DBRS Ratings Limited (DBRS) confirmed its ratings of Auto ABS UK Loans plc (the Issuer) as follows:
-- AAA (sf) for the amended Class A3b Notes; and
-- AAA (sf) for the amended Class A4b Notes.
Additionally, DBRS discontinued its AAA (sf) rating of the Class A1 Notes following a request from the Issuer.
The rating actions reflect the restructuring of the existing transaction as at the 2018 Closing Date. Certain changes to the structure of the transaction have also been made that include: (1) an increase in subordination available to the Senior Notes, (2) amendments to the portfolio limits applicable to the pool during the revolving period, (3) updates in the margins applicable to the Senior Notes, (4) the change of Account Bank to Santander UK plc, and (5) the removal of the set-off reserve.
The securitised receivables relate to auto loans originated in England, Wales, Scotland and Northern Ireland by PSA Finance UK Limited (PSA Finance) to private individuals or sole traders. The issuer is a public company incorporated with limited liability under the laws of England and Wales, acting as a special-purpose entity specifically for the purpose of the transaction.
-- Subordination available to the Senior Notes is now 20.2% (previously 19.3%) and comprises the Subordinated Notes only. The Subordinated Notes are equal to GBP 231,000,000 whilst the Notes in total are backed by approximately GBP 1,146,000,000 of receivables.
-- The transaction includes a revolving period of 24 months; during this time there are portfolio limits that restrict concentrations from exceeding specific thresholds.
-- Floating-rate notes have been issued that are indexed to one-month GBP Libor; interest rate risk is mitigated through interest rate swaps provided by three hedging counterparties.
-- Prior to an early amortisation event, the structure incorporates two monthly payment waterfalls that recognise the distribution of interest and principal collections with the former allowing for excess spread to be redistributed to the seller. Following an early amortisation event, a single waterfall is adhered to that allows for sequential payment between the Senior Notes and the Subordinated Notes whilst ensuring any excess spread is used to repay principal and interest due on the Notes.
-- A proportion of the underlying loan contracts are personal contract purchase (PCP) with a guaranteed future value (GFV or balloon payment). The GFV affords the borrower an option to turn in the purchased vehicle at contract maturity as an alternative to repaying or refinancing the final balloon payment.
-- All underlying contracts are fixed rate; however, the transaction recognises the distinction between subvented and non-subvented contracts. Where the manufacturer or dealer subsidises the customer interest rate, upon purchase of the receivable, an equivalent subsided amount is deposited by the seller into a specific account and then released periodically (in line with respective monthly instalments) to the general collection account.
-- Receivables are transferred to the issuer at their principal balance outstanding whilst portfolio limits are in place that ensure the weighted-average effective interest rate of the purchased receivables is at least 7.4% (versus 8.0% in 2017).
-- The margins paid on the Senior Notes increase following the end of the revolving period and/or following an early amortisation event. The maximum margin for Senior Notes will be 0.9% which is applicable only during the Accelerated Amortisation Period or Post-Enforcement Period.
-- Concise portfolio limits have been defined that prevent the portfolio from negative selection during the revolving period. Examples include restrictions on residual value (RV) exposure and timings of balloon payments, used vehicle concentration, length of weighted-average remaining term and minimum portfolio interest rate.
-- Asset performance triggers have been established that contribute, amongst others, in determining whether an early amortisation event has occurred. These triggers contemplate delinquency and default ratios, voluntary termination and PCP handback rates, volumes of payment waivers and minimum excess spread levels.
-- DBRS considers the portfolio to be granular; the average outstanding balance is approximately GBP 7,500 and recognises the high proportion of A-segment and B-segment vehicles that have been financed. The receivables have a diversified geographic distribution across the United Kingdom.
-- The portfolio is well seasoned with a weighted-average remaining term of approximately 30 months and a maximum contract term of 60 months.
