DBRS Morningstar Confirms Ratings on KMU Portfolio S.A., Compartment 2015-1

DBRS Ratings GmbH (DBRS Morningstar) confirmed the following ratings on the notes (collectively, the Rated Notes) issued by KMU Portfolio S.A., Compartment 2015-1 (the Issuer):

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

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

The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the February 2022 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the Rated Notes to cover the expected losses at their respective rating levels;
-- No revolving period termination events; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The transaction is a securitisation of German commercial loans originated and serviced by akf bank GmbH & Co. KG (akf bank). As of the February 2022 payment date, the EUR 400.0 million portfolio consisted of auto loans (24.1% of the outstanding discounted principal balance), commercial vehicle loans (31.7%), machinery loans (11.4%), other equipment loans (32.0%), and ship loans (0.8%). The pool contains 27.4% of loans that include a balloon payment element. The outstanding discounted principal balance of the balloon part is 15.0% and the concentration limit further stipulates that this must remain below 15.0%.

PORTFOLIO PERFORMANCE
As of the February 2022 payment date, loans that were more than one month delinquent represented 0.2% of the outstanding collateral balance. Gross cumulative defaults amounted to 1.3% of the aggregate initial portfolio balance, of which 65.7% has been recovered so far.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the pool receivables and maintained its base case PD and LGD assumptions at 4.5% and 82.5%, respectively, based on a worst-case portfolio composition as permitted by the concentration limits applicable during the revolving period.

REVOLVING PERIOD & CONCENTRATION LIMITS
The transaction had an initial 36-month revolving period, which was extended by 20 months following an amendment in April 2017 and has been extended by an additional 36 months following an amendment in March 2020. As of the February 2022 payment date, no performance triggers have been breached; if these performance triggers were breached, they 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 Class A, Class B, and Class C 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, and 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 February 2022 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. Furthermore, 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 on 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.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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 ABS transactions. The ratings are 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 9 December 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/389454/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2021-update and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 the “Master European Structured Finance Surveillance Methodology” (8 February 2022).

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 continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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

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 these ratings include monthly investor reports provided 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 15 March 2021, when DBRS Morningstar confirmed its ratings on 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 Preben Cornelius Overas.

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 rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar expected a base case PD and 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.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating on the Class A Notes would be expected to remain at AA (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating on the Class A Notes would be expected to fall to AA (high) (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to fall to AA (low) (sf).

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

Class C Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of 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:
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: Preben Cornelius Overas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 13 August 2015

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (29 July 2021),
https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (8 February 2022), https://www.dbrsmorningstar.com/research/392000/master-european-structured-finance-surveillance-methodology.
-- 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.
-- 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.
-- 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.
-- 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].