DBRS Ratings Limited (DBRS Morningstar) finalised its provisional rating of AAA (sf) on the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment 11 (the Issuer).
The rating of the Class A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date on 15 February 2027, in accordance with the terms of the notes.
DBRS Morningstar based its rating on information provided by the Issuer and its agents as of the date of this press release.
The Class A and Class B notes are backed by a static portfolio of approximately EUR 1.89 billion receivables related to amortising and balloon auto loan contracts granted by Mercedes-Benz Bank AG (MBB, the Seller, or the Servicer), a wholly owned direct subsidiary of Daimler AG, to borrowers in the Federal Republic of Germany. The underlying motor vehicles relate to the finance contracts consist of both new and used passenger and light-commercial vehicles. MBB services the receivables.
The underlying receivables relating to the balloon loans either feature a mandatory or an optional balloon payment due at the end of the agreement. The optional balloon payment feature allows a borrower to hand back the underlying vehicle at contract maturity to its dealer as an alternative to paying or refinancing the final balloon payment. Under this scenario, the dealer has the responsibility for paying the final instalment. However, the borrower can only turn in the vehicle as long as the dealer is not insolvent and does not have the option to return the vehicle to MBB or the Issuer. The inclusion of balloon loans directly exposes the Issuer to potential, additional balloon risk.
DBRS Morningstar based its rating on the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, excess spread, and the availability of the general reserve. Credit enhancement levels are sufficient to support DBRS Morningstar-projected expected cumulative net 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;
-- MBB’s capabilities with regard to originations, underwriting, servicing, and its financial strength. DBRS Morningstar conducted an operational risk review of MBB 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 Federal Republic of Germany, currently at AAA with a Stable trend; and
-- The consistency of the transaction’s legal structure with DBRS Morningstar’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.
The transaction benefits from a single waterfall that outlines the allocation of the available distribution amount including collections representing interest, principal, and recoveries. The notes amortise sequentially subject to a note-specific target principal redemption amount.
A nonamortising general reserve account equal to 0.5% of the portfolio balance at the cut-off date is available to the structure. The general reserve provides liquidity to the Class A Notes while also ultimately providing credit enhancement to the notes. It is available to repay principal on the notes when the outstanding principal balance of the portfolio reaches zero.
All underlying contracts are fixed rate while floating-rate notes have been issued. The Class A Notes are indexed to one-month Euribor. Interest rate risk for the Class A Notes is mitigated through an interest rate swap provided by DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank AG).
DBRS Morningstar analysed the transaction cash flow structure in Intex DealMaker.
Elavon Financial Services DAC (Elavon) has been appointed to act as the account bank for the transaction. Based on DBRS Morningstar’s private rating of Elavon and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.
DZ Bank AG has been appointed as a swap counterparty. The downgrade provisions relating to the swap counterparty are consistent with DBRS Morningstar’s "Derivative Criteria for European Structured Finance Transactions" methodology.
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 adjustments 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.
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.
All figures are in euros unless otherwise noted.
The principal methodology applicable to the rating is “Rating European Consumer and Commercial Asset-Backed Securitisations” (13 January 2020).
DBRS Morningstar 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.
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 the Seller and the arranger, BNP Paribas.
DBRS Morningstar received the following data and information:
-- Static quarterly cumulative gross loss data from Q1 2014 to Q1 2020;
-- Static quarterly recovery data from Q1 2014 to Q1 2020;
-- Dynamic monthly prepayment data from February 2014 to February 2020;
-- Dynamic delinquency data from February 2014 to February 2020;
-- Dynamic portfolio balances (including delinquencies and prepayments) from February 2014 to February 2020; and
-- Portfolio stratification tables as at 30 April 2020 and its related contractual amortisation profile.
For cumulative gross losses and recoveries, DBRS Morningstar received portfolio subset breakdowns that distinguished between new/used vehicles, private retail/commercial customers, and balloon/standard amortising loans.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.
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.
This is the first rating action since the Initial Rating Date.
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.
To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating.
-- Expected default: 2.0%
-- Expected recovery rate: 70%
-- Loss given default (LGD): 55% for the AAA (sf) scenario.
Scenario 1: A 25% increase in the expected default rate.
Scenario 2: A 50% increase in the expected default rate.
Scenario 3: A 25% increase in the LGD.
Scenario 4: A 25% increase in the expected default rate and a 25% increase in the LGD.
Scenario 5: A 50% increase in the expected default rate and a 25% increase in the LGD.
Scenario 6: A 50% increase in the LGD.
Scenario 7: A 25% increase in the expected default rate and a 50% increase in the LGD.
Scenario 8: A 50% increase in the expected default rate and a 50% increase in the LGD.
DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes: AA (high) (sf), AA (sf), AA (high) (sf), AA (sf), AA (low) (sf), AA (sf), AA (low) (sf), A (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 Limited are subject to EU and U.S. regulations only.
Lead Analyst: Miklos Halasz, Senior Analyst
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 14 May 2020
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020),
-- Rating European Structured Finance Transactions Methodology (28 February 2020),
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019),
-- 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.
-- 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.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019),
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 firstname.lastname@example.org.