DBRS Upgrades Rating on Class A Notes Issued by Silk Finance No. 4 and Removes UR-Positive

DBRS Ratings Limited (DBRS) has today upgraded the rating on the EUR 509 million Class A Asset-Backed Fixed Rate Securitisation Notes (Class A) issued by Silk Finance No. 4 (the Issuer) to A (high) (sf) from A (sf) and has removed Under Review with Positive Implications (UR-Pos.) status.

The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal on or before the Final Legal Maturity Date in January 2031.

The rating action reflects an annual review of the transaction and concludes the UR-Pos. status of the rating. The Class A notes were placed UR-Pos. following a material update to the methodology DBRS applies to monitor the counterparty risks of the transaction (see “Legal Criteria for European Structured Finance Transactions”, published on 19 February 2016). This methodology incorporates DBRS’s new Critical Obligations Ratings (CORs), which were introduced in the “Critical Obligations Rating Criteria” methodology published on 2 February 2016, and provide more granular rating levels for Account Bank institution replacements and eligible investments.

The rating on the Class A notes has been upgraded based on the following analytical consideration:
-- Updated and more granular rating levels introduced by the “Legal Criteria for European Structured Finance Transactions” methodology for Account Bank institution replacement triggers.

The rating of the Class A notes also considers the following:
-- The overall portfolio performance as of the July 2016 payment date, in particular with regard to low levels of cumulative net defaults and delinquencies.
-- No Early Amortisation Events have occurred.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms and conditions of the notes.
-- The current available credit enhancement to the notes to cover expected losses assumed in line with an A (high) (sf) rating level for the Class A notes.

The Issuer is a securitisation collateralised by a pool of vehicle loans (87%), leases (5%) and long-term rentals (8%) granted by Banco Santander Consumer Portugal S.A. (BSCP) to Portuguese individuals and companies. The residual value component of the lease agreements is not securitised.

The transaction, incorporated as a special-purpose vehicle under Portuguese securitisation law, closed in November 2015 and has a three-year revolving period ending in January 2019. There are concentration limits and Early Amortisation Events in place to mitigate potential portfolio performance deterioration during the revolving period. To date, all of these tests have been passed.

The portfolio is performing in line with DBRS’s expectations. As of the July 2016 payment date, Delinquent Receivables (defined as more than three months in arrears) were 0.13% of the portfolio principal balance, while net defaults were 0.01%.

Credit enhancement for the Class A notes has been stable at 17% since issuance in November 2015 and is provided by the subordination of Class B and Class C notes and the Reserve Account.

The transaction structure includes a Reserve Account funded at closing with the proceeds from the issuance of Class C notes. This reserve is available to cover senior expenses and missed interest payments on the Class A notes and to cure the Class A Principal Deficiency Ledger. The reserve fund is currently at its target level of EUR 3.70 million; at the end of the revolving period, it will amortise to a target equal to 1.21% of the Class A and Class B notes balance, subject to a floor of EUR 1.83 million.

BNP Paribas Securities Services SCA, London Branch is the Accounts Bank of the transaction. The DBRS private rating of BNP Paribas Securities Services SCA, London Branch complies with 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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Master European Structured Finance Surveillance Methodology”.

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 current analysis is based on worst-case replenishment criteria as set forth in the transaction legal documents.

A review of the transaction 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 the sovereign risk impact on Structured Finance ratings, please refer to the DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries.

The sources of information used for this rating include monthly Servicer reports provided by BSCP, investor reports provided by Deutsche Bank AG, London Branch (the Transaction Manager) and loan level data from the European DataWarehouse GmbH.

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

DBRS was supplied with third-party assessments at the Initial Rating Date. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating to be 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 19 February 2016, when the rating on the Class A notes was placed UR-Pos. Prior to that, DBRS assigned an A (sf) rating to the Class A notes on 17 November 2015.

The lead responsibilities for this transaction have been transferred to Joana Seara da Costa.

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

To assess the impact of changing transaction parameters on the rating, at closing DBRS considered the following stress scenarios 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 portfolio based on a review of the current assets and the transaction’s replenishment criteria. 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 6.74% and 74.43%, respectively, including sovereign stress.

-- The Risk Sensitivity below illustrates the ratings expected for Class A notes if the PD and LGD increase by a certain percentage over the base case assumptions. For example, if the LGD increases by 50%, the rating of Class A notes would be expected to decrease to BBB (high) (sf), all else being equal. If the PD increases by 50%, the rating of Class A notes would be expected to decrease to BBB (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of Class A notes would be expected to decrease to BB (sf), all else being equal.

Class A notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (low) (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Authority (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: Kevin Chiang
Initial Rating Date: 17 November 2015
Initial Rating Committee Chair: Erin Stafford

Lead Surveillance Analyst: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Senior Vice President

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London EC3M 3BY
United Kingdom

Registered in England and Wales: No. 7139960

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

-- Master European Structured Finance Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Operational Risk Assessment for European Structured Finance Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- 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.