Press Release

DBRS Morningstar Finalises Its Provisional Ratings on TREVA Equipment Finance SA, Compartment 2021-1

Consumer/Commercial Leases

November 17, 2021

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by TREVA Equipment Finance SA, Compartment 2021-1 (the Issuer):

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

DBRS Morningstar did not assign provisional ratings to the Class M Notes (together with the Class A Notes, Class B Notes, and Class C Notes, the Notes) issued in this transaction.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date. The ratings on the Class B Notes and Class C Notes address the ultimate payment of interest and the ultimate repayment of principal by the final maturity date, while junior to other outstanding classes of notes, but the timely payment of interest when they are the senior-most tranche, in accordance with the Issuer’s default definition in the transaction documents.

This transaction represents the issuance of Notes backed by a static EUR 400 million portfolio of receivables related to lease agreements, excluding the residual value component of the leases, granted by PEAC (Germany) GmbH (PEAC) to commercial lessees residing or incorporated in Germany. The notes benefit from security granted over the assets by the Issuer to Intertrust Trustees GmbH by way of transfer and assignment of the lease receivables, including all present and future rights, claims, interests, and security title to the leased objects. The proceeds of a subordinated loan will fund the cash reserve.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction's capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, excess spread, and the availability of the general reserve;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected cumulative net losses under various stressed cash flow assumptions for the rated notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- PEAC´s financial strength and its capabilities with regard to originations, underwriting, and 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;
-- The sovereign rating of 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 and the presence of legal opinions that are expected to address the transfer and assignment of the assets to the Issuer.

The ratings are also based on the following analytical considerations:
-- DBRS Morningstar determined the probability of default (PD) for the portfolio using the historical performance information supplied. DBRS Morningstar assumed an annualised PD of 1.9%. DBRS Morningstar applied additional adjustments in the context of the current Coronavirus Disease (COVID-19) pandemic.
--The assumed weighted-average life (WAL) of the portfolio was 1.7 years.
-- The PDs and WAL were used in the DBRS Morningstar Diversity Model to generate the hurdle rate for the assigned ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.

TRANSACTION STRUCTURE
The transaction features a mixed pro rata/sequential amortisation. Issuer available funds will initially be allocated pro rata and switch to a sequential allocation only if a sequential trigger event has occurred. The pro rata allocation considers the Notes` relative principal amounts outstanding and the performing collateral portfolio. Once the sequential redemption event is triggered, the principal repayment of the Notes will turn sequential and is nonreversible until the Notes are fully redeemed.

Interest on the Notes (excluding the Class A Notes and Class B Notes) may be subordinated to protect the payment of principal of the more senior Notes. Interest subordination is subject to note-specific conditions that evaluate the actual ranking of the Notes and the level of available (over)collateralisation. These subordinations are curable and potentially allow for interest payments previously subordinated to switch back to their higher position in the pre-enforcement priority of payments as soon as the relevant deferral trigger has been remedied. Any subordinated interest is not subject to further interest accruals.

The transaction benefits from liquidity support provided by a cash reserve, funded to an amount equal to 0.5% of the initial principal amount of the rated notes. The reserve is available to cover the payment of senior expenses, swap payments, and nonsubordinated interest on the rated notes prior to being restored to its target amount equal to 0.5% of the outstanding principal balance of the rated notes, subject to a floor of EUR 500.000.

All lease receivables are sold using the lease-specific yield as discount rate while the rated notes are indexed to one-month Euribor. Interest rate risk for the rated notes is mitigated through an interest rate swap provided by Bank of America Europe Designated Activity Company (BofA DAC).

COUNTERPARTIES
The collection accounts are held with Société Générale, SA. The DBRS Morningstar public Long-Term Issuer Rating on Société Générale, S.A. is A (high) with a Stable trend and the Long Term Critical Obligations Rating is AA with a Stable trend. The transaction contains downgrade provisions relating to the account bank consistent with DBRS Morningstar’s criteria. The seller has granted a pledge over the collection accounts under German law in favour of the Issuer.

The Issuer bank account is held at BNP Paribas Securities Services (BNP). DBRS Morningstar has assigned a private rating to BNP. The transaction contains downgrade provisions relating to the account bank consistent with DBRS Morningstar’s criteria.

BofA DAC is the swap counterparty for the transaction. DBRS Morningstar has assigned a private rating to BofA DAC. The hedging documents contain downgrade provisions consistent with DBRS Morningstar’s criteria.

CORONAVIRUS 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 lessees. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many ABS transactions and portfolios, including SMEs. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar increased the expected default rate for obligors in certain industries based on their perceived exposure to the adverse disruptions caused by the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. 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

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/360734.

For more information on DBRS Morningstar considerations for European Structured Credit transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/361098.

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 ratings 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: http://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.

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 source of data and information used for these ratings is PEAC.

DBRS Morningstar received the following data and information:
-- Quarterly cumulative default, recovery, and prepayment vintage data from Q1 2015 to Q1 2021;
-- Annual cumulative default vintages, split by business, unit from 2015 to 2020;
-- Annual cumulative recovery vintage data, split by business unit, from 2015 to 2020;
-- Aggregate annual recovery data for contracts where assets were sold, by main equipment type, from 2015 to 2021;
-- Aggregate recovery timing summary information, by main equipment type, from 2015 to 2021; and
-- A theoretical amortisation and stratifications of the provisional pool (as of 30 September 2021).

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

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.

These ratings concern newly issued new financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

This is the first rating action since the Initial Rating Date.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the ratings (the base case):

-- Probability of default (PD) used: Expected PD of 28.1% for the AAA (sf) scenario, 23.9% for the AA (sf) scenario, 18.1% for the A (low) (sf) scenario, and a 25% and 50% increase on the applicable PD at each rating level.
-- Recovery rate used: Expected recovery rate of 44.0% for the AAA (sf) scenario, 48.4% for the AA (low) (sf) scenario, 51.9% for the AA (low) (sf) scenario
-- Loss given default (LGD) used: Expected LGD of 56.0% for the AAA (sf) scenario, 51.6% for the AA(low) (sf) scenario, 48.1% for the A (low) (sf) scenario, and a 25% and 50% increase on the applicable LGD at each rating level.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and a 25% increase on the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase on the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase on the expected LGD

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes: AA (high) (sf), A (high) (sf), AA (high) (sf), A (high) (sf), A (low) (sf), AA (low)(sf), A (low) (sf), and BBB (high) (sf);
-- Class B Notes: A (sf), BBB (high) (sf), A (high) (sf), BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (sf), and below BB (high) (sf)
-- Class C Notes: BBB (high) (sf), BB (high) (sf), BBB (high) (sf), BB (high) (sf), BB (high) (sf), BBB (low) (sf), BB (high) (sf), and BB (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. 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: Stephan Rompf, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 October 2021

DBRS Ratings GmbH
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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: http://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: 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].

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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