Press Release

DBRS Morningstar Assigns Ratings to Weser Funding S.A., Compartment No. 6

Structured Credit

April 06, 2023

DBRS Ratings GmbH (DBRS Morningstar) assigned an A (sf) rating to the Compartment No. 6 Floating Rate Notes due 2058 (the floating-rate notes) issued by Weser Funding S.A., acting in the name of its Compartment No. 6 (the Issuer).

The rating on the floating-rate notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in April 2058.

The transaction is a revolving cash securitisation backed by a portfolio of euro-denominated loans to small and medium-size enterprises (SMEs) located in Germany and other European countries. Oldenburgische Landesbank AG (OLB) originated the loans. The initial portfolio has an aggregate par balance of EUR 288.2 million and was selected in accordance with the loan eligibility criteria and concentration limits. This figure excludes a portion of 5% (EUR 15.2 million) in each loan receivable not sold to the Issuer, which OLB retains for risk- retention purposes and assigns to the Issuer under the retained receivables security agreement to cover for any potential set-off risk. The total initial portfolio par balance, including risk retention, amounted to EUR 304 million at closing (the initial portfolio reference amount). As per the transaction documentation, OLB intends to increase the portfolio par balance to EUR 1.3 billion (the transaction portfolio reference amount) by issuing additional floating-rate notes and subordinated notes before August 2023.

The transaction has a three-year revolving period ending in May 2026, during which time OLB has the option to sell additional loan receivables to the Issuer on a daily basis as long as the eligibility criteria and the concentration limits are complied with. The revolving period will end prematurely if certain early amortisation events occur, including if the monthly default ratio exceeds 1.0%, the monthly delinquency ratio exceeds 4.0%, or the gross cumulative default rate exceeds 1.0% of the initial balance. A shortfall of more than EUR 1 million in the required replenishment fund or required set-off reserve, or a shortfall in the cash reserve or expected collections reserve will also lead to an early amortisation event.

Commingling risk is mitigated through the expected collections reserve. During the revolving period, OLB will deposit on a monthly basis the expected interest collections for the next monthly period into the Issuer bank account. All principal proceeds will be kept in OLB’s collection accounts for up to three days to purchase additional loans. The purchase of new receivables is on a daily basis. The expected collections during the amortisation period include expected interest and principal to be collected during the next monthly collection period.

The current set-off risk exposure of EUR 25.7 million (8.5% of the initial portfolio reference amount) is mitigated through an effective overcollateralisation of EUR 24.3 million and the set-off risk reserve, funded in the amount of EUR 1.4 million at closing, which is adjusted monthly to account for the changes in the set-off exposure during the reinvestment period.

The transaction does not benefit from any excess spread to cover principal shortfalls that could occur as a result of portfolio defaults.

DBRS Morningstar conducted its analysis based on a stressed portfolio composition stipulated by the transaction concentration limits. The concentration limits allow the originator significant flexibility, which may result in higher industry and obligor concentrations compared with the current portfolio. It also allows up to 20% of the portfolio balance be granted to borrowers in other European Union (EU) countries. However, the eligibility criteria and concentration limits provide tight quality tests regarding the overall probability of default (PD) of the portfolio and maximum portfolio weighted-average life (WAL), and they also exclude borrowers with a low internal rating.

The notes pay interest on a floating rate while the portfolio generates interest based on a mix of floating- and fixed-rate loans. The resulting interest risk is mitigated by several factors: (1) interest on the floating-rate notes is floored at 0% and capped at a maximum coupon of 3.4%, (2) the portfolio yield floor test that ensures that, during the revolving period, a minimum average portfolio yield of 3.5% is available to cover the notes coupon. In addition, concentration limits are in place to guarantee (3) a minimum weighted-average fixed rate of 2.7%, (4) a weighted-average floating-rate margin of 1.8%, (5) a maximum share of floating-rate loans in the portfolio, capped at 80% of the transaction amount, and (6) a cap of 40% for the share of unfloored floating-rate loans. The cash reserve will also act as a liquidity reserve given that a significant portion of the portfolio can pay interest with a quarterly, semiannual, or annual frequency.

While a portion of the portfolio benefits from security in the form of mortgage collateral, pledges, or guarantees, there is no minimum security covenant. For this reason, DBRS Morningstar assumed senior unsecured recovery rates for the total portfolio in its analysis. The recovery rate used for the A (sf) rating level was 24.8%, resulting from applying the unsecured recovery rate of 26.3% for 80% of the portfolio, and unsecured recovery rates of 21.3% and 16.25% for each 10% of the remaining portfolio to account for potential exposures to borrowers in EU countries with a lower expected recovery.

DBRS Morningstar assumed an annualised base-case PD of 1.65% for SME obligors, 4.16% for SME acquisition finance projects, and 4.85% for SME leasing companies, which was based on an analysis of OLB’s rating systems, historical migration data, and the maximum portfolio weighted-average internal PD covenant of 1.1% for SME obligors and 1.85% for SME acquisition finance projects allowed in the replenishment criteria.

DBRS Morningstar assumed a stressed WAL of the portfolio of 4.75 years in its analysis which was based on the maximum allowed under the concentration limits and the provisional portfolio. The PD assumptions and WAL were used in the DBRS Morningstar Diversity Model to generate the hurdle rate for the target rating.

DBRS Morningstar analysed the transaction structure in its proprietary cash flow tool, considering the default rates at which the rated notes did not return all specified cash flows.

At closing, the floating-rate notes benefit from a total credit enhancement of 99.2%. However, the planned top-up of the capital structure foresees an increase of mainly the floating-rate notes, thereby diluting the available credit enhancement to 23.2%. DBRS Morningstar considered both the initial and the planned top-up capital structure in its analysis.

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.

DBRS Morningstar analysed the transaction structure in its Proprietary Cash Flow Engine, considering the default rates at which the rated notes did not return all specified cash flows.

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), https://www.dbrsmorningstar.com/research/398252/rating-clos-backed-by-loans-to-european-smes.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 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 include QuantFS GmbH and Oldenburgische Landesbank AG.

DBRS Morningstar received annual migration data for OLB’s rating systems from 2018 to 2022, static historical monthly cumulative default and recovery data from 2018 to 2022, and historical monthly delinquency statistics from 2018 to 2022 for acquisition finance and SME leasing borrowers (from 2012 to 2020 for SME borrowers). OLB further provided balance sheet information of a subsample of OLB’s acquisition finance borrower universe, and supplemental information on its SME leasing business. Stratification and pool information was provided as of the initial cut-off date of 24 March 2023 and included its related contractual amortisation profile.

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

DBRS Morningstar was supplied with one or more 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 with the parameters used to determine the rating (the Base Case):

-- PD Rates Used: A base case PD of 1.65% for SME obligors, 4.85% for SME leasing companies, and 4.16% for SME acquisition finance projects, and a 10% and 20% increase on the base case PD.
-- Recovery Rates Used: A base case recovery rate of 24.75% at the A (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%, ceteris paribus, would lead to a downgrade of the floating-rate notes to BBB (high) (sf). A hypothetical decrease of the recovery rate by 20%, ceteris paribus, would lead to a downgrade of the floating-rate notes to A (low) (sf). A scenario combining both an increase in the PD by 10% and a decrease in the recovery rate by 10% would lead to a downgrade of the floating-rate notes to BBB (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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Stephan Rompf, Vice President, Credit Ratings
Rating Committee Chair: Carlos Silva, Senior Vice President, Head of European Structured Credit
Initial Rating Date: 6 April 2023

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The rating methodologies used in the analysis of this transaction can be found at: https://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: 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].

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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