DBRS Ratings Limited (DBRS) assigned a AAA (sf) rating to the Class A Notes (the Notes) issued by Bumper 11 S.A. (the Issuer).
The transaction represents the issuance of the Notes backed by an approximately EUR 762 million pool of auto lease receivables and expectancy rights related to motor vehicle operating lease contracts granted by LeasePlan Deutschland GmbH (LPDE, the originator or the seller) to corporations, small and medium-sized enterprises (SMEs) and public-sector clients with registered offices in Germany. The receivables represent the right to receive regular lease instalment payments and expectancy rights linked to vehicle realisation proceeds from the sale of the underlying vehicles.
At closing, proceeds from the subscription of the Notes and the funds granted by the Senior Subordinated and Junior Subordinated Lenders financed the purchase of the initial portfolio from LPDE. The EUR 2.7 million liquidity reserve was funded directly by LeasePlan Corporation N.V. (LPC). Other reserves may be funded throughout the lifetime of the transaction following specific triggers or events.
The Class A Notes’ subordination consists of the Senior Subordinated Loan (24.2%) and the Junior Subordinated Loan (5.0%). Subordination does not include the liquidity reserve that is not funded with the subordinated loans.
The transaction benefits from a one-year revolving period. During the revolving period, the seller may offer additional receivables and their related expectancy rights that the Issuer will purchase subject to the eligibility criteria, concentration limits, performance triggers and other conditions set out in the transaction documents.
The receivables are also serviced by LPDE. The leased vehicles returned at lease maturity are marketed and sold by LPDE. LPDE will purchase back the vehicles at the discounted balance of the expectancy rights under the put option agreement. Any vehicles not repurchased (e.g., due to defaulted lease receivables) will be disposed of at market price by LPDE on behalf of the Issuer, acting in its capacity as realisation agent.
-- DBRS considers LPDE to be a highly specialised leasing company part of a multinational leasing group, and an experienced servicer and realisation agent.
-- Receivables are transferred to the Issuer at their aggregate discounted balance, which is calculated by discounting the scheduled payments under the lease agreements and the expectancy rights by 5%. The use of this fixed discount rate provides potential excess spread to the transaction, considering the transaction’s senior costs and the weighted-average coupon of the Notes.
-- The transaction benefits from a liquidity reserve that was fully funded at closing. Amounts standing to the liquidity reserve are made available to cover senior fees, interest rate swap payments and interest on the Notes during both the revolving and amortisation periods. The reserve is set at 0.5% of the Notes with a floor of EUR 2 million.
-- The Issuer benefits from a put option offered by the seller under which the trustee is instructed to exercise the right to sell a returned vehicle to the seller at its contractual residual value (RV) rate at any time.
CHALLENGES AND MITIGATING FACTORS
-- The pool consists of operational lease agreements where the Issuer may be exposed to RV risk related to the expectancy rights upon LPDE’s insolvency.
Mitigants: (1) LPDE is potentially able to recalculate the RV associated with lease agreements if usage thresholds are met or if there is an early termination. (2) DBRS has considered the length of the revolving period and a migration toward the maximum RV exposure permitted under the transaction’s replenishment criteria. (3) Within its cash flow analysis, DBRS has applied both frequency and severity rating-related stresses to RV performance. (4) LPDE offers the Issuer a put-option, which allows the trustee to exercise the right to sell a vehicle to the seller at its RV.
-- Commingling and set-off risk: LPDE is entitled to commingle collections with funds standing in its own accounts and may transfer these to the Issuer at the end of each monthly period. Collections may therefore be commingled with LPDE’s estate upon insolvency. Lessees may also be entitled to set-off payment obligations against amounts owed to them by LPDE that may arise through open-calculation lease agreements.
Mitigants: (1) Following a Reserves Trigger Event, the commingling and set-off reserves will be funded. Given the associated definition, these reserves are not funded upon closing. (2) The servicer may also increase the frequency of collection transfers to the Issuer’s account. (3) The seller will indemnify the Issuer against any set-off claims and offer appropriate representations in this respect.
-- The transaction is reliant on LPDE to coordinate maintenance activities.
