Morningstar DBRS Confirms Credit Ratings on Weser Funding S.A., Compartments No. 3 and 4

DBRS Ratings GmbH (Morningstar DBRS) confirmed the following credit ratings on the notes issued by Weser Funding S.A., Compartment No. 3 (Weser 3) and Weser Funding S.A., Compartment No. 4 (Weser 4):

Weser 3:
-- Compartment No. 3 Fixed Rate Notes due 2056 (Fixed Rate Notes) at A (high) (sf)

Weser 4:
-- Compartment No. 4 Floating Rate Notes due 15 May 2058 at BBB (sf)
-- Compartment No. 4 Fixed Rate Notes due 15 May 2058 at BBB (sf)

The credit rating on the rated notes address the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date in July 2056 (Weser 3) and May 2058 (Weser 4).

The credit rating confirmations follow an annual review of the transactions and are based on the following analytical considerations:
-- The portfolios 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 portfolios;
-- 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 respective credit rating levels.

Both transactions are revolving cash securitisation transactions backed by a portfolio of euro-denominated loans granted to large corporates and small and medium-size enterprises (SMEs) located in Germany and other European countries. The loans are originated and serviced by Oldenburgische Landesbank AG (OLB).

The Weser 3 transaction closed in July 2021 and has a three-year revolving period ending in July 2024, during which OLB has the option to sell additional loan receivables to the issuer on a daily basis in accordance with the outlined eligibility criteria and concentration limits. The revolving period is scheduled to end prematurely if certain early amortisation events occur (e.g., if the monthly default ratio exceeds 1.0%, if the monthly delinquency ratio exceeds 4.0%, or if the gross cumulative default rate exceeds 1.0% of the outstanding balance at the relevant cut-off date).

The Weser 4 transaction closed in April 2023 and also has a three-year revolving period ending in May 2026, during which 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 met. 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.

Weser 4's current portfolio has an aggregate par balance of EUR 770 million, unchanged since closing. As per the transaction documentation, the issuer can increase the portfolio par balance to EUR 1 billion by issuing additional rated notes, junior notes, and subordinated notes. The capital structure of such increases is not clearly defined and Morningstar DBRS did not consider it as part of its analysis. Any increase is subject to a rating agency confirmation that such increase will not negatively affect the current credit ratings on the rated notes.

Weser 4's portfolio consists of loans governed by German and Dutch laws, which are transferred via a true sale to the issuer, as well as a portfolio of loan receivables governed by English law. The loans under English law relate to loans granted to certain borrowers in the context of acquisition finance transactions, which will not be sold to the issuer but assigned through a collateralised pass-through note (the CPTN) to the issuer. The CPTN's terms and conditions as well as the associated cash flow agreement between the issuer and OLB will effectively give the issuer the right to receive payments from CPTN debtors. In addition, following the occurrence of a servicer termination event, OLB will instruct the CPTN debtors to make payments of any loan instalments directly into the issuer's account.

PORTFOLIO PERFORMANCE
As of the March 2024 payment date, the overall Weser 3 portfolio consisted of 14,527 loan drawings under 408 loans with an aggregate principal balance of EUR 399.7 million. As of the March 2024 payment date, the overall Weser 4 portfolio consisted of 17,994 loan drawings under 508 loans with an aggregate principal balance of EUR 769.2 million.

The portfolios are 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 in both transactions.

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 2.5% for Weser 3 based on the same hypo pool composition as at closing. For Weser 4, Morningstar DBRS maintained its portfolio's annualised base-case PD of 1.65% for SME obligors, 4.95% for SME acquisition finance projects, and 4.85% for SME leasing companies, based on the same hypo pool composition as at closing.

For Weser 3, Morningstar DBRS maintained its default rate assumption at 35.2% and updated its recovery assumption to 25.6% at the A (high) (sf) credit rating level as a result of an updated methodology. For Weser 4, Morningstar DBRS maintained its default rate assumption at 40.5% and updated its recovery assumption to 41.5% at the BBB (sf) credit rating level as a result of an updated methodology.

CREDIT ENHANCEMENT
As of March 2024, the credit enhancement available to the Fixed Rate Notes for Weser 3 was 31.0% compared with 31.1% at the last annual review. As of the same date, the credit enhancement available to the rated notes for Weser 4 was 26.52%, unchanged since closing. The stable levels of credit enhancement for both transactions reflect the revolving periods in place.

Both transactions also benefit from their respective cash reserves, which are currently at their target balance of EUR 2 million for Weser 3 and EUR 9 million for Weser 4. The cash reserves are available to cover shortfalls in senior expenses and interest on the notes during the life of the transactions. Once the outstanding portfolio balance has been reduced to zero, the cash reserves 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 (BNYM Frankfurt) acts as the account bank for both transactions. Based on Morningstar DBRS' private credit rating on BNYM Frankfurt, the downgrade provisions outlined in the transaction's documents, and other mitigating factors inherent in the transactions' structures, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit ratings assigned to the notes in both transactions, as described in Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit rating on the 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 ratings is: Rating CLOs Backed by Loans to European SMEs (23 February 2024), https://dbrs.morningstar.com/research/428543.

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

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transactions 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 transactions, the analysis continues to consider potential portfolio migration based on replenishment criteria set forth in the transaction's legal documents.

A review of the transactions 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 these credit ratings 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 for Weser 3, Morningstar DBRS was supplied with third-party assessments. However, this did not affect the credit rating analysis.

At the time of the initial credit rating for Weser 4, Morningstar DBRS was not 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 these credit ratings 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.

The last credit rating action on Weser 3 took place on 21 April 2023, when Morningstar DBRS confirmed its credit rating on the Fixed Rate Notes at A (high) (sf).

This is the first credit rating action since the Initial Credit Rating Date for Weser 4.

The lead analyst responsibilities for Weser 4 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 2.5% for Weser 3, a 10% increase of the base case and a 20% increase of the base-case PD. A Base-case PD of 1.65% for SME obligors, 4.85% for SME leasing companies, and 4.95% for SME acquisition finance projects, and a 10% and 20% increase on the base-case PD.

-- Recovery Rates Used: Base-case recovery rate of 25.6% at the A (high) (sf) credit rating level for Weser 3, a 10% and 20% decrease in the base-case recovery rates. Base-case recovery rate of 41.5% at the BBB (sf) credit rating level for Weser 4, 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.

For Weser 3, Morningstar DBRS concludes that a hypothetical increase of the base-case PD by 20%, ceteris paribus, would lead to a confirmation of the notes at A (high) (sf). A hypothetical decrease of the recovery rate by 20%, ceteris paribus, would also lead to a confirmation of the notes at A (high) (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 confirmation of the notes at A (high) (sf).

For Weser 4, Morningstar DBRS concludes that a hypothetical increase of the base-case PD by 20%, ceteris paribus, would lead to a downgrade of the notes to BB (high) (sf). A hypothetical decrease of the recovery rate by 20%, ceteris paribus, would also lead to a downgrade of the notes to BB (high) (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 notes to BB (high) (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.

These credit ratings are 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:
Weser 3: 7 July 2021
Weser 4: 20 April 2023

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

-- Rating CLOs Backed by Loans to European SMEs (23 February 2024) and 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].