-- The structure benefits from a general reserve, which, during the revolving period, is sized at 1.7% of the outstanding Senior Notes. Following an early amortisation event, amounts are dynamically released and made available as funds to the accelerated amortisation priority of payments (single waterfall). Following an early amortisation event, the general reserve is dynamically sized at 1.2% of the Senior Notes balance (with a floor of 0.3% of the initial note balances) and therefore provides ongoing liquidity support to the structure.
-- Because of a minimum effective interest rate of 7.4%, excess spread is available to the transaction upon closing; during the revolving period and amortisation period this is returned to the seller and following an early amortisation event is made available to the issuer until all interest, principal and fees have been repaid.
-- DBRS considers commingling risk to be limited because of a weekly transfer of collections to the Issuer’s bank account as well as a declaration of trust over the collection account in favour of the Issuer.
TRANSACTION CHALLENGES AND MITIGATING FACTORS
-- The issuer is exposed to RV risk for a portion of PCP receivables. Furthermore, DBRS considers the historic RV performance of the portfolio to be more volatile when compared with other U.K. originators. DBRS recognises various factors when assessing this volatility, including the manufacturers’ direct role in setting contractual GFVs and the cyclical nature of vehicle prices associated with the introduction of new model lines.
MITIGANT(S): DBRS’s assumptions, in accordance with the respective methodology, have assumed a RV decline and a conservative turnback rate that recognise recent trends in vehicle realisation proceeds at contract maturity. DBRS’s cash flow assumptions have recognised a migration of the portfolio to the maximum PCP and balloon payment thresholds permissible under the transaction’s portfolio limits.
-- At closing, the portfolio’s weighted-average original loan-to-value (LTV) ratio is deemed high at approximately 88%.
MITIGANT(S): DBRS notes that a concentration limit exists that prevents the portfolio weighted-average LTV ratio from exceeding 93.0% during the revolving period (versus 90% in 2017).
-- Receivables are subject to potential voluntary termination pursuant to the UK Consumer Credit Act.
MITIGANT(S): DBRS received static vintage data with regard to incidences where customers have exercised voluntary terminations. DBRS has applied stresses to their base case voluntary termination assumptions that contemplate rating-related increases to voluntary termination rates. Furthermore, DBRS recognises that, prior to insolvency, PSA has an obligation to buy back any voluntarily terminated vehicles at the outstanding loan balance.
-- The seller provides a payment waiver facility for both PCP and CS products where up to six monthly instalments (excluding GFV) can be waived upon involuntary unemployment; this could lead to delays in recognising losses apportioned to the transaction.
MITIGANT(S): DBRS notes that an early amortisation trigger would be breached should the monthly volume of payment waivers exceed GBP 200,000; furthermore, DBRS has utilised a six-month recovery lag to defaults within its cash flow analysis, which is longer than typical for U.K. auto loan transactions. Payment waiver volumes are considered low, averaging approximately 50 per annum.
DBRS has noted relatively stable performance in credit defaults since the initial ratings were previously assigned to the transaction; however, there has been an increasing trend in voluntary terminations and RV losses associated with PCP maturities. DBRS elected to maintain its RV haircut applied under a AAA scenario at 46.7% (compared with 43.7% in 2016).
As part of the restructuring of the transaction, Santander UK plc (Santander UK) was appointed as Account Bank. DBRS privately rates Santander UK, and has concluded that it meets DBRS’s minimum criteria to act in such capacity. The transaction contains downgrade provisions relating to Santander that are DBRS’s criteria.
Certain hedging arrangements have not been renewed and there remain three providers of interest rate swaps. Wells Fargo Securities International Limited, Banco Santander SA and HSBC France have been appointed; DBRS privately rates all three of these entities. DBRS has concluded that individually all counterparties meet DBRS’s minimum criteria to act in such capacity. The transaction contains downgrade provisions relating to the hedging counterparties that are consistent with DBRS’s criteria, whilst respective swap collateral accounts have been established.
