Press Release

DBRS Morningstar Confirms Ratings on Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-2 and Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2021-2

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October 18, 2022

DBRS Ratings Limited (DBRS Morningstar) confirmed its AAA (sf) ratings on the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-2 (Silver Arrow UK 2020-2) and the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2021-2 (Silver Arrow UK 2021-2) (together, the Rated Notes).

The ratings on the Rated Notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity dates.

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the September 2022 payment date;
-- Probability of default (PD), loss given default (LGD), residual value (RV) haircut, and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the Rated Notes to cover the expected losses at the AAA (sf) rating level.

Both transactions are securitisations of auto loan contracts granted mainly to individuals and, in a lesser measure, to companies in England, Wales, Scotland, and Northern Ireland by Mercedes-Benz Financial Services UK Limited (MBFS), which is wholly owned by Mercedes-Benz Group AG (formerly Daimler AG) and which also acts as servicer. The pools consist mainly of personal contract purchase (PCP) loans and a small portion of hire purchase (HP) loans, and are backed by new and used vehicles.

Silver Arrow UK 2020-2 and Silver Arrow UK 2021-2 closed in November 2020 and October 2021, respectively. Both transactions have a static collateral and are subject to RV 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 dates are at the payment dates in December 2026 and in October 2027 for Silver Arrow UK 2020-2 and Silver Arrow UK 2021-2, respectively.

PORTFOLIO PERFORMANCE
As of the September 2022 payment date, loans two to three months in arrears for Silver Arrow UK 2020-2 and Silver Arrow UK 2021-2 both represented 0.1% of their respective outstanding portfolio balances, up marginally since DBRS Morningstar’s initial rating. Loans at least three months in arrears represented 0.1% of the outstanding portfolio balance for both transactions, also up marginally since DBRS Morningstar’s initial rating. The cumulative default ratios for Silver Arrow UK 2020-2 and Silver Arrow UK 2021-2 were 1.2% and 0.1%, respectively.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted an analysis of the pools of receivables and updated its expected PD, LGD, and RV haircut assumptions for both transactions to the following:
-- Expected PD of 6.1%;
-- Expected LGD of 51.5% at the AAA (sf) rating level;
-- RV haircut of 43.6% at the AAA (sf) rating level.

The transactions are subject to voluntary termination (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 September 2022 payment date, 93.2% of the Silver Arrow UK 2020-2 portfolio and 91.7% of the Silver Arrow UK 2020-2 portfolio consisted of PCP receivables with original terms equal to or longer than four years, which poses increased VT risk as per DBRS Morningstar’s “UK Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination” commentary at https://www.dbrsmorningstar.com/research/326850/uk-autos-elongated-pcp-terms-increase-the-risk-of-voluntary-termination. DBRS Morningstar factored this risk into its base case PD and LGD assumptions.

CREDIT ENHANCEMENT
As of the September 2022 payment date, credit enhancement to the Class A Notes in Silver Arrow UK 2020-2 and Silver Arrow UK 2021-2 was 90.5% and 38.4%, respectively, up from 43.0% and 24.5%, respectively, at the time of the last rating action on each transaction one year ago.

The transactions benefit from nonamortising reserves that provide liquidity support to the Class A Notes through the life of the transactions and can be used toward repayment of the Class A Notes upon the outstanding portfolio balance reducing to zero. As of the September 2022 payment date, the reserves were funded at their target amounts of GBP 5.4 million and GBP 2.0 million for Silver Arrow UK 2020-2 and Silver Arrow UK 2021-2, respectively.

Elavon Financial Services DAC (Elavon) acts as the account bank for the transactions. Based on DBRS Morningstar’s private rating on Elavon, the downgrade provisions outlined in the transactions’ documents, and other mitigating factors inherent in the transactions’ structures, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Rated Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank) acts as the swap counterparty for Silver Arrow UK 2020-2. Skandinaviska Enskilda Banken AB acts as the swap counterparty for Silver Arrow UK 2021-2. DBRS Morningstar's Long Term Critical Obligations Rating of AA on DZ Bank and Skandinaviska Enskilda Banken AB is above the first rating threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant impact on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

DBRS Morningstar analysed the transactions’ structure in Intex DealMaker.

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

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (19 May 2022).

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

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

A review of the transactions’ 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/401817/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 these ratings include investor reports provided by MBFS and loan-level data provided by MBFS.

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

At the time of the initial ratings, 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 purpose of providing these ratings 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 Silver Arrow UK 2020-2 took place on 19 November 2021, when DBRS Morningstar confirmed its rating on the Class A Notes at AAA (sf). The last rating action on Silver Arrow UK 2021-2 took place on 28 October 2021, when DBRS Morningstar finalised its provisional AAA (sf) rating on the Class A Notes.

The lead analyst responsibilities for Silver Arrow UK 2021-2 have been transferred to Natalia Coman.

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

Sensitivity Analysis: 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 and LGD for the pools 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.
-- Expected PD of 6.1% for Silver Arrow UK 2020-2 and Silver Arrow UK 2021-2
-- Expected LGD of 51.5% at the AAA (sf) rating level;
-- RV haircut of 43.6% at the AAA (sf) rating level

-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf), assuming no change in the LGD. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf).

Silver Arrow UK 2020-2 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)

Silver Arrow UK 2021-2 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 AA (high) (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.

These ratings are 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
Silver Arrow UK 2020-2 Initial Rating Date: 20 November 2020
Silver Arrow UK 2021-2 Initial Rating Date: 7 October 2021

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 these transactions can be found at: https://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 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.

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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