RPT-Fitch Assigns German Mittelstand Equipment Finance SA, Compartment 2 Expected Ratings

Fri Jul 11, 2014 6:12am EDT

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July 11 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned German Mittelstand Equipment Finance SA, Compartment 2's class A, B and C notes expected ratings as follows:

EUR194.7m class A notes (ISINXS1068733218): 'AAA(EXP)sf'; Stable Outlook

EUR12.9m class B notes (ISIN1068748752): 'AA(EXP)sf'; Stable Outlook

EUR18.1m class C notes (ISIN1068749057): 'A(EXP)sf'; Stable Outlook

EUR34m subordinated loan: not rated

This transaction is a securitisation of receivables (without residual values) from lease contracts with German commercial businesses or self-employed professionals, originated by IKB Leasing GmbH (IKBL), which is entirely owned by IKB Deutsche Industriebank AG (IKB).

The ratings reflect the pool's expected asset performance, available credit enhancement for the rated notes, the transaction's legal structure and IKBL's sound origination and servicing procedures.

The final ratings are subject to the receipt of final documents and legal opinions that are in line with information already received.

KEY RATING DRIVERS

Fitch observed that the performance of the underlying four asset categories differs and has derived individual default and recovery assumptions for each group. This resulted in a weighted average (WA) base case default rate of 6% for the total portfolio. This is slightly higher than for other German equipment transactions rated by Fitch. The agency assigned a default multiple between median and high (5.5x in 'AAAsf'), primarily because of the revolving period, the long default definition and since the default base case does not incorporate economic stress.

Fitch determined a base case recovery rate of 65% for the initial pool. The agency applied a median-to-high recovery haircut (55% in 'AAAsf'), primarily because the pool contains a wide variety of heterogeneous lease contracts. The transaction has a revolving period up to one year. The risk of changing portfolio composition is mitigated by tight portfolio limits. Therefore, the agency did not differentiate between the current portfolio and a potential worst-case portfolio. Furthermore, performance triggers ensure stable portfolio quality during the revolving period.

The portfolio's industry and obligor concentrations are higher than in a typical ABS transaction. Fitch applied its ABS rating criteria to derive the default assumptions and then back-tested the results using the SME CLO approach to check whether these concentrations lead to additional default stresses. The impact of concentration was found to be limited.

Ninety-three per cent of the lessees (by balance) pay their monthly or quarterly collections by direct debit to an account in the name of the servicer, which is pledged to the SPV. This account has been created solely for the purpose of the securitisation. In the agency's view, this account mitigates the commingling risk with respect to the direct debit payers. A commingling reserve covers the commingling risk with respect to self-payers (7%).

IKBL acts as servicer of the leases. The transaction benefits from an appointed back-up servicer (BFS Finance GmbH). The back-up servicer, together with a liquidity reserve, satisfactorily reduces the servicer discontinuity risk. The liquidity reserve covers at least six months of SPV's costs of funding.

RATING SENSITIVITIES

Expected impact upon the note rating of increased defaults (class A/B/C):

Current Ratings: 'AAAsf'/'AAsf' /'Asf'

Increase base case defaults by 10%: 'AA+sf'/'AA-sf' /'Asf'

Increase base case defaults by 25%: 'AA+sf'/'A+sf' /'A-sf'

Increase base case defaults by 50%: 'AA-sf'/'Asf' /'BBBsf'

Expected impact upon the note rating of reduced recoveries (class A/B/C):

Current Ratings: 'AAAsf'/'AAsf' /'Asf'

Reduce base case recovery by 10%: 'AAAsf'/'AA-sf' /'Asf'

Reduce base case recovery by 25%: 'AA+sf'/'AA-sf' /'A-sf'

Reduce base case recovery by 50%: 'AA+sf'/'A+sf' /'BBB+sf'

Expected impact upon the note rating of increased defaults and decreased

recoveries (class A/B/C):

Currentl Ratings: 'AAAsf'/'AAsf' /'Asf'

Increase default base case by 10%; reduce recovery base case by 10%:

'AA+sf'/'AA-sf' /'A-sf'

Increase default base case by 25%; reduce recovery base case by 25%:

'AAsf'/'Asf'/'BBBsf'

Increase default base case by 50%; reduce recovery base case by 50%:

'Asf'/'BBB+sf' /'BB+sf'

TRANSACTION CHARACTERISTICS

The initial portfolio consists of 8,715 contracts to 5,427 lessees, with an outstanding aggregate principal balance of EUR259.7m. The range of leased objects is wide and can be divided into four asset categories machinery (84.2%), commercial vehicles (5.7%), cars (1.5%) and IT, office and other equipment (8.6%).

After the end of the revolving period, the notes will amortise in sequential order. Certain portfolio limits and early amortisation triggers ensure the stability of the portfolio composition and the performance of the portfolio during the revolving period.

The class A, B and C notes are euro-denominated and pay floating interest, while the portfolio consists of fixed-rate assets. The potential interest mismatch is covered by a swap paying one-month-EURIBOR to the issuer in return for a fixed swap rate.

Credit enhancement for the class A notes is 25.4%, 20.4% for class B notes and 13.5% for the class C notes. The credit enhancement is provided through overcollateralisation and the reserve fund floor of EUR1m. Excess spread (on a "use-it-or-lose-it" basis) provides a first layer of protection against defaults.

Key Rating Drivers and Rating Sensitivities are further described in the accompanying Presale report available at www.fitchratings.com.

Link to Fitch Ratings' Report: German Mittelstand Equipment Finance SA, Compartment 2

here

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