstanding principal on the notes.

Societe Generale S.A. – Frankfurt Branch acts as the account bank for Weser 1 and The Bank of New York Mellon, Frankfurt Branch acts as the account bank for Weser 2. Based on the DBRS Morningstar private rating of both entities, the downgrade provisions outlined in the transactions’ documents, and other mitigating factors inherent in the transactions’ structures, DBRS Morningstar considers the risk arising from the exposure to the account banks to be consistent with the ratings assigned to the notes in both transactions, 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

DBRS Morningstar analysed the transactions’ structures in its proprietary Excel-based cash flow engine.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that payment holidays and delinquencies may continue to increase in the coming months for many SME transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For these transactions, DBRS Morningstar increased the expected default rate on receivables granted to obligors operating in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus. As per DBRS Morningstar’s assessment, 6.4% and 41.4% of the outstanding portfolio balance for Weser 1, and 3.2% and 17.0% of the outstanding portfolio balance for Weser 2, represented industries classified in mid-high and high-risk economic sectors, respectively. This led to the underlying one-year PDs to be multiplied by 1.5 times (x) and 2.0x, respectively, as per DBRS Morningstar’s “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary released on 18 May 2020, wherein DBRS Morningstar discussed the overall risk exposure of the SME sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and more likely to be affected by the fallout of the pandemic on the economy. For more details, please see: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

DBRS Morningstar also conducted additional sensitivity analysis to determine that the transactions benefit from sufficient liquidity support to withstand high levels of payment holidays in the portfolios. As of the March 2021 payment date, 0% of the collateral balance for Weser 1and Weser 2 had been granted payment moratoriums.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Rating CLOs Backed by Loans to European SMEs” (30 September 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the surveillance section of the principal methodology.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

A review of the transactions’ legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action for each transaction.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include investor reports as well as payment holiday information provided by QuantFS GmbH, and loan-by-loan data from the European DataWarehouse GmbH.

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 not 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 actions on these transactions took place on 24 April 2020 for Weser 1, when DBRS Morningstar confirmed the rating on the Compartment No. 1 Notes at A (low) (sf), and on 7 May 2020 for Weser 2, when DBRS Morningstar assigned an A (sf) rating to the Class A Notes and a BBB (high) (sf) rating to the Class B Notes.

The lead analyst responsibilities for these transactions have been transferred to Helvia Meana.

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

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the ratings (the base case):
-- PD Rates Used: Base case PD of 3.0% and 2.2% for Weser 1 and Weser 2, respectively, a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: Base case recovery rate of 24.5% at the AA (sf) rating level for Weser 1, 25.7% at the A (high) (sf) rating level and 26.5% at the BBB (high) (sf) rating level for Weser 2, 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 Morningstar 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 Senior Notes at AA (sf) for Weser 1. For Weser 2, a hypothetical increase of the base case PD by 20% would lead to a downgrade of the Class A Notes to A (low) (sf) while a hypothetical decrease of the recovery rate by 20%, would also lead to a downgrade of the Class A Notes to A (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 lead to a downgrade of the Class A Notes to A (low) (sf). A hypothetical increase of the base case PD by 20% would lead to a downgrade of the Class B Notes to BBB (sf) for Weser 2, while a hypothetical decrease of the recovery rate by 20%, would lead to a confirmation of the Class B Notes at BBB (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 lead to a downgrade of the Class B Notes to BBB (sf).

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:
https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Helvia Meana, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates: 11 May 2017 for Weser 1 and 7 May 2020 for Weser 2.

DBRS Ratings GmbH
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60311 Frankfurt am Main – Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at https://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].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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