Morningstar DBRS Finalises Provisional Credit Ratings on TREVA Equipment Finance SA, Compartment 2024-1

DBRS Ratings GmbH (Morningstar DBRS) finalised its provisional credit ratings to the Class A, Class B, and Class C Notes (together, the Rated Notes) issued by TREVA Equipment Finance SA, Compartment 2024-1 (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (high) (sf)
-- Class C Notes at A (high) (sf)

Morningstar DBRS did not assign credit ratings to the Class M Notes (together with the Class A, Class B, and Class C Notes, the Notes) issued in this transaction.

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date. The credit ratings on the Class B and Class C Notes address the ultimate payment of interest and the ultimate repayment of principal by the final maturity date while junior to other outstanding classes of notes, but the timely payment of interest when they are the senior-most tranche in accordance with the Issuer's default definition provided in the transaction documents.

This transaction represents the issuance of Notes backed by a static EUR 500 million portfolio of receivables related to lease agreements, excluding the residual value component of the leases, granted by PEAC (Germany) GmbH (PEAC; the originator) to commercial lessees residing or incorporated in Germany. The Notes benefit from security that the Issuer granted over the assets to Intertrust Trustees GmbH by way of transfer and assignment of the lease receivables, including all present and future rights, claims, interests, and security title to the leased objects. The proceeds of a subordinated loan will fund the cash reserve.

CREDIT RATING RATIONALE
Morningstar DBRS based its credit ratings on a review of the following analytical considerations:
-- The transaction's structure, including the form and sufficiency of available credit enhancement to withstand stressed cash flow assumptions and repay the Issuer's financial obligations according to the terms under which the Notes have been issued;
-- The credit quality of PEAC's portfolio, the characteristics of the collateral, its historical performance, and Morningstar DBRS-projected behaviour under various stress scenarios;
-- PEAC's capabilities with respect to originations, underwriting, servicing, and its position in the market and financial strength;
-- The operational risk review of PEAC, which Morningstar DBRS deems to be an acceptable servicer;
-- The opinion on the backup servicer, Intertrust (Deutschland) GmbH, and its role in the transaction;
-- The transaction parties' financial strength with regard to their respective roles;
-- The consistency of the transaction's legal structure with Morningstar DBRS' "Legal Criteria for European Structured Finance Transactions" methodology;
-- The consistency of the transaction's hedging structure with Morningstar DBRS' "Derivative Criteria for European Structured Finance Transactions" methodology; and
-- The sovereign credit rating on the Federal Republic of Germany, currently rated AAA with a Stable trend by Morningstar DBRS.

The credit ratings are also based on the following analytical considerations:
-- Morningstar DBRS determined the probability of default (PD) for the portfolio using the historical performance information supplied. Morningstar DBRS assumed an annualised PD of 2.2%.
-- The assumed weighted-average life (WAL) of the portfolio was 1.6 years.
-- Morningstar DBRS used the PDs and WAL in its Diversity Model to generate the hurdle rate for the assigned credit ratings.

TRANSACTION STRUCTURE
The transaction features a mixed pro rata/sequential amortisation. Issuer available funds will initially be allocated pro rata and switch to a sequential allocation only if a sequential trigger event occurs. Such event will include, among others, the cumulative gross default ratio exceeding certain threshold levels, the Class M Notes interest deferral trigger being breached on two consecutive payment dates by a pre-defined amount, and only 10% of the aggregate discounted balance remaining outstanding. The pro rata allocation considers the Notes' relative principal amounts outstanding and the performing collateral portfolio. Once the sequential redemption event is triggered, the principal repayment of the Notes will turn sequential and is nonreversible.

Interest on the Notes (excluding the Class A Notes) may be subordinated to protect the payment of principal on the more senior Notes. Interest subordination is subject to note-specific conditions that evaluate the actual ranking of the Notes and the level of available (over)collateralisation. These subordinations are curable and potentially allow for interest payments that were previously subordinated to switch back to their higher position in the pre-enforcement priority of payments as soon as the relevant deferral trigger has been remedied. Any subordinated interest is not subject to further interest accruals.

The transaction benefits from liquidity support provided by a cash reserve, funded to an amount equal to 1.0% of the initial principal amount of the Rated Notes. The reserve is available to cover the payment of senior expenses, swap payments, and nonsubordinated interest on the Rated Notes prior to being restored to its target amount equal to 1.0% of the outstanding principal balance of the Rated Notes, subject to a floor of EUR 500.000.

All lease receivables are sold using the lease-specific yield as discount rate while the Rated Notes are indexed to one-month Euribor.

Interest rate risk for the Rated Notes is mitigated through an interest rate swap provided by Bank of America Europe Designated Activity Company (BofA DAC) and ING Bank N.V. (ING).

COUNTERPARTIES
The collection accounts are held with Société Générale, SA (SocGen). Morningstar DBRS' public Long-Term Issuer Rating on SocGen is A (high) with a Stable trend and the Long Term Critical Obligations Rating is AA with a Stable trend. The transaction contains downgrade provisions relating to the collection account bank that are consistent with Morningstar DBRS' criteria.

The Issuer bank account is held at BNP Paribas SA, Luxembourg Branch, a branch of BNP Paribas SA (BNP). Morningstar DBRS' public Long-Term Issuer Rating on BNP is AA (low) with a Stable trend. The transaction contains downgrade provisions relating to the account bank that are consistent with Morningstar DBRS' criteria.

