Rating action

Scope Ratings GmbH (Scope) has today assigned a final rating of BBB-_SF to the lessee payment contingent fixed rate notes issued by Solis Real Assets Luxemburg - Compartment I:

Lessee Payment Contingent Fixed Rate Notes, EUR 30,000,000: rated BBB-_SF

Transaction overview

The transaction is a cash securitisation of bicycle leases with residual value exposure, originated by Hofmann Leasing GmbH and granted to SMEs in Germany and Austria. BLS Bikeleasing-Service GmbH & Co. KG (BLS) will act as operational servicer for the transaction. The issuance of the EUR 30m fixed rate notes will fund the purchase of the securitised portfolio, at a 9.5% discount over the nominal value of the future outstanding lease payments and the bicycles’ estimated residual value. The asset portfolio will increase over a ramp-up period ending in December 2023, while the notes were fully issued on 3 November 2023.

The securitised assets are lease receivables composed of lease instalments and the bicycles’ residual value. The lessee pays monthly instalments, based on a lease factor on the net purchase price of the bicycle plus the mandatory insurance fees, optional additional insurance payments and service charges.

The 9.5% purchase price discount on the securitised portfolio provides some level of overcollateralisation sufficient to cover for the potential portfolio losses commensurate with the assigned rating, after paying for senior costs and the notes' coupon. In addition, the assets must satisfy some eligibility criteria, including concentration limits and minimum credit quality requirements. Furthermore, the criteria impose limits on exposure to top obligors and sectors.

The transaction features an amortisation schedule for the fixed rate notes, adjusted for the level of cumulative observed defaults and remaining length of the amortisation period. The notes’ principal repayment starts following the ramp-up period. The fixed coupon rate on the notes is 4.5% per annum.

Rating rationale

The rating reflects the legal and financial structure of the transaction; the credit quality of the collateral in the context of the macroeconomic conditions and historical performance of bike lease receivables in Germany; the ability of the originator and servicer Hofmann Leasing; and the counterparty exposures to BLS as operational servicer, Kreis-Sparkasse Northeim as the servicer account bank, Baden-Württembergische Bank as the issuer account bank and Greenium Service GmbH as the calculation agent.

The notes will benefit from the 9.5% transfer value discount on the non-interest-bearing receivables. Portfolio proceeds will be used to pay senior fees, interests and principal on the notes. Periodic excess collections will be stored in the issuer cash account and can be used to cover amounts due on subsequent payment dates.

To assess the issuer’s exposure to credit counterparty risks, Scope considered counterparty ratings from Scope, when available, or public ratings.

Key rating drivers

Positive portfolio selection bias (positive)¹. Obligor selection is based on third-party credit scores. Concentration limits on lower credit quality score bands and a floor on the weighted average credit quality of the portfolio results in a positive bias in obligor credit quality.

Guaranteed residual value of collateralised assets (positive)¹. The operational servicer has provided a guarantee that the issuer will receive at least 10% of the net purchase price of the leased bikes at the end of the term as residual value payment.

Servicer default risk (negative)¹. In the event of a servicer default, cash in the servicer account may be lost. Moreover, there is no back-up servicer appointed at closing. In the event of a servicer default, this may lead to delays in the resumption of cash flows from receivables and lead to higher costs related to the reappointment of a replacement servicer.

Liquidity risk (negative)¹. The structure does not present any dedicated funds that can be used to cover shortfall of collections for the payment of senior costs and interests. The interconnected priority of payments in combination with the expected highly granular receivables portfolio partially mitigate the risk. Moreover, at-closing-contracted servicing costs are zero and available excess funds will be trapped and can build a buffer to cover for portfolio payment shortfalls.

Rating-change drivers

Positive. A better-than-expected portfolio at the end of the ramp-up period could positively affect the rating.

Positive. Faster-than-expected portfolio amortisation could positively affect the rating.

Negative. Worse-than-expected asset performance, reflected in a higher-than-expected default rate or lower-than-expected recovery upon asset default, could negatively impact the ratings.

Negative. Significant deterioration in servicer’s credit quality could negatively affect the rating as it will increase commingling and liquidity risk.

Quantitative analysis and assumptions

Scope considered the portfolio eligibility criteria, such as the portfolio concentration limits by sector, and inferred obligors’ credit quality based on these criteria to model a representative portfolio. Scope determined: i) pairwise asset correlations with the other borrowers in the pool; ii) a one-year default probability extrapolated in accordance with Scope’s idealised default probability tables over the transaction’s lifetime; and iii) a recovery rate upon default. Scope then analysed the reference portfolio’s performance using a single-step Monte Carlo simulation that implements a Gaussian-copula dependency framework. The resulting default distribution and default timings were then used together with rating-conditional recovery assumptions in a cash flow model to determine the expected loss and expected weighted average life of the notes, reflecting the structural features of the transaction.

Scope’s assumptions related to pairwise asset correlations range from 2% to 27% and are composed of additive factors reflecting the borrowers’ exposure to common factors, i.e., a global factor of 2%, a country factor of 5% and an industry factor of 20%.

Scope derived a default distribution from the simulation with a portfolio lifetime mean default rate of 1.83% and an implicit coefficient of variation of 113.63% over a pool weighted average life of 1.65 years. These assumptions represent a long-term view of the portfolio’s credit performance and incorporate the credit quality implied by the portfolio eligibility criteria.

Scope considered a base case recovery rate for the portfolio of 50% applicable for a B category rating. Rating-conditional haircuts of 40% were applied for a AAA rating target, 32% for AA, 24% for A, 16% for BBB and 8% for BB.

Scope also considered the situation of a servicer default and replacement through accounting for commingling losses and increased service charges. Replacement servicers with capacity and capability to operate the leasing portfolio are widely available in the German market. Scope also accounted for the mismatch between asset and liabilities during the ramp-up period.

Sensitivity analysis

Scope tested the resilience of the ratings to deviations in the main input parameters: the mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios. The following shows how the results for each rated tranche change compared to the assigned rating when the assumed mean default rate increases by 50% or the portfolio’s expected recovery rate decreases by 50%, respectively:

1. Increase in mean default rate, one notch decrease
    
2. Decrease in expected recovery rate, one notch decrease

Rating driver references
1. Transaction documents (Confidential)

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings primarily analysed the distribution of portfolio losses and its impact on the rated instruments, with the use of Scope Ratings’ Portfolio Model Version 1.1.
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow Structured Finance Expected Loss Model Version 1.2, incorporating relevant asset assumptions, and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for this Credit Rating (General Structured Finance Rating Methodology, 25 January 2023; Counterparty Risk Methodology, 13 July 2023; Consumer and Auto ABS Rating Methodology, 3 March 2023) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The models used for this Credit Rating are (Portfolio Model Version 1.1, Cash Flow Structured Finance Expected Loss Model Version 1.2), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has not received a third-party asset due diligence assessment. Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit. The internal analysis was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Leonardo Scavo, Senior Specialist
Person responsible for approval of the Credit Rating: Antonio Casado, Managing Director
The preliminary Credit Rating was first released by Scope Ratings on 19 October 2023. The final Credit Rating was released by Scope Ratings on 21 November 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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