Morningstar DBRS Confirms Credit Rating on Weser Funding S.A., Compartment No. 6

DBRS Ratings GmbH (Morningstar DBRS) confirmed its A (sf) credit rating on 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 (Weser 6 or the Issuer).

The credit 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 credit rating confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of the level of delinquencies and defaults, as of the March 2024 payment date;
-- The one-year base-case probability of default (PD) and default and recovery rates on the portfolio;
-- The fact that no early amortisation event has occurred; and
-- The current available credit enhancement to the notes to cover the expected losses at their A (sf) credit rating level.

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 transaction closed in April 2023 and the total initial portfolio par balance, including risk retention, amounted to EUR 304 million at closing. As of the June 2023 payment date, OLB increased the portfolio par balance to EUR 1.3 billion by issuing additional floating-rate notes and subordinated notes.

The transaction includes a three-year revolving period scheduled to end 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.

PORTFOLIO PERFORMANCE
As of the March 2024 payment date, the overall Weser 6 portfolio consisted of 62,725 loan drawings under 1,325 loans with an aggregate principal balance of EUR 1.3 billion. The portfolio is performing within Morningstar DBRS’ expectations. As of the March 2024 payment date, there were no loans in arrears for more than 90 days and no defaulted loans reported.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the outstanding pool of receivables. However, given the revolving period, Morningstar DBRS maintained its portfolio’s one-year base-case PD assumption at 1.9%, based on the same hypo pool composition as at closing.

Morningstar DBRS slightly updated its default rate and recovery assumptions to 30.5% and 25.7%, respectively, at the A (sf) credit rating level, as a result of an updated asset model version.

CREDIT ENHANCEMENT
As of March 2024, the credit enhancement available to the floating-rate notes was 23.2%, unchanged since the top-up executed on the June 2023 payment date, due to the revolving period in place.

The transaction also benefits from a cash reserve, which is currently at its target balance of EUR 8.2 million. The cash reserve is available to cover shortfalls in senior expenses and interest on the notes during the life of the transaction. Once the outstanding portfolio balance has been reduced to zero, the cash reserve will be released through the waterfall and will be available to pay down outstanding principal on the notes.

The Bank of New York Mellon, Frankfurt Branch acts as the account bank for the transaction. Based on Morningstar DBRS’ private credit rating on The Bank of New York Mellon, Frankfurt Branch, the downgrade provisions outlined in the transaction’s documents, and other mitigating factors inherent in the transaction’s structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit rating assigned to the floating-rate notes, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS’ credit rating on the floating-rate notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS’ credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in its proprietary Excel-based cash flow engine.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit rating is: Rating CLOs Backed by Loans to European SMEs (23 February 2024), https://dbrs.morningstar.com/research/428543.

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

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the surveillance section of 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’s legal documents.

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://dbrs.morningstar.com/research/421590.

The sources of data and information used for this credit rating include investor reports provided by QuantFS GmbH and loan-by-loan data from the European DataWarehouse GmbH.

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

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

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

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

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

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings (the base case):

-- PD Rates Used: Base-case PD of 1.9%, a 10% increase of the base case and a 20% increase of the base-case PD.
-- Recovery Rates Used: Base-case recovery rate of 25.7% at the A (sf) credit rating level, a 10% and 20% decrease in the base-case recovery rates. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery-rate levels.

Morningstar DBRS 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 A (low) (sf).

For further information on Morningstar DBRS 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 Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit 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: 6 April 2023

DBRS Ratings GmbH
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Rating CLOs Backed by Loans to European SMEs (23 February 2024) and Morningstar DBRS SME Diversity Model version 2.6.1.4, https://dbrs.morningstar.com/research/428543
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602
-- Global Methodology for Rating CLOs and Corporate CDOs (23 February 2024), https://dbrs.morningstar.com/research/428544
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730
-- Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024), https://dbrs.morningstar.com/research/429054
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].