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 Class A and Class B Notes (the Notes) issued by Bavarian Sky S.A. acting in respect of its Compartment German Auto Loans 2 (the Issuer):

-- EUR 160,981,134.22 Class A Notes confirmed at AAA (sf)
-- EUR 53,800,000 Class B Notes upgraded to AAA (sf) from AA (sf)

The above-mentioned rating actions reflect an annual review of the transaction and are based on the following analytical considerations, as described more fully below:
-- The overall portfolio performance as of the July 2016 payment date, in particular with regard to low levels of cumulative net defaults and delinquencies.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms and conditions of the Notes.
-- The increased levels of credit enhancement available to the Notes to cover expected losses assumed in line with their respective rating levels.

The ratings of the Notes address the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date in August 2021.

Bavarian Sky S.A. acting in respect of its Compartment German Auto Loans 2 is a securitisation of auto loans originated in Germany by BMW Bank GmbH (BMW Bank). The EUR 288.34 million portfolio as of the July 2016 payment date comprises of loans for the purchase of new (42.54%) and used (57.46%) vehicles, granted to both commercial (28.04%) and private individuals (71.96%).

The portfolio is performing better than DBRS’s expectations at closing. The gross cumulative default ratio (as a percentage of the original portfolio) is 0.65% as of July 2016, of which 58.28% has been recovered. The 90+ delinquency ratio is 0.17%.

Credit Enhancement (CE) is provided by overcollateralisation, the subordination of the respective junior obligations and the cash reserve. CE for the Class A Notes increased to 48.62% in July 2016 from 9.00% at closing in August 2014 and the CE for the Class M Notes increased to 29.96% from 3.75%. Contributing to this increase has been cash trapping mechanism, where excess spread can be used to pay down the Notes.

The transaction closed with the support of a non-amortising EUR 12.82 million cash reserve, funded with part of the proceeds from a subordinated loan. This is available to cover shortfalls on senior fees, the interest on the rated Notes and any principal shortfall on the Notes at maturity. This cash reserve has maintained at its target level of 1.25% of the initial collateral balance since closing and represents 4.45% of the current collateral balance.

The deal is exposed to potential commingling and set-off risks (as debtors may open accounts with the Originator). As a mitigant, the Servicer undertakes to fund a Commingling Reserve, as well as a Set-Off Reserve, if the DBRS rating of the BMW Bank’s parent company (BMW AG) falls below specific thresholds as defined in the legal documentation. These reserves continue to be unfunded as no rating threshold triggers have been breached to date.

Elavon Financial Services DAC, UK Branch serves as Account Bank for the transaction. The DBRS private rating of Elavon Financial Services DAC, UK Branch complies with the Minimum Institution Rating given the current ratings of the Notes, as described in the DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

To mitigate the interest rate risk arising from fixed rate receivables and floating rate notes, the Issuer entered into a swap agreement. Under this agreement, the special-purpose vehicle will receive 1-Month Euribor and pay a fixed rate of 0.12% on each payment date based on a notional amount equal to the amount of principal outstanding of the Class A and Class B Notes.

DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ Bank) is the Swap Counterparty for this transaction. The DBRS private rating of DZ Bank complies with the First Rating Threshold defined in DBRS’s “Derivative 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.

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 DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/

The sources of information used for this rating include monthly investor reports provided by BMW Bank 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 not supplied with third party assessments. 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 August 2015, when DBRS confirmed the Class A Notes at AAA (sf) and upgraded the Class B Notes to AA (sf) from A (high) (sf).

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

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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 to 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. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

-- The Base Case of PD and LGD of the current pool of assets of receivables are 2.52% and 38.96%, respectively.

-- The Risk Sensitivity overview below illustrates the ratings expected for the 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 ratings for both the Class A and Class B Notes would be expected to remain the same, all else being equal. If the PD increases by 50%, the ratings for the Class A and Class B Notes would be expected to remain the same, all else being equal. Furthermore, if both the PD and LGD increase by 50%, the ratings for the Class A and Class B Notes would be expected to remain the same, all else being equal.

Class A Notes 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)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

Class B Notes 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)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

For further information on DBRS historical 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: David Sanchez Rodriguez
Initial Rating Date: 30 June 2014
Initial Rating Committee Chair: Mary Jane Potthoff

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

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