DBRS Assigns Final Ratings to Autopia Finance UK Limited

DBRS Ratings Limited (DBRS) has today assigned a AAA (sf) final rating to the Variable Funding Note (“VFN”) issued by Autopia Finance UK Limited (“Issuer”). The transaction represents the first placed issuance from Hyundai Capital UK Limited (“HCUK”) in the United Kingdom. The receivables to be securitised consist of a pool of auto loan receivables comprising of Conditional Sale and Personal Contract Purchase (“PCP”) finance agreements to retail and commercial customers secured by new and used vehicles.

The ratings are based upon review by DBRS of the following analytical considerations:
• Transaction capital structure, proposed ratings and form and sufficiency of available credit enhancement.
• Credit enhancement is in the form of overcollateralisation, whilst a Reserve Fund provides liquidity support. Credit enhancement levels are sufficient to support DBRS projected expected cumulative net loss (CNL) and residual values (RV) assumptions and under various stress scenarios.
• The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested. For this transaction, the rating addresses the payment of timely interest on a monthly basis and principal by the legal final maturity date.
• The transaction parties' capabilities with regards to originations, underwriting and servicing.
• The credit quality and diversification of the collateral and historical and projected performance of the originator’s auto loan receivables portfolio.
• The transaction's consistency of the legal structure with the DBRS Legal Criteria for European Structured Finance Transaction's methodology and the presence of legal opinions that address the true sale of the assets to the issuer and non-consolidation of the special purpose vehicle with the seller.

Transaction Summary
The structure envisages a single VFN with a Purchase Commitment equal to £300,000,000. The initial VFN credit support of 30.00% comprises of overcollateralisation only whilst a dynamic Reserve Fund of 1.00%, with a floor of £1,500,000, of the outstanding VFN provides liquidity support during the two year revolving period and the amortisation period.
The VFN benefits from credit enhancement of 30.00% and there are certain performance triggers in place which, if breached, would initiate the amortisation period:

• The Weighted Average Spread (after considering senior costs, servicing fees and cost of funds) falls below 1.0%;
• Three month average Delinquent Receivables (greater than three instalments in arrears) exceed 0.80% of the portfolio balance;
• Three month average net losses exceeds 0.16% of the sum of the portfolio balance;
• Three month average Defaulted Receivables exceed 0.30% of the sum of the portfolio balance, plus the balance of the Reserve Fund;
• The Seller defaults on any form of indebtedness greater than £10,000,000;
• The outstanding principal of the VFN exceeds the lesser of the borrowing base or the maximum Purchase Commitment;
• A change of control occurs with respect to the Seller otherwise than as a result of (i) any one or more of Hyundai Capital UK Limited, Kia Motors UK Limited and/or Hyundai Motor UK Limited gaining control of the Seller or (ii) the reduction in the combined shareholding of Hyundai Capital UK Limited, Kia Motors UK Limited and Hyundai Motor UK Limited to less than 40% of the issued share capital of the Seller.

The Originator
HCUK was formally established in February 2012, and initiated operations five months later in July. The company is a joint venture between several Hyundai entities and Santander Consumer (UK) plc (“SCUK”) with the latter having a controlling interest at 50.01%. Hyundai Capital Services Inc. owns 29.99% of the joint venture with Hyundai Motor UK and Kia Motors UK each holding a 10% share. While HCUK has only been in operation for 18 months, Hyundai and Kia have been present within the UK market for over 5 years, and SCUK has been providing origination and servicing for the Korean automakers since 2009 (Kia) and 2011 (Hyundai).

DBRS does not rate HCUK or its minority shareholders. Private ratings have been assigned to the sub-servicer, SCUK, as well as its parent company Santander U.K. plc. DBRS confirmed Banco Santander’s long-term rating at ‘A’ in August 2013. More information regarding Banco Santander can be found at www.dbrs.com.

Back-Up servicing
No backup servicer has been appointed at closing. DBRS believes that the servicing agreement between the joint venture and SCUK, as well as the current financial condition of the sub-servicer, supported by Santander U.K. plc and Banco Santander, mitigates the risk of a potential disruption in servicing following a servicer event of default including insolvency.