The ratings are based on a review by DBRS of the following analytical considerations:
-- Transaction capital structure, including and form and sufficiency of available credit enhancement;
-- Credit enhancement levels are sufficient to support DBRS-projected expected cumulative net losses under various
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the rating addresses the payment of timely interest on a monthly basis and principal by the legal final maturity date;
-- PSA Finance’s capabilities with regard to originations, underwriting, servicing and their financial strength;
-- DBRS conducted an operational risk review of PSA Finance’s premises in Redhill, United Kingdom, and deems it to be an acceptable servicer;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The credit quality of the collateral and historical and projected performance of the seller’s portfolio;
-- The sovereign rating of the United Kingdom, currently at AAA; and
-- The transaction’s consistency of the legal structure with the DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the true sale of the assets to the issuer and non-consolidation of the special-purpose vehicle with the seller.
The transaction structure was analysed in Intex DealMaker, considering the default rates at which the rated notes did not return all specified cash flows.
All figures are in British pound sterling 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.
An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be 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.
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 at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.
The sources of data and information used for these ratings, provided by Santander Corporate and Investment Bank include:
-- Static quarterly cumulative gross loss data from Q1 2006 and up to Q4 2017, split by the inclusion and exclusion of voluntary terminations;
-- Static quarterly recovery data from Q1 2006 and up to Q4 2017, split by the inclusion and exclusion of voluntary terminations;
-- Dynamic portfolio balances and accounts from Q1 2006 and up to Q4 2017;
-- Origination balances and accounts from Q1 2006 and up to Q4 2017;
-- Loan-level and portfolio vehicle realisation data for PCP handbacks from Q4 2006 to Q4 2017; and
-- PCP early settlement/prepayment frequency and maturity data by month from Q1 2006 to Q1 2018.
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.
The last rating action on this transaction took place on 30 May 2018.
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 to the parameters used to determine the rating (the “Base Case”):
-- Probability of default (PD) rate used: base case PD of 3.8%, a 25% and 50% increase on the base case PD.
-- Recovery rate used for AAA: recovery rate of 46%.
-- Loss given default (LGD): base case LGD of 54%, a 25% and 50% increase on the base case LGD.
-- RV haircut: for Senior Notes, a base case of 46.7%, a 25% and 50% increase in RV haircut.
DBRS concludes that for the Senior Notes:
-- A hypothetical increase of the base case PD and LGD by 25%, ceteris paribus, would lead to a downgrade of the Senior Notes to AA (high) (sf).
-- A hypothetical increase of the base case PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the Senior Notes to AA (sf).
-- A hypothetical increase of the base case RV haircut by 25%, ceteris paribus, would lead to a downgrade of the Senior Notes to AA (high) (sf).
-- A hypothetical increase of the base case RV haircut by 50%, ceteris paribus, would lead to a downgrade of the Senior Notes to AA (sf).
-- A hypothetical increase of the base case PD and LGD by 25% and a hypothetical increase of the RV haircut by 25%, ceteris paribus, would lead to a downgrade of the Senior Notes to AA (sf).
-- A hypothetical increase of the base case PD and LGD by 50% and a hypothetical increase of the RV haircut by 25%, ceteris paribus, would lead to a downgrade of the Senior Notes to A (high) (sf).
-- A hypothetical increase of the base case PD and LGD by 25% and a hypothetical increase of the RV haircut by 50%, ceteris paribus, would lead to a downgrade of the Senior Notes to A (high) (sf).
-- A hypothetical increase of the base case PD and LGD by 50% and a hypothetical increase of the RV haircut by 50%, ceteris paribus, would lead to a downgrade of the Senior Notes to A (sf).
These ratings did not include participation by the rated entity or any related third party and is based solely on publicly available information.
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: Matthew Nyong – Senior Financial Analyst, Structured Finance
Rating Committee Chair: Christian Aufsatz – Managing Director, Head of European Structured Finance
Initial Rating Date: 29 April 2016
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.
-- 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.