DBRS Morningstar Assigns New Rating to VCL Master Residual Value S.A., acting with respect to its Compartment 2

DBRS Ratings GmbH (DBRS Morningstar) assigned an A (high) (sf) rating to the Series 2020-1, Class B Notes issued by VCL Master Residual Value S.A., acting with respect to its Compartment 2 (the Issuer).

The rating addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in September 2026.

DBRS Morningstar assigned the rating following the issuance of the above-mentioned notes on the 26 May 2020 payment date. The Series 2020-2, Class B Notes, issued by the Issuer on the same date, are not rated by DBRS Morningstar.

Additionally, DBRS Morningstar acknowledged the tap issuance on the same payment date under the following series of notes issued by the Issuer:

-- Series 2015-1, Class A Notes
-- Series 2015-4, Class A Notes
-- Series 2015-5, Class A Notes
-- Series 2015-6, Class A Notes
-- Series 2016-4, Class A Notes
-- Series 2018-2, Class A Notes
-- Series 2018-4, Class A Notes
-- Series 2018-5, Class A Notes
-- Series 2016-1, Class B Notes
-- Series 2016-3, Class B Notes
-- Series 2017-1, Class B Notes
-- Series 2018-1, Class B Notes
-- Series 2018-2, Class B Notes
-- Series 2019-1, Class B Notes

The Series 2015-2, 2015-3, 2016-1, 2016-2, 2018-1, and 2019-1 Class A Notes, and Series 2015-1 and 2015-3 Class B Notes are also rated by DBRS Morningstar under this Issuer but were not included as part of the tap issuance.

The Issuer is a securitisation established in November 2015, backed by a revolving pool of receivables related to motor vehicle lease contracts originated by Volkswagen Leasing GmbH (VWL) to retail and commercial customers in Germany, secured by new and used vehicles. All series of notes are currently in their revolving period. The programme allows for the tap-up issuance as well as the issuance of further series of notes, subject to collateralisation levels and performance requirements being met as specified in the transaction documents, up to the programme maximum.

The notes are backed by EUR 9.0 billion of assets, including cash expectancy rights related to residual values of motor vehicle lease contracts originated by VWL.

PORTFOLIO PERFORMANCE
As at the April 2020 payment date, loans that were 30 to 60 days delinquent and 60 to 90 days delinquent represented 0.2% and 0.1% of the portfolio discounted balance, respectively, while loans delinquent by more than 90 days represented 0.1%. Cumulative write-offs amounted to 0.1% of the aggregate original and subsequently purchased portfolios.

CREDIT ENHANCEMENT
As of the May 2020 payment date, the Class A Notes benefitted from overcollateralisation of 47.6%, while the Class B Notes benefitted from overcollateralisation of 37.2%.

The transaction benefits from a liquidity reserve, currently funded to EUR 244.9 million, reflecting its target level of 4.32% of the aggregate outstanding notes balance. The reserve is available to cover senior expenses and interest payments on the notes.

The Bank of New York Mellon, Frankfurt Branch (BNYM Frankfurt) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of BNYM Frankfurt, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to BNYM Frankfurt to be consistent with the rating assigned to the notes, as described in DBRS Morningstar’s "Legal Criteria for European Structured Finance Transactions" methodology.

ING Bank N.V. (ING) and Skandinaviska Enskilda Banken AB (SEB) act as the swap counterparties for the transaction. DBRS Morningstar’s public Long-Term Critical Obligations Ratings of ING and SEB at AA (high) and AA, respectively, are consistent with the First Rating Threshold as described in DBRS Morningstar’s "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis and, where appropriate, additional stresses to expected performance as a result of the global efforts to contain the spread of the coronavirus.

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. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

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

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

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360734.

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.

The principal methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology” (22 April 2020). DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

In DBRS Morningstar’s opinion, the changes under consideration do not warrant the application of the entire principal methodology. Given the master trust structure, no asset or cash flow analysis was conducted as the asset portfolio complies with the composition limits set forth in the transaction legal documents and current transaction performance is within expectations.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at: https://www.dbrsmorningstar.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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include monthly investor reports provided by VWL and legal documentation provided by the Issuer’s legal counsel.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial rating, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar rating on this financial instrument.

The last rating action on this transaction took place on 25 March 2020, when DBRS Morningstar confirmed the ratings of the outstanding Class A Notes and Class B Notes at AAA (sf) and A (high) (sf), respectively.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies is available at www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):
-- DBRS Morningstar expected base case probability of default (PD), loss given default (LGD), and residual value (RV) loss rate for the portfolio based on an annual review of the transaction in March 2020. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.
-- PD rate used: base case PD of 1.40%, a 25% and 50% increase on the base case PD was tested;
-- LGD rates used: LGD of 60% at the AAA (sf) stress level and 48% at the A (high) (sf) stress level, a 25% and 50% increase in the LGD was tested;
-- RV Loss rate: 40% at the AAA (sf) stress level and 32% at the A (high) (sf) stress level. In both scenarios, a 25% and 50% increase in RV Loss was tested.

Class A Notes Risk Sensitivity:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a decrease of the rating of the Class A Notes to AA (high) (sf);
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a decrease of the rating of the Class A Notes to AA (high) (sf);
-- A hypothetical increase of the RV Loss rate by 25%, ceteris paribus, would lead to a decrease of the rating of the Class A Notes to BBB (high) (sf);
-- A hypothetical increase of the RV Loss rate by 50%, ceteris paribus, would lead to a decrease of the rating of the Class A Notes to BB (low) (sf);
-- A hypothetical increase of the RV Loss rate by 25%, and a hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a decrease of the rating of the Class A Notes to AA (low) (sf);
-- A hypothetical increase of the RV Loss rate by 25%, and a hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a decrease of the rating of the Class A Notes to A (high) (sf);
-- A hypothetical increase of the RV Loss rate by 50%, and a hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a decrease of the rating of the Class A Notes to BB (low) (sf);
-- A hypothetical increase of the RV Loss rate by 50% and a hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a decrease of the rating of the Class A Notes to BBB (sf).

Class B Notes Risk Sensitivity:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a decrease of the rating of the Class B Notes to A (sf);
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a decrease of the rating of the Class B Notes to A (sf);
-- A hypothetical increase of the RV Loss rate by 25%, ceteris paribus, would lead to a decrease of the rating of the Class B Notes to BB (high) (sf);
-- A hypothetical increase of the RV Loss rate by 50%, ceteris paribus, would lead to a decrease of the rating of the Class B Notes to B (high) (sf);
-- A hypothetical increase of the RV Loss rate by 25%, and a hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a decrease of the rating of the Class B Notes to BB (sf);
-- A hypothetical increase of the RV Loss rate by 25%, and a hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a decrease of the rating of the Class B Notes to BB (sf);
-- A hypothetical increase of the RV Loss rate by 50%, and a hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a decrease of the rating of the Class B Notes to B (sf);
-- A hypothetical increase of the RV Loss rate by 50% and a hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a decrease of the rating of the Class B Notes to B (sf).

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Daniel Rakhamimov, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 26 September 2016

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology (22 April 2020),
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- Rating European Structured Finance Transactions Methodology (28 February 2020), https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020), https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019), https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019), https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019), https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

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