Mitigants: The transaction incorporates a maintenance reserve, which will be funded upon a Reserve Trigger Event. It is made available to the Issuer for distribution to maintenance providers. Furthermore, a backup maintenance coordinator will be procured if LPC is not considered to be rated at least investment grade and can be appointed following termination of LPDE as maintenance coordinator.
-- Since the Issuer is expected to purchase additional receivables during the revolving period, the pool composition at the end of the revolving period may differ in comparison with the issue date.
Mitigants: Additional receivables added to the portfolio during the revolving period must adhere to the specific eligibility and replenishment criteria outlined in the transaction documents. DBRS considers the revolving period, at one year, to be relatively short compared with other auto loan/lease transactions and has adjusted its cash flow analysis to accommodate a deterioration in the pool. There are separate replenishment criteria for lease instalments and expectancy rights.
Bumper 11 S.A. is a limited liability company (societe anonyme) incorporated under the law of the Grand Duchy of Luxembourg for the purpose of issuing asset-backed securities according to Luxembourg Securitisation Law. The Issuer has expressly elected in its articles of incorporation to be governed by the Luxembourg Securitisation Law.
The Issuer was established with the exclusive purpose to enter into this securitisation transaction. Within the scope of its role, the Issuer is permitted to purchase receivables, issue securitisation notes, enter into the relevant transaction documents and carry out any required activities related to securitisation transactions. Prior to this securitisation, the Issuer has not carried out any relevant activity.
In accordance with Luxembourg Securitisation law, the Issuer is organised into two segregated compartments (Compartment 1 and Compartment 2) that will be treated as separate legal entities. Compartment 1 and Compartment 2 have different roles and responsibilities in this transaction: Compartment 1 acts as the lease receivables purchaser whereas Compartment 2 acts as the expectancy right purchaser. The lease receivables represent the rights to receive payments under the lease contracts, while the expectancy rights represent the right to receive proceeds of sale of the underlying assets upon its return at contract maturity. This distinction is crucial since, under German law, the existence of the expectancy rights would be invalid if they were to arise within the same legal entity that holds the receivable at that point in time.
DBRS understands that although separate compartments are treated as separate legal entities under Luxembourg law, their treatment under German law has never been tested in cases related to insolvency or liquidation of any or both compartments. The transaction counsel’s opinion specifically addresses the existence and enforceability of the receivables and the expectancy rights.
The Issuer has not carried on any business or activities other than those incidental to its incorporation, the authorisation and the other activities incidental to the exercise of its rights and compliance with its obligations under the transaction. The Issuer does not directly conduct any activity and thus has no employees of its own; however, it appointed the transaction parties to conduct all activities necessary to its existence and the management of this securitisation transaction.
Pursuant to the terms of the transaction documents, the corporate services provider will provide the independent director and other corporate and administration services to the Issuer in consideration for the payment by the Issuer of an annual fee. Likewise, the Issuer has mandated the other transaction parties to conduct all the activities necessary to the continuation of this transaction.
Upon each assignment, Compartment 1 transfers the legal title to enforce its rights to the security trustee, while Compartment 2 transfers the legal title to enforce rights connected to expectancy rights to the expectancy right trustee (a separate legal entity from the security trustee). The Issuer mandates the security trustee to enforce the rest of its contractual rights in relation to the assets backing the Notes and the transaction documents to the security trustee. Both trustees acknowledge the assignments and rights and will act on behalf of the Issuer to enforce its rights in case of breach of obligations by any transaction party.
The Issuer (if applicable though its compartments) retains the right to bring indemnification claims against the seller or the originator (or their successors) if purchased receivables do not exist, cease to exist or prove not to have been legally valid upon assignment. However, the Issuer is exposed to obligors’ credit risk and (when applicable), to risk of realisation from sale of the leased vehicle upon return at maturity, and the seller does not grant any guarantees or warrants the full and timely payment by the obligors of any sums payable.
ABN AMRO Bank N.V. (ABN AMRO) has been appointed as the Issuer’s account bank transaction and the swap counterparty for the Notes. DBRS considers that ABN AMRO meet DBRS’s minimum criteria to act in both capacities and the transaction contains downgrade provisions relating to their roles consistent with DBRS’s criteria.