BofA DAC and ING are the swap counterparties for the transaction. Morningstar DBRS has a private credit rating on BofA DAC as well as a public Long-Term Issuer Rating of AA (low) with a Stable trend on ING. The hedging documents contain downgrade provisions that are consistent with Morningstar DBRS' criteria.

Morningstar DBRS' credit ratings on the Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related principal amount outstanding and the related interest amounts.

Morningstar DBRS' credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) 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.

Morningstar DBRS notes the share of e-Mobility assets (electric bicycles) is high, amounting to 43.5% of the portfolio discounted balance and relating to 93.9% of the total number of lease contracts. These represent PEAC´s vendor business segment, by which clients are offered a solution to provide lease financing of electric bicycles to employees. Morningstar DBRS assumed a PD of 0.56% for the vendor business segment, significantly lower than corresponding PDs for the corporate business and trucks & trailers segments.

In order to determine the relevance and significance of the e-Mobility assets as a potentially credit relevant or significant environmental factor, Morningstar DBRS conducted further analysis of the vendor business segment. The portfolio composition of the vendor business segment is materially different from the two other business segments in terms of borrower size: the relative share of obligors classified as non-SME as per the classification of enterprises by size, in accordance with the Annex to Commission Recommendation 2003/361/EC (i.e., larger corporates), is 33.7% (of the portfolio discounted balance) in the vendor business segment and only 5.5% and 1.7% in the corporate- and trucks & trailer segments, respectively. It also comprises the highest relative share of medium-sized enterprises at 30.6%, compared to 22.1% and 17.7% in the corporate- and trucks & trailers segments, respectively. In addition, the average exposure to borrowers seems to be shorter in the vendor segment with an average original contract length of about 36 months, compared with 62.1 months and 53.0 months in the corporate and trucks & trailers segments. In Morningstar DBRS´ view, the prevalence of larger corporates in the vendor business segment, combined with a shorter average exposure, lends a plausible explanation for the observed lower PDs. In other words, in Morningstar DBRS' view, it is not the type of the collateral (electric bicycles) that determines the lower PD.

In terms of recoveries, the vendor business segment aligns with the corporate business segment, but both are performing worse than the trucks & trailers segment, with an average recovery assumption of 55.5% (56.2% for corporate business), versus 80.4% in the trucks & trailer segment. In Morningstar DBRS´ view, the existence of a well-established secondary market for vehicles along with a historical track record of experienced asset depreciation would support a better performance of this segment compared to more exotic and/or less established asset types. Considering the similar recovery rates of the vendor business and the corporate segments, Morningstar DBRS concluded that no specific recovery rate adjustment was made for the e-Mobility assets.

As a result, with lower PD assumptions due to borrower characteristics and no specific recovery rate adjustment for e-Mobility assets, environmental factors were not deemed to be relevant or significant.

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, https://dbrs.morningstar.com/research/427030.

Morningstar DBRS 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: Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219.

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 principal methodology.

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 the originator and its agents.

Morningstar DBRS received the following data and information:
-- Quarterly cumulative default, recovery, and prepayment vintage data from Q2 2015 to Q4 2024;
-- Annual cumulative default vintages, split by business unit from 2015 to 2024;
-- Annual cumulative recovery vintage data, split by business unit, from 2015 to 2024;
-- Aggregate annual recovery data for contracts where assets were sold, by main equipment type, from 2015 to 2023;
-- Aggregate recovery timing summary information, by main equipment type, from 2015 to 2023; and
-- A theoretical amortisation and stratifications of the provisional pool (as of 30 April 2024).

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

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 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.

These credit ratings concern newly issued financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://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):

-- Probability of default (PD) used: Expected PD of 24.1% for the AAA (sf) scenario, 20.7% for the AA (high) (sf) scenario, 16.6% for the A (high) (sf) scenario, and a 25% and 50% increase on the applicable PD at each credit rating level.
-- Recovery rate used: Expected recovery rate of 42.4% for the AAA (sf) scenario, 44.6% for the AA (high) (sf) scenario, and 48.5% for the A (high) (sf) scenario.
-- Loss given default (LGD) used: Expected LGD of 57.6% for the AAA (sf) scenario, 55.4% for the AA (high) (sf) scenario, 51.5% for the A (high) (sf) scenario, and a 25% and 50% increase on the applicable LGD at each credit rating level.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and a 25% increase on the expected LGD.
Scenario 5: A 50% increase in the expected default and a 25% increase on the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and a 50% increase on the expected LGD.
Scenario 8: A 50% increase in the expected default and a 50% increase on the expected LGD

Morningstar DBRS concludes that the expected credit ratings under the eight stress scenarios will be:
-- Class A Notes: AAA (sf), AAA (sf), AAA (sf), AAA (sf), AA (high) (sf), AAA (sf), AA (high) (sf), and AA (low) (sf);
-- Class B Notes: AA (high) (sf), AA (sf), AA (high) (sf), AA (low) (sf), A (high) (sf), AA (sf), A (high) (sf), and A (low) (sf); and
-- Class C Notes: A (sf), BBB (high) (sf), A (high) (sf), BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (sf), and 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: Stephan Rompf, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 7 June 2024

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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 SME Diversity Model v2.6.1.4, https://dbrs.morningstar.com/research/428543
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730
-- Rating European Structured Finance Transactions Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425149
-- 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
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
-- 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 https://dbrs.morningstar.com or contact us at [email protected].