Collateral Analysis
The collateral pool initially supporting the VFN consists of Conditional Sale and PCP contracts. During the revolving period collections from the receivables will be used to fund the purchase of Further Receivables and there are eligibility criteria and concentration limits in place to ensure that Further Receivables will not result in a negative credit migration of the pool and include references to delinquent accounts, instalments paid, PCP balances, Guaranteed Future Values (“GFV”) and the mix of used vehicles and non-Hyundai/Kia vehicles. The selected portfolio demonstrated the following characteristics as at December 31st 2013:
• The Kia brand dominates and represents approximately 61% of the receivables pool. The remainder is predominantly represented by Hyundai (37%). Other branded vehicles primarily consist of used vehicle financing, however approximately 0.2% of the portfolio relates to the financing of new vehicles for non Kia/Hyundai brands.
• The PCP product represents over 72% of the portfolio; the remainder is made up of Conditional Sale agreements. No other products are included within the proposed pool.
• Vehicle type concentration is high with the top five vehicle types representing over 60% of the pool, the Kia Sportage accounts for over 19% of the pool.
• The portfolio consists almost entirely of cars; however 0.1% of the pool represents light commercial vehicles.
• Over 96% of the portfolio refers to vehicles registered since 2011; all financed contracts were originated after July 2012.
• Average terms reflect the two different product types; PCP contracts are offered with tenors from two to three and a half years whereas Conditional Sale contracts range from one to five years. The weighted average PCP term is 37.5 months and 42.4 months for Conditional Sale.
• Contractual interest rates (APRs) are clustered between 4% and 7% with this range representing 74% of the portfolio. HCUK do offer 0% contracts and approximately 8% of the portfolio avail of this arrangement.
• As at the closing date, the securitised portfolio excludes unsecured fixed sum loan agreements due to the application of a zero per cent concentration limit.

Hyundai and Kia’s portfolio has grown significantly from 2009, initially through the private label arrangement with SCUK. Year-on-year growth has remained consistently high with the portfolio almost doubling in size every twelve months. The growth of the PCP product in lieu of Conditional Sale is aligned with the Originator’s focus on customer retention, trade cycle management and the utilisation of residual values to drive affordable monthly payments.

DBRS considers reported delinquencies to be low for both Conditional Sale and PCP products; total portfolio delinquencies peaked at just over 1% in April 2011 but have subsequently fallen to a consistent level of approximately 0.60% in recent months. DBRS observed slightly better performance amongst the PCP product, when compared to Conditional Sale, but nevertheless performance has remained stable for both products.

Credit Analysis
DBRS cash flow model assumptions focused on the amount and timing of defaults and recoveries, prepayment speeds, interest rates and residual value loss. DBRS received cumulative gross loss data at total portfolio level which was further broken down by product, vehicle type (new/used) and brand subsets (Kia/Hyundai). Data was provided and assessed on a monthly basis from July 2009 to August 2013 and DBRS elected to base its credit loss assumptions by splitting the portfolio by product type.

Voluntary Termination and Credit Loss
HCUK provided static pool gross loss data for auto loan receivables going back to July 2009. This data was further presented as follows:
• By manufacturer (Kia or Hyundai);
• By Product: i) Conditional Sale (HP), ii) Personal Contract Purchase (PCP), iii) Total Portfolio;
• By Vehicle type - New / Used; and
• By loss type: i) Credit Defaults, ii) Voluntary Termination (VT), iii) Losses on vehicle handbacks.

Due to the limited history of data available, voluntary termination frequencies and volumes have been very low with monthly voluntary termination amounts typically representing the return of one or two vehicles for each product type. DBRS considers underlying voluntary termination rates to be low for the portfolio due to the lower than average original contractual terms, an average deposit of approximately 30% and HCUK’s use of CAP (and subsequent haircut) to establish guaranteed future values for its PCP product.

