Press Release

DBRS Morningstar Confirms Rating on Rosenkavalier 2015 UG Following Amendment

Structured Credit

November 30, 2021

DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (high) (sf) rating on the Class A Notes issued by Rosenkavalier 2015 UG (the Issuer) following a transaction amendment that includes the purchase of an additional portfolio funded via an increase in the outstanding balance of the Class A and Class B Notes to EUR 2,375,000,000 and EUR 1,425,000,000, respectively. The total portfolio increased to EUR 3,800,000,000 from EUR 3,500,000,000.

The restructuring, which will be effective on 30 November 2021, introduced a number of changes to the transaction including:
-- An extension of the replenishment period until the payment date falling in November 2024;
-- The issuance of additional Class A and Class B Notes (together, the Notes) in the amount of EUR 271.5 million and EUR 28.5 million, respectively. The credit enhancement to the Class A Notes via subordination decreased to 37.5% from 39.9% pre-restructuring;
-- An increase of the total portfolio by EUR 300 million to EUR 3.8 billion from EUR 3.5 billion, funded by additional issuance of Class A and Class B Notes.
-- Changes to certain pool limits and the wind-down events definition (for details, please see the accompanying rating report at www.dbrsmorningstar.com).

The transaction is a revolving cash flow securitisation transaction backed by a portfolio of euro-denominated loans to large corporates, small and medium-size enterprises (SMEs), entrepreneurs, and self-employed individuals based in Germany. The loans are originated and serviced by UniCredit Bank AG (UCB; the Originator, Seller, and Servicer).

The transaction has a three-year revolving period ending in November 2024, during which time UCB has the option to sell additional loan receivables to the Issuer on a daily basis as long as the eligibility criteria and replenishment criteria are met. The revolving period will end prematurely if certain replenishment termination events occur, including if the cumulative default ratio exceeds 1.0% or the cumulative delinquency ratio exceeds 5.5%.

The transaction cash flow structure resembles that of a typical synthetic rather than a cash securitisation transaction 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 on the Class A Notes is allowed to defer and is ultimately extinguishable without resulting in an event of default under the agreements. DBRS Morningstar’s rating on the Class A Notes addresses the likelihood of the ultimate payment of interest and the ultimate payment of principal on or before the final legal maturity date on 30 November 2045.

RATING RATIONALE
The rating confirmation is based on the following analytical considerations:

-- The eligibility criteria and replenishment criteria, based on which DBRS Morningstar created a worst-case portfolio. The loss limits on the borrower and industry concentrations negatively affected the transaction, which DBRS Morningstar considered in its analysis. On the other hand, DBRS Morningstar considered the limits on the maximum weighted-average (WA) internal probability of default (PD) of 1.90% and a minimum obligor rating of 6 for the portfolio to be positive factors in its analysis.

-- The likelihood that, while the loans may be backed by mortgage collateral, this will include second-lien loans and below. Given the absence of loan-to-value covenants, DBRS Morningstar 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 Morningstar 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 of a typical 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 Morningstar 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 (sf) rating level reduced to 23.44% from 26.25%.

-- Commingling risk, which 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 servicing.

-- Following the restructuring, the Class A Notes’ total credit enhancement of 37.5%, which DBRS Morningstar 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 consistency of the legal structure with DBRS Morningstar's “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions addressing the assignment of the assets to the Issuer.

-- The current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

DBRS Morningstar analysed the transaction structure in its proprietary Excel-based cash flow engine.

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 SME 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. For this transaction, DBRS Morningstar increased the expected default rate for obligors in certain industries based on their perceived exposure to the adverse disruptions 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.

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 rating is Rating CLOs Backed by Loans to European SMEs (28 June 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. Due to the inclusion of a revolving period in the transaction, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

DBRS Morningstar conducted a review of the amended transaction documents, including, inter alia, the Amendment Agreement.

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 sources of data and information used for this rating include UniCredit Bank AG .

DBRS Morningstar received the following data:
-- Annual rating migration matrices for three business segments (small business customers, medium-size enterprises, and large corporates) from 2009 to 2020;
-- Annual static default and net-loss data for from 2011 to 2020;
-- Aggregate prepayment summary information covering 2019 and 2020;
-- Performance track record of Rosenkavalier 2015 UG since 2015; and
-- Loan-by-Loan portfolio and amortisation schedule as of 23 November 2021.

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

At the time of the amendment, 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 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.

The last rating action on this transaction took place on 26 November 2020, when DBRS Morningstar confirmed the rating on the Class A Notes at A (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to Stephan Rompf.

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

Sensitivity Analysis: 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 (the Base Case):

-- Probability of Default Rates Used: Base Case PD of 2.2%, and a 10% and 20% increase on the Base Case PD.
-- Recovery Rates Used: Base Case recovery rate of 23.4% at the A (high) (sf) rating level and 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 not have an impact on the rating on the Class A Notes. A scenario combining both an increase in the PD by 10% and a decrease in the Recovery Rate by 10% would not have an impact on the rating on the Class A Notes.

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.

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

Lead Analyst: Stephan Rompf, Assistant Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 18 December 2015

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: 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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