DBRS Morningstar Upgrades Rating of Alstertal Consumer Funding 2021-1 DAC Class A Notes Following Amendment

DBRS Ratings GmbH (DBRS Morningstar) upgraded to AA (high) (sf) from AA (sf) its rating of the Class A notes issued by Alstertal Consumer Funding 2021-1 DAC (the Issuer) following an amendment effective on 23 May 2023 (the Amendment).

DBRS Morningstar does not rate the Class Z VFN Note also issued in this transaction.

The rating of the Class A notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date.

The notes are backed by a portfolio of fixed-rate, unsecured, amortising personal loans granted to private individuals domiciled in Germany and serviced by Barclays Bank Ireland plc Hamburg Branch (the seller and servicer).

The transaction closed in October 2021. In August 2022, an amendment (the August 2022 Amendment) was executed to increase the subordination to 23%, from 12% at the transaction closing, due to erroneously extracted historical data that substantially underestimated the true credit defaults the portfolio applied in 2021.

The rating action follows an entire review of the transaction and reflects the increased subordination level effective since August 2022 along with other changes contemplated in the Amendment as listed below:
(1) Clarifying the default definition to:
-- When the debtor is 90 days in arrears, or
-- When the debtor is considered unlikely to pay its credit obligations.
(2) Increasing the revolving period termination trigger of cumulative net loss ratio to 5.5% from 2.5% at transaction closing.
(3) Revising the following concentration limits:
-- Increasing the minimum weighted-average interest rate of all purchased receivables at each purchase during the revolving period to 3.5% from 3%.
-- Increasing the concentration of a single debtor to EUR 100,000 from EUR 50,000 at transaction closing.
-- Reducing the maximum self-employed borrower percentage to 10% from 20% at transaction closing.
(4) Revising the payment date from 20th to 22nd of each month.

Additionally, the rating action is based on the following considerations:
-- Portfolio performance, in terms of delinquencies and cumulative net losses, as of the April 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on a potential portfolio migration according to the replenishment criteria;
-- Updated historical data provided by the seller;
-- No early amortisation events to date; and
-- Current available credit enhancement available to the Class A notes to cover the expected losses at the AA (high) (sf) rating level.

TRANSACTION STRUCTURE
The transaction has a remaining 18-month scheduled revolving period until November 2024. During the revolving period, the seller may continue to offer additional receivables that the Issuer will purchase, provided that the eligibility criteria and portfolio criteria set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers, insolvency of the seller, or replacement of the servicer.

The transaction allocates payments on separate interest and principal priorities and benefits from an external liquidity facility with the commitment amount equal to 0.5% of the outstanding Class A notes balance. The liquidity facility can be used to cover shortfalls of senior expenses, interest payments on the Class A notes, and liquidity facility fees and interest if the interest collections are not sufficient. Principal funds can also be reallocated to cover the above shortfalls if the interest collections and liquidity facility draw amount are not sufficient.

The transaction further benefits from a set-off reserve, which will be funded through the transaction’s interest waterfalls if the seller’s rating falls below the BBB threshold.

At the end of the revolving period, the notes will be repaid on a fully sequential basis.

PORTFOLIO PERFORMANCE
Delinquency ratio has been low since closing. As of the April 2023 payment date, delinquency ratio was at 0.3% of the portfolio’s outstanding balance. As of the April 2023 payment date, cumulative loss ratio represented 1.6% of the total receivables purchased.

PORTFOLIO ASSUMPTIONS
During the August 2022 Amendment, DBRS Morningstar was informed that historical default information provided for the transaction analysis in 2021 was incorrect as it should have been compiled based on the definition of IFRS 9, a more conservative default recognition at three or more months in arrears and forbearance, borrower death, and bankruptcy, instead of at six or more months in arrears provided in 2021. In addition, defaulted loans that were subject to the in-house recovery were omitted from the information provided in 2021. As a result, the defaults provided for the transaction analysis in 2021 were underestimated.

DBRS Morningstar was informed of additional data compilation issues in early 2023 and was provided with updated historical data of higher defaults levels compared with the 2022 data. DBRS Morningstar subsequently revised the expected default rate to 6.5% from 4.0% used in transaction closing, taking into consideration the revised historical data and the proposed changes in the Amendment.

COUNTERPARTIES
Elavon Financial Services DAC (Elavon) is the account bank for the transaction. Based on DBRS Morningstar’s private rating of Elavon, 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 commensurate with the rating assigned to the Class A notes, as described in DBRS Morningstar's " Legal Criteria for European Structured Finance Transactions" methodology.

Barclays Bank plc (Barclays) is the liquidity facility provider for the transaction. DBRS Morningstar has a long-term issuer rating of ‘A’ and a critical obligations rating of AA (low) on Barclays, which meets the aforementioned DBRS Morningstar criteria to act in such capacity. The transaction documents contain downgrade provision consistent with the criteria.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Consumer and Commercial Asset-Backed Securitisations” (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.

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 continues to consider 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 servicer reports and the following historical data provided by the seller:
-- Quarterly gross default vintage data from Q1 2015 to Q4 2022;
-- Dynamic monthly prepayment data from January 2016 to January 2023;
-- Dynamic monthly delinquency data from January 2011 to January 2023; and
-- Amortisation schedule and loan by loan data as of 31 January 2023.

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.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

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:

-- Expected Default Rate of 6.5%: A 25% and 50% increase.
-- Expected loss given default (LGD) of 80%: A 25% increase.

Scenario 1: 25% increase in Expected Default
Scenario 2: 50% increase in Expected Default
Scenario 3: 25% increase in LGD
Scenario 4: 25% increase in Expected Default and 25% increase in LGD
Scenario 5: 50% increase in Expected Default and 25% increase in LGD

DBRS Morningstar concludes that the expected ratings under the five stress scenarios are:
-- Class A Notes: AA (sf), AA (low) (sf), AA (sf), AA (low) (sf), A (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: Roberto Perez, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 13 October 2021

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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 European Consumer and Commercial Asset Backed Securitisations (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- 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.
-- 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].