DBRS Ratings Limited (DBRS Morningstar) assigned an A (sf) rating to the Class A Notes issued by Globaldrive Auto Receivables UK 2020-A plc (the Issuer). The Issuer is a public company with limited liability incorporated in England and Wales and serves as a special-purpose entity solely for the purpose of this transaction.
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 20 June 2028, in accordance with the terms of the notes. DBRS Morningstar has not assigned ratings to the Class B and Class C notes issued in this transaction.
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, Class B, and Class C notes are backed by a portfolio of approximately GBP 964 million of receivables related to amortising and balloon auto loan contracts granted by FCE Bank plc (FCE, the seller or the servicer), a subsidiary of Ford Motor Company, to borrowers in the United Kingdom. The underlying motor vehicles relating to the finance contracts consist of both new and used passenger and light commercial vehicles. FCE services the receivables.
The underlying receivables relating to the balloon loans feature an optional balloon payment due at the end of the agreement (the guaranteed future value or GFV). The optional balloon payment feature allows the borrower to hand back the underlying vehicle at contract maturity to its dealer in lieu of paying or refinancing the final balloon payment. This feature exposes the issuer to residual value (RV) 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 a 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;
-- FCE’s capabilities with regard to originations, underwriting, servicing, and its financial strength. DBRS Morningstar conducted an operational risk review of FCE 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 of Great Britain and Northern Ireland, currently at AAA with a Negative 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 separate waterfalls that facilitate the distribution of interest and principal collections. Both waterfalls allow for the fully sequential payment of both interest and principal on the Class A, Class B, and Class C notes.
A nonamortising general reserve account equal to 0.75% of the initial Class A and Class B notes balance is available to the structure. The general reserve provides liquidity to the Class A and Class B notes while also ultimately providing credit enhancement to the notes. It is available to repay principal on the final maturity date.
All underlying contracts are fixed rate while floating-rate notes have been issued. The Class A and Class B notes are indexed to Daily Compounded Sonia. Interest rate risk for the Class A and Class B notes is mitigated through an interest rate swap provided by Banco Santander S.A.
Elavon Financial Services DAC, UK branch (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.
Banco Santander, S.A. has been appointed as the interest rate 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. For this transaction, DBRS Morningstar assumed a moderate expected decline in RVs.
On 16 April 2020, the DBRS Morningstar Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 period. These scenarios were updated on 1 June 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/361867/global-macroeconomic-scenarios-june-update 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.
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 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:
-- Static cumulative gross and net loss data going back to Q1 2015 and up to Q4 2019; data was provided separately for used and new vehicles and TCM and standard contracts. This data was further split into hostile and voluntary termination.
-- Loss and recovery data from Q1 2015 to Q4 2019, again split by product and vehicle type.
-- Dynamic delinquency from January 2015 to March 2020.
-- Vehicle realisation, turn-in, and prepayment data.
-- Loan-level data representing the closing pool and summarised stratification tables as at 31 May 2020.
-- A theoretical amortisation of the pool and the net present values of the balloon and GFV components.
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.
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 (the Base Case):
-- Expected default: 4.4%
-- Expected recovery rate: 69%
-- Loss given default (LGD): 49% for the A (sf) scenario.
-- RV haircut for the A (sf) scenario: 28%
-- Turn-in rate at maturity for the A (sf) scenario: 90%
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 loss.
Scenario 4: A 25% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 5: A 50% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 6: A 50% increase in the expected RV loss.
Scenario 7: A 25% increase in the expected default and LGD and a 50% increase in the RV loss.
Scenario 8: A 50% increase in the expected default and LGD and a 50% increase in the RV loss.
DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes: A (low) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (sf), BBB (low) (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: 26 June 2020
DBRS Ratings Limited
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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),
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020),
-- 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 email@example.com.