DBRS Assigns Provisional Ratings to BMW Canada Auto Trust 2015-1 Notes

DBRS Limited (DBRS) has today assigned the following provisional ratings to the Class A-1, Class A-2 and Class A-3 Notes, Series 2015-1 (collectively, the Notes) issued by BMW Canada Auto Trust:

-- Class A-1 Notes, Series 2015-1 (the Class A-1 Notes) provisionally rated AAA (sf)
-- Class A-2 Notes, Series 2015-1 (the Class A-2 Notes) provisionally rated AAA (sf)
-- Class A-3 Notes, Series 2015-1 (the Class A-3 Notes) provisionally rated AAA (sf)

The Notes will be supported by a portfolio of retail closed-end lease contracts of new passenger cars and sport-activity vehicles (the Portfolio of Assets). The lease contracts were originated by authorized BMW dealers in Canada.

Repayment of the Notes will be made from collections from the Portfolio of Assets, which includes 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.

The pass-through structure repays the Notes as monthly principal payments are collected from 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 Maturity Dates.

The provisional ratings incorporate the following considerations:

(1) High Level of Credit Enhancement
Target overcollateralization (OC) of 18.50% plus 0.25% of cash plus excess spread. On closing, 16.75% of credit enhancement will be available (0.25% of cash and 16.50% of OC). Excess collections will be applied monthly to repay outstanding principal of the Notes until OC reaches the target (18.50% of the Securitization Value (SV)), which is expected by month six based on scheduled payments. In addition, approximately 4.08% (annualized) of excess spread, net of indicative cost of funds and potential Replacement 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 highest at contract maturity. Non-amortizing credit enhancement ensures that an increasing level of protection is available to offset potential vehicle disposition losses as these contracts mature.

(3) Conservative Advance Rate on Residual Values
The Base Residual Value is determined by using the lower of the contract residual values and the Automotive Lease Guide (ALG) estimated values as of March-April 2015, if available. The reference to the ALG values in setting the advance rate on the Notes largely eliminates potential embedded losses (negative equity in relation to residual values) on the Expected Closing Date, effectively reducing residual value risk in the Portfolio of Assets. As ALG projects its residual values primarily based on auction proceeds, the ALG values represent an independent and conservative estimate of the expected wholesale value of the vehicles in the portfolio at maturity.

(4) Strong Obligor Profile
The obligors of the underlying lease contracts represent high credit quality customers, as the weighted-average FICO score is 802. 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 six years.

(5) Established Remarketing Strategy
BMW Canada Inc. (BMW Canada) 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. Historical trends demonstrate BMW Canada’s ability to leverage its dealer network and other dealer groups across Canada to purchase off-lease vehicles. Certified pre-owned and pull ahead programs employed by BMW Canada create more incentives for dealers to purchase such vehicles, as they increase potential sales prices and also ensure a healthy supply of used vehicles to the dealers. The strategy of selling directly to the dealers reduces its reliance on remarketing vehicles through physical auctions, which generally yield lower proceeds. The enhancement levels are robust enough, however, to support a 95% turn-in rate and disposition through third-party auctions should these channels become unavailable.

(6) Operational and Brand Strength of Seller
The Seller and its parent, BMW AG (the Company), have been confirmed at “A” with a Positive trend by DBRS as of May 4, 2015. The corporate rating confirmations recognize the Company’s strong earnings performance in the last four years and its strong business profile as the world’s leading automotive manufacturer in the premium vehicle segment. As a subsidiary of BMW AG, BMW Canada benefits from its parent’s strong financial standing and global presence, allowing it to leverage the experience and expertise of BMW’s other financial services companies worldwide to ensure sound and consistent underwriting standards and efficient servicing operations.

DBRS cash flow analysis included stresses on credit and residual value loss exposures, vehicle turn-in rates and prepayments, and indicates 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.