DBRS Assigns Provisional Ratings to MBARC Credit Canada Inc. 2014-A Notes

DBRS has today assigned the following provisional ratings to the 2014-A Class A-1, Class A-2 and Class A-3 Asset Backed Notes (collectively, the Notes) issued by MBARC Credit Canada Inc. (the Issuer):

-- 2014-A Class A-1 Asset Backed Notes (the Class A-1 Notes) provisionally rated AAA (sf)
-- 2014-A Class A-2 Asset Backed Notes (the Class A-2 Notes) provisionally rated AAA (sf)
-- 2014-A Class A-3 Asset Backed Notes (the Class A-3 Notes) provisionally rated AAA (sf)

The Notes will be supported by a portfolio of retail closed-end lease contracts of primarily new passenger cars, cross-over and sport-utility vehicles (the Portfolio of Assets). The lease contracts were originated by authorized Mercedes-Benz dealers in Canada.

Repayment of the Notes will be made from collections from the Portfolio of Assets, which generally include scheduled monthly lease payments (including residual value payments in the case of customer-retained vehicles) as well as proceeds from vehicle sales either at the end of the lease term or earlier in the case of prepayments and defaults. Proceeds from excess mileage and wear and tear charges, if any, also form part of the collections used to repay the Notes.

Monthly payment of interest and principal will be made with the amortization schedule of the Notes based on the amortization of the Portfolio of Assets. The Notes will be repaid in sequential order with the Class A-1 Notes being repaid first, followed by the repayment of the Class A-2 Notes and finally the repayment of the Class A-3 Notes. The provisional ratings assigned are based on the full repayment of the Notes by their respective Final Scheduled Payment Dates.

The provisional ratings incorporate the following considerations:

(1) High Level of Credit Enhancement
Initially, it is expected that 16.50% of credit enhancement will be available, consisting of 0.50% of cash and 16.0% of overcollateralization (OC). By applying excess collections available monthly to repay outstanding principal of the Notes, the OC amount will build to 17.8% of the Securitization Value (SV) at closing. No cash will be released to the Issuer until the Target Overcollateralization Amount is met. This is expected by month six based on scheduled payments. In addition, approximately 4.07% (annualized) of excess spread, net of indicative cost of funds and monthly servicer fees, is available to offset any collection shortfalls on a monthly basis.

(2) Non-Amortizing Credit Enhancement
The requirement to maintain the cash account and the OC amounts at their target levels provides a deleveraging structure as principal on the Notes is repaid. Residual values represent the largest risk in closed-end auto lease securitizations and the exposure to such risk is at its highest at the maturities of the lease contracts. Non-amortizing credit enhancement ensures that an increasing level of protection is available to offset potential vehicle disposition losses.

(3) Operational and Brand Strength of Seller
The Seller’s ultimate parent, Daimler AG (Daimler), and its related Canadian entities have been confirmed at A (low) by DBRS as of October 24, 2014. The corporate rating confirmation recognizes the Company’s strong business profile as a highly established premium automotive manufacturer as well as the world’s leading truck producer. As a subsidiary of Daimler, Mercedes-Benz Financial Services Canada Corporation (MBFSC) benefits from its parent’s strong financial standing and global presence, allowing it to leverage the experience and expertise of Daimler’s other financial services companies worldwide to ensure sound and consistent underwriting standards and efficient servicing operations.

(4) Conservative Advance Rate on Residual Values
The Base Residual Value is determined by using the lower of contract residual value, original Canadian Black Book (CBB) value and the CBB value as of July 2014. The reference to the CBB values in setting the Base Residual Value eliminates potential embedded losses (negative equity in relation to residual values) on the Closing Date, effectively reducing residual value risk in the Portfolio of Assets. The CBB value at origination and the updated CBB value (if available) have been provided for each of the vehicles in the Portfolio of Assets. As CBB projects its residual values primarily based on auction proceeds, the CBB values represent an independent and conservative estimate of the expected wholesale value of the vehicles in the portfolio at maturity.

(5) Strong Obligor Profile
The obligors of the underlying lease contracts represent high credit quality customers as the weighted-average Beacon score is 744. The strong credit profile is also supported by low credit losses and delinquency levels of the Seller’s owned and managed portfolio in the last five years.

(6) Established Remarketing Strategy
MBFSC has an established vehicle remarketing strategy to maximize the disposition proceeds and minimize the time to remarket the vehicles should they be returned upon or prior to maturity. Dealers are financially incented to purchase off-lease vehicles, supported by a history of purchasing approximately 40.0% of maturing leases since 2009. The commitment from the dealers in turn reduces MBFSC’s reliance on remarketing the vehicles through the auction channel, which historically results in additional costs and lower liquidation proceeds. In addition, the use of Pull Ahead Programs sponsored by the Seller’s parent are expected to be maintained and to manage the supply of used vehicles by shifting the maturity schedule of leases into months where the used car market is expected to be strong. By including a manufacturer’s warranty at the cost of the Seller’s parent, the certified pre-owned programs also enhance disposition proceeds as potential customers can expect a high level of quality in the condition of the vehicles.

DBRS cash flow analysis included stresses on credit and residual value loss exposures, vehicle turn-in rates and prepayments indicate that the credit enhancement available provides sufficient protection to the Notes to warrant the ratings assigned.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The Rule 17g-7 Report of Representation and Warranties is hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Canadian Auto Retail Loan and Lease Securitizations (October 2014) and Legal Criteria for Canadian Structured Finance (August 2014), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.