Press Release

DBRS Morningstar Confirms Rating on Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-1

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April 08, 2022

DBRS Ratings Limited (DBRS Morningstar) confirmed its AAA (sf) rating on the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-1 (the Issuer).

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the March 2022 payment date.
-- Probability of default (PD), loss given default (LGD), and residual value (RV) haircut assumptions on the remaining receivables.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level.

The Issuer is a securitisation of auto loan contracts, granted to individuals and companies in England, Wales, Scotland, and Northern Ireland by Mercedes-Benz Financial Services UK Limited, which is wholly owned by Mercedes-Benz Group AG and which also acts as servicer.

The pool consists of Personal Contract Purchase (PCP) loans and Hire Purchase loans granted for the purchase of new and used vehicles. The transaction, closed in April 2020, has a static collateral and is subject to residual value risk through the presence of PCP loans. The receivables do not include the financing of ancillary products such as insurance components. The legal final maturity is on the payment date in December 2025.

PORTFOLIO PERFORMANCE
Delinquencies are low and have been decreasing since closing with loans that are two to three months in arrears and more than three months in arrears representing 0.1% of the outstanding portfolio balance.

According to the transaction documents, defaulted loans are defined as loans that are more than three instalments in arrears or that have been declared defaulted by the servicer. As of the March 2022 payment date, the total gross default ratio was 3.6% with 2.4% related to voluntary terminations (VT) and 1.1% related to credit defaults. Cumulative recoveries represented 85.9% of the cumulative defaulted amount. The performance of the portfolio remains within DBRS Morningstar’s expectations. Payment holidays granted in the context of the Coronavirus Disease (COVID-19) pandemic have all ended.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar reviewed the remaining receivables and maintained its base case PD assumption at 7.0% and RV haircut of AAA (sf) at 44.8%, and decreased its LGD assumption of AAA (sf) to 51.5% from 53.9% at the last annual review. The transaction is subject to VT risk, as under the UK Consumer Credit Act, the borrower has the right to terminate a consumer loan agreement after having paid at least half of the total amount payable, provided that the vehicle returns to the finance provider in good condition. As of the March 2022 payment date, 79.5% of the portfolio consisted of PCP receivables that have an original term equal to or longer than four years, which poses an increased VT risk, as shown in DBRS Morningstar’s “U.K. Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination” commentary. DBRS Morningstar factored this risk into its base case PD and LGD assumptions. The decrease in LGD is due to the removal of coronavirus adjustments, namely the haircut that DBRS Morningstar previously applied to the base case recovery rate.

CREDIT ENHANCEMENT
Credit enhancement to the Class A Notes consists of the subordination of the Class B Notes and increased to 88.0% from 41.8% at the last annual review.

The transaction benefits from a nonamortising reserve that provides liquidity support to the Class A Notes through the life of the transaction and can be used towards repayment of the Class A Notes upon the outstanding portfolio balance being reduced to zero. As of the March 2022 payment date, the reserve was funded at its target amount of GBP 5.4 million.

Elavon Financial Services DAC (Elavon) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating on Elavon, 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 the account bank to be consistent with the rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ Bank) acts as the swap counterparty for the transaction. DBRS Morningstar's Long Term Critical Obligations Rating of DZ Bank at “AA” is above 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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the rating is “Master European Structured Finance Surveillance Methodology” (8 February 2022).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include investor reports and loan-level data provided by Mercedes-Benz Financial Services UK.

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.

The last rating action on this transaction took place on 9 April 2021, when DBRS Morningstar confirmed the rating on the Class A Notes at AAA (sf).

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 with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar expected a lifetime base case PD, LGD, and RV haircut for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD of the current pool of loans for the Issuer is 7.0%. The LGD and RV haircut at the AAA (sf) rating level are 51.5% and 44.8%, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD, LGD, and the RV haircut increase by a certain percentage over the base case assumption. For example, if the RV haircut increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf), assuming no change in both the PD and LGD. If both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in the RV haircut. Furthermore, if the PD, LGD and the RV haircut all increase by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in both PD and LGD, expected rating of AAA (sf)
-- 50% increase in both PD and LGD, expected rating of AAA (sf)
-- 25% increase in both PD and LGD and 25% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in both PD and LGD and 50% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in both PD and LGD and 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in both PD and LGD and 50% increase in RV haircut, expected rating of AAA (sf)

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Natalia Coman, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 9 April 2020

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

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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