The receivables and the expectancy rights backing the Notes were assigned by LPDE as the seller. The receivables and the expectancy rights are related to operating lease contracts originated by LPDE in Germany, in its normal course of business.
No backup servicer was appointed at closing. DBRS believes that LPDE’s current financial condition mitigates concerns about a possible disruption in servicing following a servicer event of default, particularly insolvency, and further notes that a backup servicer facilitator was instead appointed for the transaction.
The lease receivables and expectancy rights that are to be assigned to the Issuer consist of operating lease agreements granted for the purpose of leasing passenger or light commercial vehicles (LCVs) by LPDE to corporate, SME, and public-sector clients with registered offices in Germany. LPDE offers agreements through a master lease product, which allows multiple vehicles to be leased under a single set of general conditions. Furthermore, a lease agreement is established for each vehicle which allows for specific terms to be referenced.
LPDE offers two types of operating lease agreements: open-calculation contracts and closed-calculation contracts. Under an open-calculation contract, the product provides flexibility by aligning the client usage with the lease instalments. There is a profit-sharing arrangement between LPDE and the lessee if there arises any financial gain in relation to the combined result of (1) the sale of the vehicle and (2) the utilisation of the budgeted maintenance facilities against the terms and conditions of the contract within the master-lease agreement. These amounts are calculated on an annual basis and debits/credits are applied to a client’s settlement account. Under a closed-calculation contract, the lessee is not provided with the same transparency and does not have the option of receiving any refund from LPDE if its usage is lower than budgeted at the start of the contract. For both open- and closed-calculation agreements, LPDE takes the RV risk.
The rating is based on a review by DBRS of the following analytical considerations:
-- Transaction capital structure including form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS-projected expected cumulative net losses and RV losses under various stress scenarios.
-- 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 ultimate payment of principal by the legal final maturity date.
-- LPDE’s financial strength and its capabilities with regard to originations, underwriting and servicing.
-- DBRS’s operational risk review of LPDE’s premises in Neuss, Germany, which deemed it to be an acceptable servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality and industry diversification of the collateral and the historical and projected performance of the seller’s portfolio.
-- The sovereign rating of the Federal Republic of Germany, which is currently rated at AAA with a Stable trend by DBRS.
-- The consistency of the transaction’s legal structure with 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.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is: “Rating European Consumer and Commercial Structured Finance Transactions”
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 is 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 this rating include performance and portfolio data relating to receivables sourced by LPDE.
DBRS received static monthly cumulative default and recoveries data from January 2011 up to July 2018. Dynamic data was also provided relating to outstanding balances, delinquencies, prepayments and RV performance as well as stratifications related to the portfolio.
DBRS did not rely upon third-party due diligence in order to conduct its analysis.
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 to the parameters used to determine the rating (the “Base Case”):
-- Expected default of 2.8%: a 25% and 50% increase.
-- Expected loss given default (LGD) of 50% at AAA (sf) and 46% at AA (high) (sf): a 25% and 50% increase.
-- RV haircut of 42% at AAA (sf) and 39% at AA (high) (sf): a 25% and 50% increase.
Scenario 1: A 25% increase in the expected default and LGD.
Scenario 2: A 50% increase in the expected default and LGD.
Scenario 3: A 25% increase in the RV haircut.
Scenario 4: A 25% increase in the RV haircut and 25% increase in the expected default and LGD.
Scenario 5: A 50% increase in the RV haircut and 25% increase in the expected default and LGD.
Scenario 6: A 50% increase in the RV haircut.
Scenario 7: A 25% increase in the RV haircut and 50% increase in the expected default and LGD.
Scenario 8: A 50% increase in the RV haircut and 50% increase in the expected default and LGD.
DBRS concluded that the Class A Notes rating is expected to remain at AAA (sf) under the eight stress scenarios.
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, Global Structured Finance
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 28 November 2018
DBRS Ratings Limited
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London EC3M 3BY
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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 European Consumer and Commercial Asset-Backed Securitisations
-- Rating CLOs Backed by Loans to European SMEs
-- 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 email@example.com.