DBRS Assigns Ratings to Startline Auto Receivables Limited

DBRS Ratings Limited (DBRS) has today assigned a new rating of A (high) (sf) to the Senior Note issued by Startline Auto Receivables Limited (the Issuer). The transaction represents the first issuance from Startline Motor Finance Limited (SMF) in the United Kingdom through an existing programme that commenced in February 2015. The receivables securitised consist of a pool of auto loan receivables comprising hire purchase (HP) finance agreements to retail customers secured by predominantly used vehicles. The receivables are serviced by Link Financial Outsourcing Limited (Link), a separate entity than SMF.

The rating is based on DBRS’s review of the following analytical considerations:

-- Transaction capital structure, proposed ratings and form and sufficiency of available credit enhancement;
-- Credit enhancement levels are sufficient to support DBRS-projected expected cumulative net losses (CNL) under various stress scenarios;
-- The ability of the transaction to withstand stressed cash flow assumptions, as modelled in Intex DealMaker, and repay investors according to the terms under 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;
-- SMF’s capabilities with regard to originations, underwriting, their financial strength and trading history;
-- Link's capacity with regard to servicing the auto loan portfolio;
-- DBRS conducted an operational risk review of Link’s premises in Caerphilly, United Kingdom, and deems it to be an acceptable servicer;
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality of the collateral and historical and projected performance of the seller’s portfolio.
-- The sovereign rating of the United Kingdom, currently rated AAA with a Stable trend by DBRS.
-- The transaction’s consistency of the legal structure with the DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the true sale of the assets to the Issuer.

Transaction Summary
The structure includes the issuance of a Senior Note and a Junior Note. The Senior Note has a maximum facility size of GBP 175,000,000 and benefits from credit enhancement in the form of subordination from the Junior Note (16.4%), a dynamic General Reserve Ledger (1.6% of the principal outstanding balance of all eligible receivables ) and excess spread. The transaction has a revolving period until November 2017, at which point the Senior Note will be repaid on a sequential basis. Receivables are transferred to the Issuer at their principal balance outstanding while an asset-specific trigger stipulates that the weighted-average (WA) customer interest rate of the purchased receivables is above a minimum threshold.

Transaction Strengths
-- Concise portfolio limits have been established including restrictions on maximum contract balance, channel mix, vehicle age, loan-to-value (LTV), balloon contracts, minimum external credit scores and timings as well as first payment arrears.
-- Collateral performance triggers have been established that contribute to determining whether an early amortisation event has occurred, among others. These triggers contemplate delinquency/net loss ratios and minimum WA customer interest rates.
-- DBRS considers the portfolio to be granular; the average outstanding balance is less than GBP 7,000. The receivables have a diversified geographic distribution across England, Scotland and Wales, although the proportion of receivables attributable to Scottish residents is slightly higher than typically observed.
-- The transaction represents the securitisation of automotive HP finance contracts only. There are no lease contracts or personal contract purchase (PCP) contracts contained within the portfolio and, therefore, the Issuer is not directly exposed to residual value risk.
-- The structure benefits from a reserve (equal to 1.6% of the eligible principal receivables balance) that provides liquidity support prior to the amortisation date and then may be used to repay principal on the Senior Note, subject to the priority of payments.
-- Excess spread is available to the transaction; prior to the amortisation date, this is returned to the seller and, following an early amortisation event or scheduled commitment termination date, excess spread is made available to the Issuer until all interest, principal and junior items have been repaid.
-- DBRS considers commingling risk to be limited because of a daily transfer of collections to the Issuer's bank account and a declaration of trust over the collection account in the Issuer’s favour.

Transaction Weaknesses
-- SMF first began originating auto loans in November 2013, which has led to limited historic data availability. Mitigant(s): In determining its base-case loss and recovery assumptions, DBRS has benchmarked other comparable U.K. portfolios, reviewed static data driven from externally derived credit scores and applied volatility stresses to the limited data that has been provided.
-- Receivables are subject to potential voluntary termination pursuant to the U.K. Consumer Credit Act. Mitigant(s): DBRS has received loan-level data representing vehicles that have been originated and assessed the voluntary termination risk by comparing estimated contractual settlement values with stressed vehicle depreciation rates. DBRS has also benchmarked other auto loan transactions in the United Kingdom to derive its voluntary termination assumptions.
-- The underlying receivables have a higher LTV ratio compared with other auto loan portfolios rated by DBRS; at closing, the WA LTV ratio is approximately 93%. Mitigant(s): DBRS has applied a lower-than-typical recovery rate assumption within its cash flow analysis.
-- The Issuer is owned by Startline Holdings Limited, the direct parent of SMF. Mitigant(s): DBRS notes various mitigants, including a pledge of the Issuer’s shares in favour of the Security Agent and undertakings by Startline Holdings Limited and the Issuer in relation to tax liabilities. Other undertakings of the Issuer include not to: (1) commingle its assets with another entity, (2) undertake any other business activity other than that prescribed in the transaction documents, (3) merge or amalgamate with another entity, (4) make other loans and (5) amend its constitutional documents, among others.

