DBRS Morningstar Upgrades Rating on abc SME Lease Germany S.A., acting in respect of its Compartment 7

DBRS Ratings GmbH (DBRS Morningstar) upgraded its rating on the Class A Notes issued by abc SME Lease Germany S.A., acting in respect of its Compartment 7 (the Issuer) to AA (high) (sf) from AA (low) (sf).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in October 2031.

The upgrade follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the September 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 Class A Notes to cover the expected losses at the AA (high) (sf) rating level; and
-- No revolving termination event.

The transaction is a revolving securitisation of receivables related to commercial leases extended to small and medium-size enterprises and self-employed individuals in Germany. abcfinance GmbH (abcfinance), ETL Finance GmbH & Co. KG, milon financial services GmbH, Hako Finance GmbH, and Schneidereit Finance GmbH (all either majority- or fully owned subsidiaries of abcfinance) originated and subservice the leases while abcbank GmbH (abcbank) acts as the master servicer. The transaction closed in October 2020 with an initial portfolio of EUR 462.9 million and includes a 24-month revolving period, scheduled to end on the October 2022 payment date.

PORTFOLIO PERFORMANCE
As of the September 2022 payment date, receivables that were 0 to 30 days, 30 to 60 days, and 60 to 90 days delinquent represented 0.5%, 0.0%, and 0.2% of the outstanding collateral balance, respectively, while receivables more than 90 days delinquent amounted to 0.1%. Gross cumulative defaults, defined as receivables at least 180 days in arrears per the transaction documentation, amounted to 0.6% of the aggregate initial portfolios balance, 36.8% of which has been recovered to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD and LGD assumptions to 3.9% and 49.6%, respectively, based on updated historical data provided by the originator in the course of its latest securitisation. The decreased default assumption that drove the rating upgrade results from DBRS Morningstar’s application of the actual portfolio composition instead of the worst-case scenario as permitted by the replenishment criteria during the revolving period, which is set to end in October 2022, as well as the removal of the Coronavirus Disease (COVID-19)-related adjustments.

CREDIT ENHANCEMENT
The subordination of the junior obligations provides credit enhancement to the Class A Notes. As of the September 2022 payment date, credit enhancement to the Class A Notes remained at 12.6%, unchanged from the initial rating date due to the revolving period, which is scheduled to end on the October 2022 payment date, after which the notes are expected to begin amortising.

The transaction benefits from liquidity support provided by a cash reserve, available to cover senior expenses and interest payments due on the Class A and Class B Notes. The reserve was funded to EUR 1.50 million at closing through a subordinated loan granted by abcbank, and has a target balance equal to 0.324% of the outstanding principal balance of the notes, subject to a floor of EUR 750,000. As of the September 2022 payment date, the reserve remained at its target balance of EUR 1.50 million.

The Bank of New York Mellon, Frankfurt branch (BNYM Frankfurt) acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on BNYM 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 rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant impact on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (19 May 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.

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/401817/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 investor reports and information provided by abcbank as well as loan-level data provided by the European DataWarehouse GmbH. In the context of a new transaction from the same originator, DBRS Morningstar was also provided with the following updated historical performance data:
-- Monthly static default data from Q1 2012 to Q1 2022;
-- Monthly static recovery data from Q1 2012 to Q1 2022; and
-- Monthly dynamic delinquency data from Q1 2012 to Q1 2022;

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

At the time of the initial rating, 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 15 October 2021, when DBRS Morningstar confirmed its AA (low) (sf) rating on the Class A Notes.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available at 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 with the parameters used to determine the rating (the base case):

-- DBRS Morningstar expected a lifetime base case PD and LGD for the pool 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 for the Issuer are 3.9% and 49.6%, 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 of the Class A Notes would be expected to remain at AA (high) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Class A Notes would be expected to remain at AA (high) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to decrease to A (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 (high) (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 A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (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: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 16 October 2020

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

-- Master European Structured Finance Surveillance Methodology (19 May 2022), https://www.dbrsmorningstar.com/research/397033/master-european-structured-finance-surveillance-methodology.
-- 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 (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Rating CLOs Backed by Loans to European SMEs (10 June 2022) and SME Diversity Model v2.6.0.1, https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.
-- Rating CLOs and CDOs of Large Corporate Credit (26 January 2022),
https://www.dbrsmorningstar.com/research/391226/rating-clos-and-cdos-of-large-corporate-credit.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2022), https://www.dbrsmorningstar.com/research/402774/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].