DBRS Morningstar Upgrades and Confirms Ratings on TREVA Equipment Finance SA, Compartment 2021-1

DBRS Ratings GmbH (DBRS Morningstar) took the following rating actions on the bonds issued by TREVA Equipment Finance SA, Compartment 2021-1 (the Issuer):

-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AA (high) (sf) from AA (sf)
-- Class C Notes upgraded to A (high) (sf) from A (low) (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date in July 2034. The ratings on the Class B and Class C Notes address the ultimate payment of interest and the ultimate repayment of principal by the final maturity date in accordance with the Issuer’s default definition in the transaction documents (i.e., the timely payment of interest only when they become the most-senior tranche).

The rating actions 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 September 2022 payment date;
-- Updated probability of default (PD), loss given default (LGD), and expected loss assumptions for the aggregate collateral pool and as a result of the updated historical data received; and
-- Current available credit enhancement to rated notes to cover the expected losses at their respective rating levels.

The transaction is a securitisation of a static 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 that the Issuer granted over the assets 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 transaction features a mixed pro rata/sequential amortisation. The Issuer’s 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 become sequential and is nonreversible until the notes are fully redeemed. As of the September 2022 payment date, no sequential event had occurred.

Interest on the Class C and Class M Notes may be subordinated to protect the payment of principal on 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. As of the September 2022 payment date, no interest subordination had occurred.

PORTFOLIO PERFORMANCE
As of the September 2022 cut-off date, loans that were one to two months in arrears and two to three months in arrears represented 1.6% and 0.3% of the outstanding portfolio balance, respectively. The gross cumulative default ratio was equal to 1.8% of the initial portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar assumed an annualised PD of 2.1%, up from 1.9% at closing. DBRS Morningstar updated its base case PD and LGD assumptions to 5.3% and 35.1%, respectively, based on its loan-by-loan analysis on the remaining pool of receivables and the updated historical data from PEAC. The PD decreased to 5.3% from 6.9% at closing because of the current composition of the portfolio, the lower weighted-average life of the portfolio, and the removal of Coronavirus Disease (COVID-19) adjustments.

CREDIT ENHANCEMENT
Overcollateralisation of the outstanding performing collateral portfolio provides credit enhancement to the rated notes. As of the September 2022 payment date, credit enhancement to the Class A, Class B, and Class C Notes was 20.0%, 13.5% and 8.8%, respectively, which is stable since DBRS Morningstar’s initial rating date.

The transaction benefits from liquidity support provided by a cash reserve, which is available to cover the payment of senior expenses, swap payments, and nonsubordinated interest on the rated notes. Its target amount is equal to 0.5% of the outstanding principal balance of the rated notes, subject to a floor of EUR 500,000. As of the September 2022 payment date, the cash reserve was at its target level of EUR 1.07 million.

BNP Paribas Securities Services, Luxembourg branch (BNP Paribas Luxembourg) acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on BNP Paribas Luxembourg, the downgrade provisions outlined in the transaction documents, and structural mitigants 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 notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

The collection accounts are held with Société Générale, S.A. (Société Générale). DBRS Morningstar’s public Long-Term Issuer Rating on Société Générale is A (high) with a Stable trend and its Long Term Critical Obligations Rating is AA with a Stable trend. The seller has granted a pledge over the collection accounts under German law in the Issuer’s favour.

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). DBRS Morningstar assigned a private rating to BofA DAC and the hedging documents contain downgrade provisions consistent with DBRS Morningstar’s criteria.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect 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: 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.

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 these ratings include investor reports provided by Intertrust Administrative Services B.V. and servicer reports, additional information, loan-level data, and historical performance data provided by PEAC.

DBRS Morningstar received the following historical data:
-- Quarterly cumulative default and recovery 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; and
-- Annual prepayment vintage data from 2015 to 2021.

DBRS Morningstar did not rely upon third-party due diligence 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 17 November 2021, when DBRS Morningstar finalised its provisional ratings on the Class A, Class B, and Class C Notes at AAA (sf), AA (sf), and A (low) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Pascale Kallas.

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 transactions 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 loans for the Issuer are 5.3% and 35.1%, 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 AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to AA (sf).

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

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

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

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pascale Kallas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
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.

-- Master European Structured Finance Surveillance Methodology (19 May 2022), https://www.dbrsmorningstar.com/research/397033/master-european-structured-finance-surveillance-methodology.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- 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 CLOs Backed by Loans to European SMEs (10 June 2022) and SME Diversity Model v.2.6.0.1, https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.
-- Rating European Structured Finance Transactions Methodology (15 July 2022), https://www.dbrsmorningstar.com/research/399899/rating-european-structured-finance-transactions-methodology.
-- 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.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.

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].