DBRS Morningstar Assigns AA (sf) Rating to SWK Consumer 2021-1, Fondo de Titulización Class A Notes

DBRS Ratings GmbH (DBRS Morningstar) assigned a rating of AA (sf) to the Class A Notes issued by SWK Consumer 2021-1, Fondo de Titulización (the Issuer).

DBRS Morningstar does not rate the Class B Notes also issued in the transaction.

The rating of the Class A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date.

The notes are backed by a portfolio of fixed-rate, unsecured, amortising personal loans granted to private individuals domiciled in Germany and serviced by Süd-West-Kreditbank Finanzierung GmbH (SWK Bank) as the seller and servicer. The collateral was subsequently purchased by and assigned to the Issuer, a Spanish securitisation fund.

The rating is based on the following analytical considerations:
-- The transaction's capital structure, including form and sufficiency of available credit enhancement to support DBRS Morningstar's projected expected net loss assumptions under various stressed scenarios;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay the Class A Notes according to the terms of the notes;
-- The seller's capabilities with regard to originations and underwriting;
-- The seller's capabilities with regard to servicing;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The credit quality of the collateral and historical and projected performance of the seller's portfolio;
-- DBRS Morningstar's sovereign rating on the Republic of Germany, currently at AAA with a Stable trend; and
-- The consistency of the transaction's legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

TRANSACTION STRUCTURE
The transaction includes a 36-month revolving period until October 2024. During the revolving period, the seller may offer additional receivables that the Issuer will purchase, provided that the eligibility criteria and portfolio criteria set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers, the seller’s insolvency, or the servicer’s replacement.

The transaction allocates payments on single combined interest and principal priorities and benefits from two reserves: (i) a EUR 1,672,000 liquidity senior reserve, subject to a floor of EUR 250,000, and (ii) a liquidity cash reserve starting at EUR 5,280,000, which is subsequently replenished through the transaction waterfall to the target amount of 3% of Class A balances, subject to a floor of EUR 2,640,000. Both liquidity reserves were initially provided by the seller and are included in the available distribution amount for senior expenses and interest payments on the Class A Notes before being replenished up to the respective required amounts in the transaction waterfall.

Borrowers make payments into a collection account held at SWK Bank, which are transferred daily to the issuer account.

At the end of the revolving period, the notes will be repaid on a fully sequential basis.

COUNTERPARTIES
Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) is the account bank for the transaction. Based on DBRS Morningstar’s rating of BBVA, 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 rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

COVID-19 CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many asset-backed securities (ABS) transactions. The rating is based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. The DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Consumer and Commercial Asset-Backed Securitisations” (29 October 2021).

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

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 cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include the following data provided by the seller:
-- Static monthly cumulative default data from January 2014 to June 2021;
-- Static monthly cumulative recovery data from January 2014 to June 2021;
-- Static monthly cumulative net loss data from January 2014 to June 2021;
-- Dynamic monthly default data from January 2014 to June 2021;
-- Dynamic quarterly delinquency data from Q1 2014 to Q2 2021; and
-- Dynamic monthly prepayment data from January 2014 to June 2021.

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

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 this rating 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating:
-- Expected Default Rate of 5.5%: A 25% and 50% increase.
-- Expected loss given default (LGD) of 57%: A 25% and 50% increase.

Scenario 1: 25% increase in Expected Default
Scenario 2: 50% increase in Expected Default
Scenario 3: 25% increase in LGD
Scenario 4: 25% increase in Expected Default and 25% increase in LGD
Scenario 5: 50% increase in Expected Default and 25% increase in LGD
Scenario 6: 50% increase in LGD
Scenario 7: 50% increase in Expected Default and 25% increase in LGD
Scenario 8: 50% increase in Expected Default and 50% increase in LGD

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:
-- Class A Notes: AA (low) (sf), A (high) (sf), AA (sf), A (high) (sf), A (low) (sf), A (high) (sf), A (low) (sf), BBB (high) (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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Roberto Perez, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 November 2021

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

-- Rating European Consumer and Commercial Asset-Backed Securitisations (29 October 2021), https://www.dbrsmorningstar.com/research/387042/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (30 July 2021), https://www.dbrsmorningstar.com/research/382486/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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].