DBRS Morningstar Confirms Rating on Rosenkavalier 2020 UG (haftungsbeschränkt) Following Restructuring

DBRS Ratings GmbH (DBRS Morningstar) confirmed its A (high) (sf) rating on the Class A Notes issued by Rosenkavalier 2020 UG (haftungsbeschränkt), following a transaction restructuring.

The rating on the Class A Notes addresses the ultimate repayment of interest and principal by the legal final maturity date of 30 September 2035.

The confirmation follows an annual review and restructuring of the transaction and is based on the following analytical considerations:
-- An amendment to the transaction executed on 13 September 2023 and effective on 31 October 2023, consisting of a new tranching of the Notes, the repurchase of EUR 100 million from the pool, the extension of the revolving period, and some additional structural changes (the Restructuring);
-- Portfolio performance, in terms of delinquencies and defaults, as of the August 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at their A (high) (sf) rating level; and
-- No replenishment period termination event has occurred.

The notes are backed by a portfolio of fixed-rate unsecured, amortising personal loans granted to individuals domiciled in Germany and serviced by UniCredit Bank AG (UniCredit or the originator). The transaction closed in September 2020 and included a 36-month replenishment period that was originally scheduled to end in September 2023. Following the Restructuring, the revolving period has been extended by another 42 months and it is now scheduled to end on the April 2027 payment date. During this period, the Issuer may purchase additional receivables, provided that the eligibility and replenishment criteria set out in the transaction documents are satisfied. The replenishment period may end earlier than scheduled if certain events, such as a breach of performance triggers, occur. To date, no early amortisation events have occurred.

RESTRUCTURING
The Restructuring of the transaction envisages the following changes effective as of 31 October 2023:
-- New tranching resulting in a decrease in the Class A and Class B Notes’ outstanding balances to EUR 588 million and EUR 112 million, respectively, from EUR 632 million and EUR 168 million, respectively.
-- Repurchase of EUR 100 million from the portfolio including delinquent and defaulted receivables.
-- Decrease in the credit enhancement of the Class A Notes to 16.0% from 21.0%.
-- Extension of the revolving period to April 2027 from October 2023.
-- Inclusion of an “Optional Early Redemption Mechanism” on a pro rata basis.
-- Redefinition of the “Replenishment Period termination event”, with a new limit of 3% for the cumulative default ratio, as of any cut-off date prior to or on 30 April 2027.

PORTFOLIO PERFORMANCE
As of the August 2023 payment date, loans that were one to two months and two to three months delinquent represented 0.02% and 0.00% of the portfolio balance, respectively. There are no loans more than 90 days in arrears. Gross cumulative defaults amounted to 1.0% of the aggregate original and subsequent portfolios, up from 0.7% at the last annual review. As of August 2023, the recovery ratio stood at 27.3%.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar updated its base case PD and LGD assumptions to 4.0% and 80.0%, respectively, following updated historical performance data received from UniCredit in the context of the Restructuring.

CREDIT ENHANCEMENT AND RESERVES
The subordination of the Class B Notes provides credit enhancement to the Class A Notes. As of the August 2023 payment date, credit enhancement to the Class A Notes remained unchanged since closing at 21.0%, given that the transaction is still in the revolving period. After the amendment effective 31 October 2023, the credit enhancement to the Class A Notes will decrease to 16.0%

The transaction includes a liquidity reserve, which the originator would fund when its rating falls below investment grade. The funded liquidity reserve is only available up to the amount that is not transferred by the servicer to cover the shortfalls in senior expenses and interest on the Class A Notes. DBRS Morningstar considers this arrangement to be incommensurate with a rating that addresses the timely payment of scheduled interest in the highest rating categories, resulting in a certain linkage to UniCredit's financial strength and thereby affecting the rating on the Class A Notes.

UniCredit is the account bank for the transaction. Based on DBRS Morningstar’s private rating on UniCredit, 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.

The originator will fund a deposit reserve for the excess of all borrowers' deposit exposure over 1% of outstanding loan balances if UniCredit’s rating falls below investment grade. DBRS Morningstar considers the potential 1% asset set-off in its cash flow analysis.

DBRS Morningstar’s credit rating on the Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of defaults to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the term under which a long-term obligation has been issued.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

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 the replenishment criteria set forth in the transaction legal documents.

DBRS Morningstar has conducted a review of the transaction’s legal documents provided in the context of the Restructuring.

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 performance and portfolio data relating to the receivables provided by UniCredit, including but not limited to:

-- Monthly default vintage data from October 2014 to May 2023;
-- Monthly net loss vintage data from October 2014 to May 2023;
-- Dynamic monthly delinquency data from October 2014 to May 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.

The last rating action on this transaction took place on 30 September 2022, when DBRS Morningstar confirmed its rating on the Class A Notes at A (high) (sf).

The lead analyst responsibilities for this transaction have been transferred to Helvia Meana.

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 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 4.0% and 80.0%, 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 A (high) (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to be downgraded to A (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 be downgraded to A (low) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (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 (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (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://registers.esma.europa.eu/cerep-publication. 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: Helvia Meana, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 30 September 2020

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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 (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.
-- 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.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/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.
-- 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.
-- 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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023), https://www.dbrsmorningstar.com/research/416784/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 http://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].