DBRS Morningstar Upgrades and Confirms Credit Ratings on KMU Portfolio S.A., Compartment 2015-1

DBRS Ratings GmbH (DBRS Morningstar) took the following credit rating actions on the notes (collectively, the Rated Notes) issued by KMU Portfolio S.A., Compartment 2015-1:

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

The credit ratings address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in March 2031.

The credit 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 November 2023 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and,
-- Current available credit enhancement to the Rated Notes to cover the expected losses at their respective credit rating levels.

The transaction is a securitisation of German commercial loans originated and serviced by akf bank GmbH & Co. KG (akf bank). As of the November 2023 payment date, the EUR 290.0 million portfolio consisted of auto loans (20.4% of the outstanding discounted principal balance), commercial vehicle loans (31.1%), machinery loans (11.9%), other equipment loans (35.3%), and ship loans (1.3%). Of the loans in the pool, 27.7% include a balloon payment.

PORTFOLIO PERFORMANCE
As of the November 2023 payment date, loans that were more than one month delinquent represented 0.4% of the outstanding collateral balance. Gross cumulative defaults amounted to 1.6% of the aggregate initial portfolio balance, 65.2% of which has been recovered so far.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted a loan-by-loan analysis of the pool receivables and updated its base-case PD and LGD assumptions to 3.76% and 75.7% from 4.5% and 82.5%, respectively.

CREDIT ENHANCEMENT
The subordination of the respective junior notes provides credit enhancement. As of the November 2023 payment date, the credit enhancement to the Class A, Class B, and Class C Notes stood at 33.1%, 18.3%, and 11.0%, up from 23.0%, 12.0%, and 6.5%, respectively, at last annual review. The increased credit enhancement prompted the upgrades on the Class B and Class C Notes.

The transaction closed with the support of a EUR 2.5 million cash reserve, available to cover shortfalls on senior fees and interest on the Rated Notes. To maintain the same proportional amount of credit enhancement to the Rated Notes, this reserve was increased to EUR 4.0 million in April 2017. It amortises with the Rated Notes with a target level equal to 1.0% of the aggregated balance of all rated and unrated notes with a floor of EUR 0.5 million. Currently, this account stands at its required amount of EUR 3.0 million and has not registered any shortfalls since closing.

A commingling reserve is also available to mitigate any loss resulting from servicer insolvency. It has been at its target amount of EUR 32.0 million since April 2017. The reserve will amortise with a target amount equal to the sum of the principal collections scheduled to be received over the two succeeding months plus 2.5% of the aggregate principal balance.

Should the amount of any potential set-off claims exceed 0.1% of the aggregate principal balance and the unsecured, unsubordinated, and unguaranteed obligations of akf bank breach specified credit rating thresholds, akf bank shall deposit cash collateral equal to the set-off risk amount. As of the November 2023 payment date, none of the securitised receivables had any associated set-off risk.

Since the portfolio receivables and the Rated Notes pay a fixed coupon, there is a natural hedge in the transaction structure.

The Bank of New York Mellon, Frankfurt Branch (BNY Mellon Frankfurt) acts as the account bank for the transaction. Based on DBRS Morningstar’s private credit rating on BNY Mellon Frankfurt, 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 credit ratings assigned to the Rated Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar’s credit ratings on the Rated Notes address 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 terms 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 analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is the “Master European Structured Finance Surveillance Methodology” (11 December 2023), https://www.dbrsmorningstar.com/research/425148/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.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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/421590/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 credit ratings include monthly investor reports provided by akf bank and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial credit ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 6 February 2023, when DBRS Morningstar confirmed its credit ratings on the Class A, Class B, and Class C Notes at AAA (sf), AA (low) (sf), and A (low) (sf), respectively.

Information regarding DBRS Morningstar credit 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 credit ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):

-- DBRS Morningstar expected a base-case PD and LGD for the portfolio 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 receivables are 3.8% and 75.7%, respectively.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD and LGD increase by a certain percentage over the base-case assumption.

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

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

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

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

Lead Analyst: Preben Cornelius Overas, Assistant Vice President
Credit Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit Rating Date: 13 August 2015

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (11 December 2023), https://www.dbrsmorningstar.com/research/425148/master-european-structured-finance-surveillance-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://www.dbrsmorningstar.com/research/420572/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (15 September 2023),
https://www.dbrsmorningstar.com/research/420573/operational-risk-assessment-for-european-structured-finance-originators.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (22 October 2023), https://www.dbrsmorningstar.com/research/422276/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (11 December 2023),
https://www.dbrsmorningstar.com/research/425149/rating-european-structured-finance-transactions-methodology.
-- 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 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].