DBRS Assigns Rating to Weser Funding S.A. (Compartment No. 1) Notes

DBRS Ratings Limited (DBRS) has today assigned a rating to the Compartment No. 1 Notes (the Notes) issued by Weser Funding S.A. (the Issuer) as follows:

-- EUR 310,000,000 Compartment No. 1 Fixed Rate Notes due 2028 rated A (low) (sf)

The transaction is a cash flow securitisation transaction backed by a portfolio of loans originated by Bremer Kreditbank AG (BKB or the Originator) to corporates and small and medium-sized enterprises in Germany. The initial portfolio, with an aggregate par balance of EUR 400 million, has been selected in accordance with the loan eligibility criteria.

The transaction has a three-year revolving period (ending in June 2020) during which BKB has the option to sell new loans daily at par to the Issuer so long as the eligibility criteria and replenishment criteria are complied with. The revolving period will end prematurely after the occurrence of certain events (Early Amortisation Events), including the cumulative default rate or cumulative delinquency rate exceeding 3% and 8% of the initial portfolio balance, respectively. A shortfall of more than EUR 1 million in the replenishment fund would also lead to an Early Amortisation Event.

The portfolio has very high obligor concentration with single obligor group exposure capped at 3% of the portfolio notional. The final portfolio consists of 641 loans instalments under 179 loan agreements to 81 obligor groups. The top one, ten and 20 borrower group exposures represent 3.0%, 29.8% and 55.0% of the outstanding portfolio balance, respectively.

DBRS conducted its analysis based on a worst case portfolio allowed by the transaction concentration limits. The concentration limits allow significant flexibility to the originator, which may result in higher industry and obligor concentrations compared with the current portfolio. It also allows a bucket of up to 10% of the portfolio balance being granted to borrowers based in other EU countries. However, the eligibility criteria and concentration limits do provide strong quality tests regarding the overall probability of default (PD) of the portfolio and maximum portfolio weighted-average life (WAL), and they also exclude borrowers with a low internal rating from being eligible.

The rating of the Notes is based on DBRS’s review of the following items:

-- The Eligibility Criteria and Concentration Limits, based on which DBRS has created a worst case portfolio. The loose limits on the borrower and industry concentrations are risk factors that negatively affected the DBRS analysis. However, limits on the maximum weighted-average internal PD for the portfolio of 1.40% and minimum obligor internal rating of 7B are positive factors in DBRS’s analysis.

-- While a portion of the portfolio benefits from security in the form of mortgage collateral, pledges or guarantees, there is no minimum security covenant. For this reason, DBRS assumed senior unsecured recovery rates in its analysis.

-- The Early Amortisation Events, which adequately mitigate the credit quality deterioration of the transaction during the revolving period and also mitigate the operational and credit risk exposures to BKB.

-- Interest risk is mitigated by the Portfolio Yield Floor test that ensures a minimum average interest rate is available to cover the notes coupon fixed at 0.80% and paid monthly. The cash reserve will also act as a liquidity reserve given that a significant portion of the portfolio can pay interest with a quarterly, semi-annual or annual frequency.

-- Following the end of the reinvestment period the transaction does not benefit from any excess spread to cover principal shortfalls that could occur as a result of portfolio defaults.

-- Commingling risk is mitigated through the Expected Collections Reserve. During the revolving period, BKB will deposit on a monthly basis the expected interest collections for the next monthly period into issuer bank account. All principal proceeds will be kept in BKB collection accounts for up to three days to purchase additional loans. The expected collections during the amortisation period include expected interest and principal to be collected during the next monthly collection period.

-- Set-off risk is mitigated through the Set-off Risk Reserve deposited in the issuer account bank and adjusted monthly to account for changes in set-off exposure during the reinvestment period. The initial set-off deposit is EUR 12.1 million.

-- At closing, the Notes benefit from a total credit enhancement of 22.5%, which DBRS considers to be sufficient to support the A (low) (sf) rating. Credit enhancement is provided by subordination only.

-- The adequacy of the transaction parties’ financial strength and capabilities to perform their respective duties and the quality of origination, underwriting and servicing practices.

-- The soundness of the legal structure and the presence of legal opinions that address the true sale of the assets to the issuer and the non-consolidation of the Issuer as well as consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

DBRS determined the rating of the Notes as follows, as per the principal methodology specified below:
-- The annualised PD assumed for the securitised portfolio was 2.11%, which was based on an internal rating mapping analysis and considering the maximum portfolio weighted-average internal PD covenant of 1.40% allowed in the replenishment criteria.
-- The assumed WAL of the portfolio was 3.5 years based on the maximum allowed under the replenishment criteria.
--The PD and WAL were used in the DBRS Diversity Model to generate the hurdle rate for the target rating.
-- The recovery rate used for the A (low) (sf) rating level was 25.25%, resulting from applying the unsecured recovery rate of 26.25% for 90% of the portfolio and 16.25% for the remaining 10% of the portfolio to account for potential exposures to borrowers in EU countries with a lower expected recovery.
-- The Break-Even Default Rates for the interest rate stresses and default timings were determined using the DBRS Cash Flow Model.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating CLOs Backed by Loans to European SMEs.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. Due to the inclusion of a revolving period in the transaction, the collateral was initially modelled based on the worst case replenishment criteria set forth in the transaction legal documents.

Other methodologies referenced in this transaction are listed at the end of this press release. All DBRS methodologies can 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’s “The Effect of Sovereign Risk on Securitisations in the Euro Area” commentary on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating were QuantFS GmbH and Bremer Kreditbank Aktiengesellschaft as Joint Lead Arrangers. An internal rating mapping analysis was conducted based on financial data provided by the Originator for approximately 500 corporate clients of the Originator.

DBRS did not rely upon third-party due diligence in order to conduct its analysis. At the time of the initial rating DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

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

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

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

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

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

-- PD rates used: Base case PD of 2.11%, a 10% and 20% increase on the base case PD.
-- Recovery rates used: Base case recovery rate of 25.25% at the A (sf) stress level, a 10% and 20% decrease in the base case recovery rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.

DBRS concludes that a hypothetical increase of the base case PD by 20% or a hypothetical decrease of the recovery rate by 20%, ceteris paribus, would each lead to a downgrade of the transaction to BBB (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 Class A Notes to BBB (high) (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration (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.

Lead Analyst: Carlos Silva
Rating Committee Chair: Jerry van Koolbergen
Initial Rating Date: 11 May 2017

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

-- Rating CLOs Backed by Loans to European SMEs
-- Rating CLOs and CDOs of Large Corporate Credit
-- Legal Criteria for European Structured Finance Transactions
-- Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions
-- Unified Interest Rate Model for European Securitisations
-- Cash Flow Assumptions for Corporate Credit Securitizations
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators

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