DBRS Ratings Limited (DBRS) assigned ratings to the Class A1 Notes and Class A2 Notes (the Rated Notes; together with the Class A3 Notes, the Class A Notes) issued by Globaldrive Germany Retail VFN 2018 B.V. (the Issuer) as follows:
--Class A1 Notes at AAA (sf)
--Class A2 Notes at AAA (sf)
DBRS has not assigned ratings to the Class A3 Notes and Class B Notes (together with the Rated Notes, the Notes).
The Issuer is wholly owned by Stichting Globaldrive Germany Retail VFN, a foundation (stichting) incorporated under the laws of the Netherlands. The Issuer serves as a special-purpose entity solely for the purpose of the transaction.
The Notes are backed by a pool of new, ex-demonstration and used cars and light-commercial vehicle loan receivables originated in the Federal Republic of Germany by FCE Bank plc, German Branch (FCE Germany) and Ford Bank GmbH (Ford Bank). According to a business transfer agreement executed in June 2018, FCE Germany transferred historical loan agreements to Ford Bank (a wholly owned subsidiary of FCE Bank plc) and acts as Servicer for the transaction.
The transaction represents the issuance of Notes initially backed by approximately EUR 450 million of receivables and envisages a revolving period until March 2020 where new receivables may be acquired subject to dynamic advance rates and asset concentration limits that determine subordination levels for the Rated Notes. The maximum individual commitment amounts for both the Class A1 Notes and Class A2 Notes are EUR 250,000,000 each.
The underlying receivables consist of standard and trade cycle management (TCM) auto loan agreements granted for the purchase of new, used or ex-demonstration motor vehicles. There are no lease contracts contained within the portfolio, and therefore the Issuer is not directly exposed to residual value risk through an obligor put option or obligation.
Standard loans typically represent amortising equal instalments paid monthly until maturity while TCM loans are structured with a final larger instalment. For TCM loans, the borrower has the contractual obligation to repay the final balloon payment. However, the vehicle dealers offer, under a separate agreement, the option to hand back the vehicle at a price equal to the balloon payment; if the dealer does not make this payment in full, the borrower remains liable to Ford Bank. Ford Bank also offers standard loans with balloon payments; these loans potentially allow for longer tenors with corresponding balloon payments compared with TCM loans. However, there is no option to return the vehicle to a dealership.
All underlying contracts are fixed rate while the Rated Notes are floating rate. Interest rate risk for the Rated Notes is mitigated through (1) an interest rate swap for the Class A1 and Class A2 Notes (2) a fixed rate of interest applicable to the Class A3 Notes and (3) capped senior Class A interest payments that protect against incremental interest costs associated with a change in the interest rate calculation to a commercial paper cost of funds rate. This cap and the potential for subordinated Class A payments allow DBRS to assign ratings to the Rated Notes, specifically.
Elavon Financial Services DAC, U.K. Branch has been appointed as the Issuer’s account bank for the transaction while Lloyds Bank Corporate Markets plc (LBCM) has been appointed as the swap counterparty for the Rated Notes. DBRS considers that both entities meet DBRS’s minimum criteria to act in their respective capacities and the transaction contains downgrade provisions relating to their roles consistent with DBRS’s criteria.
--Ford Bank’s operations stem entirely from FCE Bank, which has been a well-established captive finance lender in Germany and an experienced servicer across Europe. The transaction’s portfolio characteristics in terms of asset mix are very similar to previous transactions rated by DBRS, which have demonstrated stable performances.
--The transaction benefits from separate waterfalls that facilitate the distribution of interest and principal collections separately. Both waterfalls allow for the full sequential payment of both interest and principal between the Class A Notes and the Class B Notes. After the payment of senior costs, servicing fees, net swap amounts, senior interest on the Class A Notes and replenishment of the liquidity reserve, excess interest collections are available to the principal priority of payments to cover any principal deficiencies and losses.
--On the closing date, Ford Bank funded a liquidity reserve, equivalent to 1.7% of the initial receivables balance. Following the end of the revolving period, the liquidity reserve amortises to 1.15% of the end of period receivables balance on each payment date. The liquidity reserve is replenished prior to cash flows being available to cover principal deficiencies and losses, providing ongoing liquidity to the structure.
--Receivables are transferred to the Issuer at their discounted principal balance calculated by discounting the contractual future instalments at a discount rate at least equal to 3.25%. Excess spread is therefore potentially available to the transaction after considering the yield from the underlying receivables and the Issuer’s liability costs.
--DBRS was provided with detailed quarterly vintage information covering the past five years of cumulative net loss performance. Based on this information, it was possible for DBRS to estimate its expected probability of default (PD) and loss given default (LGD) assumptions. The static data showed very low and stable performance trends over the reporting period for both standard-amortising and TCM balloon loans. DBRS attributes this strong performance to a number of factors, including: (1) consistency of originations, (2) low interest rates attracting traditional cash buyers and (3) the overall strength of the German economy.
--The transaction incorporates performance triggers that, if breached, would initially lead to increased levels of required credit enhancement and ultimately end the revolving period prematurely. These triggers reference both delinquency and loss ratios.
--Ford Bank belongs to Ford Motor Company’s multinational group (Ford Motor Company is rated BBB with a Stable trend by DBRS). Ford Motor Credit Company (FMCC) has been appointed as the Servicer Guarantor.
