DBRS Confirms the Ratings on the Notes Issued by KMU Portfolio S.A., Compartment 2015-1

DBRS Ratings Limited (DBRS) has today confirmed the ratings of the Class A, Class B and Class C Notes (the Notes) issued by KMU Portfolio S.A., Compartment 2015-1 (the Issuer):

-- EUR 195,000,000 Class A Notes confirmed at AAA (sf)
-- EUR 27,500,000 Class B Notes confirmed at A (sf)
-- EUR 13,700,000 Class C Notes confirmed at BBB (sf)

The above-mentioned rating actions are based on the following analytical considerations, as described more fully below:
-- The overall portfolio performance as of the July 2016 payment date, in particular with regard to low levels of cumulative net defaults and delinquencies.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms and conditions of the Notes.
-- The high levels of credit enhancement available to the Notes to cover expected losses assumed in line with their respective rating levels.
-- No Early Amortisation Event has occurred.

The ratings of the Notes address the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date in July 2029.

KMU Portfolio S.A., Compartment 2015-1 is a securitisation of German commercial loans originated by akf bank GmbH & Co. KG (akf bank). The transaction is currently one year into a three-year revolving period before it will start to amortise. The portfolio, as of the July 2016 payment date, consists of auto loans (31.89%), commercial vehicle loans (30.72%), machinery loans (11.18%), other equipment loans (24.81%) and ship loans (1.41%). The pool contains 26.92% of loans which include a balloon payment element. The current outstanding principal balance of the balloon part is 12.78%, and the concentration limit further stipulates that this must remain below 15.00%.

The portfolio is performing in line with DBRS’s expectations. The gross cumulative default ratio (as a percentage of the original portfolio) is 0.47% as of July 2016, of which 13.32% has been recovered. The 30+ delinquency ratio is 0.13%.

At Closing, EUR 95 million of Class A Notes were issued, with the transaction documents allowing a ramp-up to a maximum Class A balance of EUR 195 million, which was subsequently reached on the March 2016 payment date. The original rating analysis considered this maximum balance.

Credit Enhancement (CE) is provided by overcollateralisation and the subordination of the respective junior obligations. Considering the Notes balance on each date and the aforementioned increase of the Class A size, CE for the Class A Notes decreased from 36.67% at closing in August 2015 to 22.00% in July 2016, the CE for the Class M Notes decreased from 18.33% to 11.00% and the CE for the Class C Notes decreased from 9.20% to 5.52%.

The transaction closed with the support of a EUR 2.5 million Cash Reserve, available to cover shortfalls on senior fees and the interest on the rated Notes. This will amortise with the Notes at the end of the revolving period when it will have a target level equal to 1% 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 and has not registered any shortfalls since closing.

To mitigate any loss resulting from Servicer insolvency, a Commingling Reserve is also available. This EUR 20.0 million reserve has been at its target amount since closing and will amortise following the revolving period with a target amount equal to the sum of the principal collections scheduled to be received over the two succeeding months plus 2.50% of the aggregate principal balance.

Should the amount of any potential set-off claims exceed 0.10% of the aggregate principal balance, or the unsecured, unsubordinated and unguaranteed obligations of akf bank breach specified rating thresholds, akf bank shall deposit cash collateral equal to the Set-Off Risk Amount. As of the July 2016, none of the securitised receivables have any associated set-off risk.

Since the portfolio receivables and the Notes pay a fixed coupon, there is a natural hedge in the transaction structure. Further, the eligibility criteria permit only fixed-rate-paying loan receivables to be purchased in each subsequent portfolio.

The Bank of New York Mellon, Frankfurt Branch (BNY Mellon, Frankfurt Branch) serves as Account Bank for the transaction. The DBRS private rating of BNY Mellon, Frankfurt Branch complies with the Minimum Institution Rating, given the ratings assigned to the Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is: “Master European Structured Finance Surveillance Methodology”.

DBRS 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. However, due to the inclusion of a revolving period in the transaction and no change in assumptions, the initial and current analysis are based on worst-case replenishment criteria as set forth in the transaction legal documents.

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

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

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

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

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

DBRS was not supplied with third party assessments. However, this did not impact the rating analysis.

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

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

The lead responsibilities for this transaction have been transferred to Joana Seara da Costa.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

-- DBRS expected a Base Case probability of default (PD) and loss given default (LGD) for the portfolio based on a review of the current assets and the transaction’s replenishment criteria. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

-- The Base Case of PD and LGD of the current pool of assets of receivables are 5.11% and 81.04%, respectively.

-- The Risk Sensitivity overview below illustrates the ratings expected for the Notes if the PD and LGD increase by a certain percentage over the base case assumptions. For example, if the LGD increases by 50%, the rating for the Class A Notes would be expected to decrease to AA (high) (sf), while the ratings of the Class B and Class C Notes would be expected to remain the same, all else being equal. If the PD increases by 50%, the ratings for the Class A, Class B and Class C Notes would be expected to decrease to AA (sf), A (low) (sf) and BB (high) (sf), respectively, all else being equal. Furthermore, if both the PD and LGD increase by 50%, the ratings for the Class A, Class B and Class C Notes would be expected to decrease to A (high) (sf), BBB (sf) and B (high) (sf), respectively, all else being equal.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)

Class B Notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (sf)

Class C Notes risk sensitivity:
-- 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (sf)
-- 50% increase in PD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of B (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of B (high) (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Alessio Pignataro
Initial Rating Date: 13 August 2015
Initial Rating Committee Chair: Chuck Weilamann

Lead Surveillance Analyst: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Senior Vice President

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

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

-- Master European Structured Finance Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Rating European Consumer and Commercial Asset-Backed Securitisations

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375