The Originator and Servicer
DBRS conducted an operational review of SMF’s auto finance operations in March 2016 in Glasgow, United Kingdom. An operational review of Link in March 2016 in Caerphilly was also conducted. DBRS considers SMF’s origination and Link’s servicing practices to be consistent with the overall U.K. auto finance market.

SMF was established in 2013 and has become a specialist provider of consumer motor finance in the United Kingdom, having originated approximately GBP 172 million of auto loans since inception (as at May 2016). SMF operates across the United Kingdom and, as at the end of May 2016, had a total portfolio consisting of approximately 20,700 active loans. The company targets the used car market and originates loans through four distribution channels: franchised dealers, independent dealers, online providers and brokers.

Link Financial has presence in seven European countries and is owned by its founders and management group. The core leadership team has been in place for over ten years. Since the group was founded in 1999, it has purchased 1900 loan portfolios with a gross book value of EUR 12 billion.

DBRS does not rate SMF or Link.

Backup servicing
No backup servicer has been appointed at closing; however, Link is contractually obliged to support any servicer transition and would receive payment for doing so. Additionally, DBRS has reviewed an exit plan that Link is responsible for maintaining on an annual basis and, in conjunction with a Backup Counterparty Facilitator, sees this as a suitable mitigant for ensuring continuity of servicing following a Servicer Termination Event in line with the rating on the Senior Note.

Collateral Analysis
The receivables represent monetary claims associated with auto loan contracts, including any associated ancillary rights (rights or guarantees that provide for payment, including claims associated with insurance policies and the right to receive vehicle sales proceeds).

Only HP contracts have been included within the collateral pool. HP contracts typically state that customers make equal monthly payments to maturity and are then afforded the opportunity to purchase the vehicle with a nominal final payment. This nominal final payment is included within the customer's final instalment and is known as an option to purchase fee or credit facility fee. Payment of this amount by the customer transfers ownership of the vehicle to the customer from SMF.

SMF does offer some HP contracts with a final balloon payment, but there is no direct residual value risk as the customer is obliged to pay this amount and does not have the contractual option to hand the vehicle back to SMF; however, the customer may have the option to voluntarily terminate the agreement, subject to the terms of the Consumer Credit Act.

DBRS has noted the following in conjunction with SMF’s portfolio as at May 2016:
-- The portfolio almost entirely comprises used vehicles, reflecting the non-captive nature and target segment of SMF;
-- The average contract balance is less than GBP 7,000, reflecting the lower values associated with used vehicles;
-- The portfolio has limited seasoning with only approximately 30% of the portfolio (by receivables) having more than 12 months’ account history. Because of SMF’s limited trading history, only 2% of the portfolio is seasoned more than two years;
-- There is limited exposure to balloon HP contracts with less than 0.5% of contracts containing such a feature;
-- No contracts have a term greater than 60 months and over 80% of receivables represent tenors of 48 months or 60 months;
-- LTVs at origination are high and the WA is approximately 93%;
-- Manufacturer mix is not concentrated and the diversification broadly reflects new car vehicle sales in the United Kingdom with Ford and Vauxhall brands representing approximately one third of the receivables balances;
-- The WA customer rate is high at around the mid-teens; and
-- Receivables are diversified across the United Kingdom, although DBRS notes a slightly higher-than-typical proportion of Scottish receivables, reflecting SMF's commercial relationships.

Credit Analysis
DBRS cash flow model assumptions focused on the amount and timing of defaults and recoveries, prepayment speeds and interest rates. In establishing its cash flow assumptions, DBRS used the following data received from Credit Suisse AG and sourced by SMF:
-- Static quarterly cumulative gross loss data from November 2013 and up to February 2016;
-- Static monthly recovery data from November 2013 and up to February 2016;
-- Historical scorecard performance and trends, both internal and external credit scores;
-- Dynamic portfolio balances (including delinquencies and prepayments) and accounts from January 2015 and up to February 2016;
-- Origination balances and accounts from January 2015 and up to February 2016; and
-- Loan-level data for contracts originated from November 2013 to May 2016.

