DBRS Takes Rating Actions on Bavarian Sky S.A. – Compartment German Auto Loans 2

DBRS Ratings Limited (DBRS) has today taken the following rating actions on the notes issued by Bavarian Sky S.A. – Compartment German Auto Loans 2 (the Issuer):

-- Class A notes confirmed at AAA (sf)
-- Class B notes upgraded to AA (sf) from A (high) (sf)

The above-mentioned rating actions are based on the following analytical considerations, as described more fully below:
-- Portfolio performance, in terms of defaults and level of delinquencies, as of the July 2015 payment date.
-- Updated default, recovery and loss assumptions on the remaining balance of the collateral portfolio.
-- Current available credit enhancements to the Class A and Class B notes to cover the expected losses.

Bavarian Sky S.A. acting in respect of its Compartment German Auto Loans 2 is a static securitisation of auto loan receivables granted by BMW Bank GmbH (the Originator) to private and commercial obligors located in Germany. BMW Bank GmbH is a fully owned German subsidiary of BMW AG.

The cumulative gross default ratio (as a percentage of the initial portfolio) has gradually increased and is currently 0.10% as of the July 2015 payment date. Delinquencies have been stable and the current 90+ delinquency ratio is 0.12%.

The Class A Notes are supported by subordination of the Class B Notes, while the Class B Notes are supported by excess spread only. Credit enhancement for the Class A and Class B Notes (as a percentage of the performing portfolio) increased to 17.32% from 7.75% and to 8.86% from 2.50%, respectively.

The transaction benefits from a non-amortising and fully-funded reserve fund available to cover senior payments during the life of the transaction (including net swap payments due and payable by the Issuer and interest under the rated notes). The reserve fund can be applied toward repayment of principal on the final payment date, when the outstanding balance of the portfolio (excluding Defaulted Receivables) will reduce to zero. On the July 2015 payment date, the reserve fund was at the initial and target level of EUR 12.8 million.

The deal is exposed to potential commingling risk and set-off risk (as debtors may open accounts with the Originator). As a mitigant to the potential commingling risk and set-off risk, the Originator undertakes to fund a Commingling Reserve, as well as a Set-Off Reserve, if the DBRS rating of BMW AG falls below specific thresholds as defined in the legal documentation.

Elavon Financial Services Limited has replaced Deutsche Bank AG as the current Issuer Account Bank for the transaction. The DBRS private rating of Elavon Financial Services Limited is at least equal to the Minimum Institution Rating, given the rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Additionally, DZ Bank AG Deutsche Zentral-Genossenschaftsbank acts as swap counterparty. The DBRS public rating of DZ Bank AG Deutsche Zentral-Genossenschaftsbank complies with the current DBRS “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is the “Master European Structured Finance Surveillance Methodology”, which can be found on the DBRS website under Methodologies at http://www.dbrs.com/about/methodologies.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology. A review of the transaction’s legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

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

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

The sources of information used for this rating include investor reports provided by BMW Bank GmbH.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the information made available to it for the purposes of providing this rating to have been 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.

The last rating action on this transaction took place on 20 August 2014, when DBRS finalised the provisional rating of AAA (sf) to the Class A notes and A (high) (sf) rating to the Class B notes.

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the base case):
-- DBRS expected a base case probability of default (PD) and loss given default (LGD) for the pool based on a review of the transaction performance. 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 and LGD of the current pool of receivables are 2.52% and 38.96%, respectively.
-- The Risk Sensitivity overview below illustrates the ratings expected for the Class A and Class B notes 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 for the Class A notes would be expected to remain at AAA (sf), all else being equal. If the PD increases by 50%, the rating for the Class A notes would be expected to remain at AAA (sf), all else being equal. If both the LGD and PD increase by 50%, the rating of the Class A notes would be expected to remain at AAA (sf), all else being equal.

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

Class B Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf).
-- 50% increase in LGD, expected rating of AA (sf).
-- 25% increase in PD, expected rating of AA (sf).
-- 50% increase in PD, expected rating of AA (sf).
-- 25% increase in LGD and 25% increase in PD, expected rating of AA (sf).
-- 25% increase in LGD and 50% increase in PD, expected rating of AA (sf).
-- 50% increase in LGD and 25% increase in PD, expected rating of AA (sf).
-- 50% increase in LGD and 50% increase in PD, expected rating of AA (sf).

For further information on DBRS historic default rates published by the European Securities and Markets Administration 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: David Sanchez Rodriguez
Initial Rating Date: 20 August 2014
Initial Rating Committee Chair: Mary Jane Potthoff

Lead Surveillance Analyst: Vito Natale
Rating Committee Chair: Diana Turner

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 and are as follows:

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

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.