DBRS elected to balance weight the voluntary termination and credit default vintages in order to compare the projected loss assumption. For both PCP and Conditional Sale, the most conservative assumption in each case was taken. In line with DBRS procedures, unseasoned vintages were projected forward to maturity and volatility stresses were applied that took into consideration the extent of the data provided. After taking into consideration the maximum exposure to PCP contracts, the gross loss assumption was set at 2.17%.

Recoveries
DBRS received dynamic and static recoveries data that allowed differentiation between proceeds derived from vehicles sales and subsequent cash recoveries. In order to derive its recovery assumption, DBRS focused its analysis on the vehicle sale proceeds data provided for both voluntary termination returns and credit loss defaults whilst establishing separate recovery assumptions for each product. Given the PCP concentration limit for the portfolio, the weighted average recovery rate was set at 58% and subsequently resulted in a cumulative net loss assumption of 0.91% for the portfolio.

Residual Value Loss
Under a PCP agreement the customer has the option, but not the obligation, to return the vehicle to the originator when the balloon payment becomes due. Historically, the return rate for PCP contracts has been extremely low; for vintages originated from 2009, turnback rates have averaged approximately 1.5% but have been as high as 4.5%.

DBRS received incremental data that demonstrated how initial minimum guaranteed future values have been monitored on a monthly basis. However, this market revaluation data was only limited to the last year and DBRS therefore elected to acquire additional loan by loan valuation data from a third party that revalued the residual value expectation as at December 2013. DBRS concluded that the Originator has applied a consistent and conservative residual value setting policy that has allowed obligors the potential to retain equity in the vehicle at contract maturity.

Residual value losses will also be a function of the used vehicle market at the time of turnback. To determine potential price volatility in the UK used vehicle market, DBRS examined historical used vehicle sales data from external data providers since 2007. This data looked at the market as a whole as well a representative pool of vehicles split by vehicle segment. Based upon this data, DBRS assumed a ‘AAA’ residual value stress equal to approximately 45% of the contractual residual value. Under the DBRS ‘AAA’ stress, 90% of the residual value balances were assumed to be turned back.

Prepayments
DBRS evaluated several different prepayment scenarios when evaluating the sufficiency of credit enhancement. From a credit enhancement perspective, the most conservative scenario considered how the transaction would perform in the case of 0% prepayments as this assumption exposes the transaction to the maximum amount of residual value risk. In addition, DBRS evaluated scenarios whereby prepayments ranged from 0% to 10% CPR in conjunction with various loss timing curves.

Transaction Counterparty Risk
Servicer
HCUK is the originator and servicer for the transaction, whilst SCUK has been immediately appointed as the initial sub-contractor of the servicer and is responsible for all servicing activities. DBRS has conducted an operational risk review of HCUK and a private rating of SCUK and concluded that they meet DBRS criteria to act as a sub-servicer. Commingling risk is mitigated through a number of mechanisms; firstly the Seller has declared that all amounts held within the Seller Account and due to the Issuer are held on trust for the Issuer. Furthermore, a payment transfer process will be followed with regards to payments from the Seller Account to the Issuer’s Transaction Account that ensures funds are transferred from the Seller Account to the Transaction within one business day of identification.

DBRS considers set-off risk to be limited given that the eligibility criteria exclude customers who are employees of the Seller, the Servicer or any Holding Company or Subsidiary of the Servicer. Additionally the eligibility criteria exclude customers who may hold a deposit account with the Seller. As at the Closing Date, HCUK does not offer deposit accounts within its product offerings.

Hedge Agreement
No hedging arrangement has been incorporated into the transaction structure and the Issuer is therefore subject to interest rate risk as assets are subject to fixed rates of interest whilst liabilities are floating in nature. This risk is partially mitigated by a weighted average spread trigger that considers the weighted average annual interest rate of the eligible receivables, the senior costs for the transaction and the current GBP LIBOR Rate plus margin. Should this weighted average spread fall below 1.0% an Early Amortisation Event will occur.

In assessing the interest rate risk for the transaction, DBRS utilised its Unified Interest Rate Model within its cash flow analysis to ensure the available credit enhancement mitigated the interest rate mismatch. This exposed the transaction to both increases and decreases in GBP LIBOR.