CHALLENGES AND MITIGATING FACTORS
--A significant proportion of the outstanding portfolio balance upon closing will be repaid by borrowers in the form of loans attracting a balloon payment at contract maturity. The expected concentration of final balloon payments and the respective contract tenors in the pool, exposes the transaction to incremental risk when compared with equal pay amortising loans, as the borrower repays only a proportion of principal until the final instalment of the loan and is then required to pay the final balloon payment. This payment can be impacted by the underlying performance and liquidity of the used car market at concentrated points in time, as the final balloon payment is typically funded through vehicle sale proceeds received by the customer or a dealer.
Mitigant: DBRS notes that default rates observed for TCM contracts are lower than for standard amortising loans and are predominantly used for the purchase of new vehicles. DBRS assessed its portfolio’s default and recovery rate assumption by considering extended historical performance, the weighted-average mix of the portfolio in conjunction with its historic vintage curve projections.
--The Servicer collects payments on its own accounts and thus collections may be commingled within the Servicer’s estate in case of insolvency.
Mitigant: Upon closing, the Servicer remits collections within the second business day from receipt and undertakes to maintain a commingling reserve available to the Issuer to secure the Servicer’s undertaking to transfer collections.
-- Ford Bank is a deposit-taking institution that may hold deposits from borrowers whose loans have been securitised, leading to potential set-off risk.
Mitigant: Ford Bank does not currently take customer deposits but may do in the future. Furthermore, following a downgrade trigger related to Ford Motor Credit Company, and the potential set-off exposure exceeding specified levels, Ford Bank is obliged to fund the general reserve with additional amounts to cover set-off risk. DBRS has considered this exposure within its cash flow analysis.
--The pool has limited seasoning at less than seven months.
Mitigant: Ford Bank operates centralised and independent credit and risk management functions with proprietary scoring models. Ford Bank, previously operating as FCE Germany, is an experienced originator and servicer and has demonstrated consistent and low credit loss performance over a sustained period.
--The cash flows associated with the theoretical amortisation of the proposed pool are somewhat concentrated with increased cash flows forecast upon the maturities associated with TCM agreements and their contractual balloon payments.
Mitigant: The transaction’s reserve account includes a commingling reserve component that can increase depending on future months’ collection amounts. DBRS considers commingling risk to be mitigated through the reserve account and the frequency of transfers to the Issuer.
The ratings are based on a review by DBRS of the following analytical considerations:
-- Transaction capital structure and form and sufficiency of available credit enhancement.
-- Relevant credit enhancement in the form of subordination and a cash reserve.
-- Credit enhancement levels are sufficient to support the expected cumulative net loss assumption projected under various stress scenarios at the AAA (sf) rating level for the Class A1 Notes and Class A2 Notes.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested.
-- Ford Bank’s capabilities with respect to originations, underwriting, servicing and financial strength.
-- The credit quality of the collateral and ability of the Servicer to perform collection activities on the collateral. DBRS conducted an operational risk review of Ford Bank and deems it to be an acceptable servicer.
-- The consistency of the transaction’s legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and presence of legal opinions addressing the assignment of the assets to the Issuer.
The transaction was analysed in Intex DealMaker.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the ratings is “Rating European Consumer and Commercial Asset Backed Securitisations”.
DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology on: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.
The sources of information used for the ratings include performance and portfolio data relating to the receivables sourced by Ford Bank through their agent, LBCM.
DBRS received quarterly net loss data relating to Ford Bank originations on a cumulative basis from Q1 2013 to Q1 2018. Dynamic data was also provided relating to losses, recoveries and delinquencies as well as pool data and stratifications of the final portfolio upon closing.
DBRS does not rely upon third-party due diligence in order to conduct its analysis.
DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.
DBRS considers that the information available to it for the purposes of providing these ratings was of satisfactory quality.
DBRS does not audit or independently verify the data or information it receives in connection with the rating process.
These rating concerns a newly issued financial instrument. These are the first DBRS ratings on this financial instrument.
Information regarding DBRS ratings, including definitions, policies and methodologies are 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:
-- Expected default of 1.6%: a 25% and 50% increase.
-- Expected LGD: 50%, a 25% and 50% increase.
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 25% increase in the expected LGD.
Scenario 5: A 50% increase in the expected default and 25% increase in the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected default and 50% increase in the expected LGD.
Scenario 8: A 50% increase in the expected default and 50% increase in the expected LGD.
DBRS concludes that the expected ratings under the eight stress scenarios are:
-- Class A1 Notes and Class A2 Notes: AAA (sf) / AAA (sf) / AAA (sf) / AAA (sf) / AA (high) / AAA (sf) / AA (high) (sf) / AA (high) (sf)
For further information on DBRS historical 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 and US regulations only.
Lead Analyst: Alex Garrod, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 19 November 2018
DBRS Ratings Limited
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Registered in England and Wales: No. 7139960
The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.
--Rating European Consumer and Commercial Asset-Backed Securitisations
--Legal Criteria for European Structured Finance Transactions
--Derivative Criteria for European Structured Finance Transactions
--Operational Risk Assessment for European Structured Finance Servicers
--Operational Risk Assessment for European Structured Finance Originators
--Interest Rate Stresses for European Structured Finance Transactions
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.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at firstname.lastname@example.org.