In addition to the above, DBRS assessed the performance of other auto loan portfolios in the United Kingdom to benchmark SMF, specifically focusing on portfolios that contained a high concentration of used vehicles and non-PCP contracts.

Because of the originator's limited trading history, no static monthly default vintages have reached full maturity; the maximum contract term is 60 months while the most seasoned vintage demonstrates 26 months of cumulative default performance since inception. Despite the limited availability of data, DBRS observed improvements in the initial default performance of vintages originated in 2015 compared with those originated in 2014, but also considers SMF’s default vintages to be more volatile compared with other auto loan portfolios. Specific vintages have been affected by the behaviour of individual accounts because of the comparatively small origination denominator. Recoveries are typically realised within six months as the initial recovered sums typically relate to the sales proceeds associated with the repossession of the underlying vehicle related to the receivable. DBRS also considers the historical recovery performance to be volatile, again predominantly driven by the limited amount of data and the low values associated with the defaulted balances.

DBRS used the historical information available in conjunction with relevant peer data to assume a combined hostile and voluntary termination gross loss assumption of 10.5%, a recovery rate of 40.0% and a subsequent CNL rate of 6.3%. DBRS considers the cumulative gross loss assumption to be high compared with other auto loan portfolios in the United Kingdom and attributes this to (1) the target customer segment, (2) limited data availability, (3) volatility of the static vintage data and (4) the lack of historical voluntary termination data.

As part of its cash flow analysis, DBRS also assumed prepayments up to 15%, yield compression below the minimum interest rate stipulated in the transaction documentation and stressed loss timing curves.

Other Transaction Counterparties
No hedging arrangement has been incorporated into the transaction structure at closing and the Issuer is therefore subject to interest rate risk as assets are subject to fixed rates of interest while liabilities are floating in nature. This risk is partially mitigated through the introduction of a hedge provider and cap only when one-month GBP LIBOR exceeds 3.5% or upon the amortisation date (whichever is earlier). DBRS has given no credit to this arrangement and has modelled the transaction’s cash flows as unhedged; however, excess spread is available to the transaction. Prior to the amortisation date, excess spread is returned to the seller and, following an early amortisation event or scheduled commitment termination date, excess spread is made available to the Issuer until all interest, principal and junior items have been repaid.

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

HSBC Bank plc has been appointed as the Issuer's account bank for the transaction. DBRS privately rates HSBC Bank plc and has concluded that it meets DBRS’s minimum criteria to act in its capacity. The transaction contains downgrade provisions relating to the account bank consistent with DBRS’s criteria.

The servicer (Link) receives and holds the collections made under the auto loan receivables as well as proceeds of sale related to returned vehicles in its own accounts. In accordance with the transaction documents, Link transfers these funds on a daily basis (through faster payments) to the Issuer's bank account from its collection account. Upon the servicer’s insolvency, the funds payable to the Issuer may be commingled within the defaulted entity’s estate; however, the commingling risk is mitigated by the undertaking of the servicer to transfer collections on a daily basis and by a declaration of trust in the Issuer’s favour that provides for segregation of such sums. DBRS perceives the mitigants outlined in the transaction documents to be sufficient in addressing commingling risk.

Notes:
All figures are in GBP unless otherwise noted.

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

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

An asset and a cash flow analysis were both conducted. However, due to the inclusion of a revolving period in the transaction and no change in assumptions, the initial analysis assumed a worst-case replenishment criteria as set forth in the transaction legal documents.

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

This can 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 performance and portfolio data relating to the receivables sourced by Startline Motor Finance Limited through Credit Suisse AG. DBRS considers that the information available to it for the purposes of providing this rating was of satisfactory quality.

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

DBRS was supplied with third-party assessments at the issuance of the Notes; however, this did not impact the rating analysis.

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 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 with the parameters used to determine the rating (the base case):

-- Probability of default (PD) rate used: base-case PD of 10.5%, a 25% and 50% increase on the base-case PD.
-- Recovery rate used: base-case recovery rate of 40.0%.
-- Loss given default (LGD): base-case LGD of 60.0%, a 25% and 50% increase on the base-case LGD.

DBRS concludes that, for the Senior Note:
-- A hypothetical increase of the base case PD and LGD by 25%, ceteris paribus, would lead to a downgrade of the Senior Note to an A (low) (sf) rating.
-- A hypothetical increase of the base case PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the Senior Note to a BBB (low) (sf) rating.

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 – Senior Vice President
Initial Rating Date: 5 July 2016
Initial Rating Committee Chair: Jamie Feehely

Lead Surveillance Analyst: Vito Natale – Senior Vice President
Rating Committee Chair: Jamie Feehely – Managing Director

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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
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Unified Interest Rate Model for European 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.

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