Bank Accounts
The Issuer has opened one bank account known as the Transaction Account held by Santander UK plc which is operated by the Cash Administrator, Elavon Financial Services Limited. As per the Deed of Charge, the Issuer has charged by way of a first fixed charge the benefit of the Transaction Account to the Security Trustee.

The Transaction Account comprises of multiple ledgers that hold funds for specific purposes including the reserve, seller returns and the available distribution amount. Prior to an enforcement event and subject to the consent of the Security Trustee, amounts held within the Transaction Account may be invested within authorised investments. DBRS has reviewed the conditions associated with these investments and concluded that they meet DBRS minimum criteria for permitted investments.

Legal Structure

Law(s) impacting the transaction
All transaction documents are governed by English law whilst terms particular to the laws of Scotland and Northern Ireland are governed by Scottish and Northern Irish law respectively.

Transfer / Assignment of the Receivables
As at the closing date and subject to certain conditions precedent, HCUK agreed to sell, assign and transfer Conditional Sale and PCP receivables and their Related Collateral to the Issuer. In respect of the Scottish Receivables, HCUK has agreed to hold them on trust for the benefit of the Issuer. Receivables may be sold, assigned and transferred on Further Purchase Dates in line with the transaction’s monthly payment dates during the revolving period.

Originator’s counsel rendered an opinion with respect to (a) corporate good standing of the Originator and Issuer, (b) enforceability of documents against Originator and Issuer, (c) “True Sale” of assets from Originator to Issuer and (d) tax regime of the Issuer and the VFN.

Notes:
All figures are in Sterling unless otherwise noted.

The principal methodology applicable is the Rating European Consumer and Commercial Asset-Backed Securitisations.

This can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

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

For a more detailed discussion of sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include performance data relating to the receivables provided by Hyundai Capital UK Limited through the arranger, The Royal Bank of Scotland plc. DBRS received monthly historical performance data on losses, recoveries, delinquencies and prepayments going back to July 2009. This was further complimented by loan level data that provided an insight into contractual residual values and portfolio stratifications. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the “Base Case”):

• Probability of Default Rate Used: Base Case PD of 2.17%, a 25% and 50% increase on the base case PD.
• Recovery Rate Used: Base Case Recovery Rate of 58.0%.
• Residual Value Loss: Base Case of 40.5%, a 25% and 50% increase in Residual Value Loss.

DBRS concludes that for the VFN:
• A hypothetical increase of the base case PD by 25% or 50%, ceteris paribus, would lead to the VFN maintaining a AAA (sf) rating.
• A hypothetical increase of the base case Residual Value Loss by 25%, ceteris paribus, would lead to the VFN maintaining a AAA (sf) rating.
• A hypothetical increase of the base case Residual Value Loss by 50%, ceteris paribus, would lead to a downgrade of the VFN to AA (high) (sf).
• A hypothetical increase of the base case PD by 25% and a hypothetical increase of the Residual Value Loss by 25%, ceteris paribus, would lead to the VFN maintaining a AAA (sf) rating.
• A hypothetical increase of the base case PD by 50% and a hypothetical increase of the Residual Value Loss by 25%, ceteris paribus, would lead to the VFN maintaining a AAA (sf) rating.
• A hypothetical increase of the base case PD by 25% and a hypothetical increase of the Residual Value Loss by 50%, ceteris paribus, would lead to a downgrade of the VFN to AA (high) (sf).
• A hypothetical increase of the base case PD by 50% and a hypothetical increase of the Residual Value Loss by 50%, ceteris paribus, would lead to a downgrade of the VFN to AA (high) (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Alexander Garrod
Initial Rating Date: January 27, 2014
Initial Rating Committee Chair: Chuck Weilamann

Last Rating Date: Not applicable as no last rating date.

Lead Surveillance Analyst: Keith Gorman
Rating Committee Chair: Chuck Weilamann

DBRS Ratings Limited
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The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

• Rating European Consumer and Commercial Asset-Backed Securitisations.
• Legal Criteria for European Structured Finance Transactions.
• Operational Risk Assessment for European Structured Finance Servicers.
• Unified Interest Rate Model Methodology for European Securitisations.