DBRS Morningstar Assigns A (high) (sf) Rating to Rosenkavalier 2022 UG (haftungsbeschränkt)

DBRS Ratings GmbH (DBRS Morningstar) assigned an A (high) (sf) rating to the EUR 2,505,000,000 Class A fixed-rate notes due May 2028 (the Class A Notes) issued by Rosenkavalier 2022 UG (haftungsbeschränkt) (the Issuer or Rosenkavalier).

The rating on the Class A Notes addresses the ultimate payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2028. Rosenkavalier also issued EUR 495,000,000 Class B fixed-rate notes due May 2028 (together with the Class A Notes, the notes), which were not rated by DBRS Morningstar.

The transaction is a revolving cash flow securitisation collateralised by a portfolio of performing loans to German corporates, small and medium-size enterprises (SMEs), and entrepreneurs. The loans were granted by UniCredit Bank AG (UCB; the originator, or the servicer) under its EGON loan program and consist of short-term bullet loans with a fixed interest and principal payment at maturity.

On the issue date, the originator will select a portfolio with an aggregate par balance of EUR 3 billion in line with the eligibility and replenishment criteria.

The transaction includes a 36-month revolving period, scheduled to end in November 2025, during which time the originator may sell new receivables to the Issuer on a daily basis, subject to certain eligibility and replenishment criteria. The revolving period will end prematurely if certain events occur, such as the cumulative gross default rate exceeding 2.5% or a downgrade of the originator’s rating below BBB (low) by DBRS Morningstar. During the revolving period, the purchase of new receivables will be funded through principal collections.

The Class A Notes benefit from a total credit enhancement of 16.5%, which is provided by the subordination of the Class B Notes. The servicer will fund a liquidity risk reserve upon a downgrade below BBB (low), which will be available to cover expenses and senior fees. DBRS Morningstar expects the liquidity risk reserve to cover senior costs for approximately one year. Interest on the notes is deferrable and, ultimately, extinguishable.

The transaction is exposed to the risk of set-off and no additional reserve or credit enhancement is provided to mitigate this risk. As a result, DBRS Morningstar assumed a set-off risk loss of EUR 105 million in its analysis, which was deducted from the portfolio balance.

UCB is a dominant counterparty for the transaction as it acts as originator, seller, servicer, account bank, cash administrator, and paying agent. UCB holds the servicer collection account, the Issuer´s operating accounts, and the liquidity risk reserve account. Based on the account bank’s rating and the replacement provisions included in the transaction documents, DBRS Morningstar considers the risk of such a counterparty to be consistent with the rating assigned, in accordance with the “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar based its analysis on a hypothetical worst-case portfolio constructed while considering the eligibility and replenishment criteria on further purchased loan receivables.

DBRS Morningstar determined its rating based on the following analytical considerations:
-- The probability of default (PD) for the portfolio was determined using the EGON loan performance information supplied. DBRS Morningstar assumed an annualised PD of 1.9% for the outstanding portfolio after the end of the revolving period.
--The assumed weighted-average life (WAL) of the portfolio was 90 days.
-- DBRS Morningstar used the PDs and WAL in its Diversity Model to generate the hurdle rate for the assigned rating.
-- DBRS Morningstar determined the recovery rate by assuming an unsecured portfolio with a corresponding recovery rate of 26.25% at the A (high) (sf) rating level.
-- DBRS Morningstar determined the breakeven rates for the interest rate stresses and default timings using DBRS Morningstar’s cash flow tool.

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 its proprietary Excel-based cash flow engine, considering the default rates at which the rated notes did not return all specified cash flows.

On 2 December 2022, DBRS Morningstar amended the above press release to include a disclosure with respect to information on historical default rates.

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” (10 June 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 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 considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 were provided by UCB and include:
(1) Vintage performance data covering the period from 2011 to 2022.
(2) Annual migration data covering small, medium, large, and commercial real estate rating systems between 2010 and 2022.
(3) Migration matrices regarding the EGON loan program:
-- Annualised monthly transitions for the years 2008 to 2022.
-- Transitions between the purchase and redemption of EGON loans for the years 2005 to 2022.

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 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.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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):

-- PD rates used: Base case PD of 1.9%, a 10% and 20% increase on the base case PD.
-- Recovery rates used: Base case recovery rate of 25.25% at the A (high) (sf) stress level, a 10% and 20% decrease in the base case recovery rate. DBRS Morningstar assumes the percentage decreases in the recovery rates 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 each lead to a rating confirmation on the Class A Notes of A (high) (sf). A scenario combining both an increase in the PD by 20% and a decrease in the recovery rate by 20% would lead to a rating confirmation on the Class A Notes of A (high) (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: Stephan Rompf, Vice President
Rating Committee Chair: Carlos Silva, Senior Vice President
Initial Rating Date: 18 November 2022

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

-- Rating CLOs Backed by Loans to European SMEs (10 June 2022) and DBRS Morningstar SME Diversity Model v2.6.0.2, https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- 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.
-- Cash Flow Assumptions for Corporate Credit Securitizations (26 January 2022), https://www.dbrsmorningstar.com/research/391225/cash-flow-assumptions-for-corporate-credit-securitizations.
-- 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 Originators (15 September 2022), https://www.dbrsmorningstar.com/research/402773/operational-risk-assessment-for-european-structured-finance-originators.
-- 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.
-- 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].