DBRS Morningstar Comments on FCT Cars Alliance DFP France Following Amendment

DBRS Ratings Limited (DBRS Morningstar) reviewed the impact of an amendment (the Amendment) to the transaction FCT Cars Alliance DFP France (the Issuer) and concluded that the Amendment will not in and of itself result in a downgrade or withdrawal of the rating of the Series 2018-1 FCT Notes (the Notes). The effective date of the amendment is 20 May 2020.

The Amendment was executed in the context of the Coronavirus Disease (COVID-19) pandemic and is only valid during a waiver period that ends upon the earlier of (1) 12 November 2020, and (2) the date on which the monthly portfolio payment rate is higher than 25% for three consecutive collection periods. The Amendment serves several objectives including:

-- Waiving the occurrence of an early amortisation event as a result of (1) the quarterly portfolio payment rate falling below 25%, and (2) amounts standing to the credit of the excess funding account exceeding 30% of the sum of the series adjusted invested amounts.
-- An increase in the general reserve required amount from 0.5% to 1.0% of the sum of the series adjusted invested amount and the series available subordination.
-- A requirement for the Seller to make cash payments to the excess funding account in order to prevent the occurrence of an early amortisation event.
-- The introduction of an increased required subordination factor of 21% when the quarterly portfolio payment rate falls below 25%. This is 5% higher than the required subordination factor applied when the quarterly portfolio payment rate reported is between 25% and 30%.
-- An increase in the single dealer concentration level from 2.5% to 4.0%.

In DBRS Morningstar’s view, the changes mitigate the increase in the liquidity risk of the transaction in the near term, when the proceeds from the portfolio are expected to be lower than the historical norm. Following the temporary closure of manufacturing plants and vehicle dealerships in France from the end of March 2020, the three-month average payment rate is expected to fall below the trigger level set at 25% following the May 2020 collection period. The immediate impact of the dealership closures can be seen in the monthly portfolio payment rate reported for April 2020 of 6.2% compared with a 2019 average of 45.8%. While the monthly portfolio payment rate is expected to increase in May following the reopening of vehicle dealerships on 11 May 2020, it will likely be insufficient to address the impact of the performance in April on the quarterly portfolio payment rate.

The closure of the manufacturing plants and vehicle dealerships has not only impacted the sale of new vehicles in France during March and April 2020, it has also constrained the supply chain leading to a reduction in the origination of receivables for the transaction. This leads to a substitution effect whereby principal collections that are received may remain in the FCT structure rather than being used to purchase new receivables representing new vehicle/parts inventory and results in a potential yield reduction for the portfolio as interest bearing assets are replaced with cash. While the removal of the excess funding threshold limits yield to the transaction cash flows, it allows for an increase in the amount of collections initially available to the Notes upon amortisation.

The suspension of the quarterly portfolio payment rate trigger and the excess funding account threshold prevent the Notes from entering early amortisation. In addition, the increase in the general reserve required amount and the requirement for the Seller to make cash payments to avert an early amortisation event enhance the issuer’s capacity for payment of the ongoing costs of the transaction and timely payment of interest on the Notes.

The increase in the minimum subordination available to the Notes while the payment rate falls below 25% provides additional protection against a potential deterioration of the performance of the portfolio in terms of defaults and recoveries during the waiver period. However, this is partially offset by an increase in exposure resulting from the change in the single dealer concentration level.

The transaction is a securitisation of auto wholesale receivables originated in France by DIAC S.A. and relates to receivables associated with the purchase and financing by motor vehicle dealers of new/used car inventory and spare parts. The transaction is currently in its revolving period, scheduled to terminate in July 2023 in the absence of any early amortisation events. The final maturity date of the Notes is on the payment date in July 2028.

As of 30 April 2020, no defaulted receivables were recorded in the transaction since closing and the quarterly portfolio payment rate was 28.2%.

More information on the transaction can be found at: https://www.dbrsmorningstar.com/issuers/23296.

COVID-19
More information about DBRS Morningstar’s view on the impact of the COVID-19 crisis on auto-wholesale securitisations can be found at: https://www.dbrsmorningstar.com/research/359606/the-impact-of-covid-19-on-global-auto-wholesale-transactions.

For more information regarding rating methodologies and COVID-19, please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies COVID-19, please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

On 16 April 2020, the DBRS Morningstar Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 time frame. For details see the following commentaries: https://www.dbrsmorningstar.com/research/359679/global-macroeconomic-scenarios-implications-for-credit-ratings and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus pandemic is likely to affect DBRS Morningstar-rated ABS transactions in Europe. For more details please see: https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

For more information on this credit or on this industry, visit www.dbrsmorningsar.com or contact us at info@dbrsmorningstar.com.

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960