DBRS Confirms Ratings on Driver UK Multi-Compartment S.A. Acting for and on Behalf of its Compartment Driver UK Three

DBRS Ratings Limited (DBRS) has today confirmed the following ratings on the outstanding notes of Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK three (the Issuer):
-- GBP 273,194,361 Class A Notes confirmed at AAA (sf)
-- GBP 39,900,000 Class B Notes confirmed at A (high) (sf)

The ratings on the notes address the timely payment of interest and the ultimate payment of principal payable on or before the Final Maturity Date in January 2024.

The confirmations of the ratings on the notes reflect an annual review of the transaction and are based on the following analytical considerations:
-- The overall portfolio performance as of the September 2016 payment date, in particular with regards to low levels of cumulative net losses 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 current available credit enhancement to Class A and Class B Notes to cover expected losses assumed in line with the AAA (sf) and A (high) (sf) rating levels, respectively.

The Issuer is a securitisation collateralised by a pool of auto loan receivables granted by Volkswagen Financial Services UK Limited (VWFS) to retail and commercial customers residing in Great Britain. The deal closed in September 2015 and had a six-month revolving period that ended in March 2016.

The portfolio is composed of Hire Purchase and Personal Contract Plan agreements (7.92%/92.08% as of the September 2016 payment date), secured by new and used vehicles. Under Hire Purchase contracts, the outstanding balance is typically amortised in equal monthly instalments and, at the end of the agreement, vehicle ownership is transferred to the Obligor after the payment of an additional fee. In the case of Personal Contract Plan agreements, equal monthly instalments are followed by an option to either take ownership by making the final balloon payment or returning the vehicle; this feature exposes the transaction to residual value risk.

The portfolio is performing in line with DBRS’s expectations. As of the September 2016 payment date, 31- to 60-day delinquencies and 61- to 90-day delinquencies were 0.24% and 0.09% of the portfolio discounted balance, respectively, while delinquencies greater than 90 days were 0.08%. The Cumulative Net Loss Ratio was at 0.07%.

Credit Enhancement (CE) of the Notes was originally provided by overcollaterallisation, the General Cash Collateral Amount and, for Class A Notes, the subordination of the Class B Notes. In March 2016, in order to increase the CE of the Notes, a second Subordinated Loan of GBP 8 million was granted to the Issuer. The proceeds of this loan were applied toward the funding of an additional non-amortising reserve account that will be redeemed at the earlier of the Clean-up Call and the Final Maturity Date. CE is currently 31.36% for Class A Notes and 20.86% for Class B Notes, including 2.11% support provided by the additional reserve.

The transaction structure includes a Cash Collateral Account, with two separate ledgers:
-- The amounts standing on the Interest Compensation Ledger are available to pay a compensation to the Issuer for interest shortfalls suffered as a result of Early Settlements of the receivables.
-- The General Cash Collateral Account is available to cover senior expenses, missed interest payments on the notes and, as soon as the portfolio balance is reduced to zero or on the Final Maturity Date, to repay principal on the notes. This account was funded at closing with GBP 5.44 million and its target balance is equal to 1.20% of the Aggregate Discounted Receivables Balance, subject to a floor of GBP 4.53 million.

A swap structure is in place to mitigate the interest rate mismatch between the Class A and Class B Notes, indexed to one-month Libor and the fixed interest rate payments for the securitised portfolio. Credit Agricole Corporate & Investment Bank (CA-CIB) is the swap counterparty; the DBRS private rating of CA-CIB complies with the First Rating Threshold defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions.”

The Bank of New York Mellon - London Branch (BNY Mellon) acts as Account Bank on this transaction. The DBRS rating of BNY Mellon at AA 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”.

Notes:
All figures are in GBP 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. This 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 investor reports provided by the VWFS 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.

This is the first rating action since the Initial Rating Date.

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):

-- Probability of Default (PD): Base Case of 6.24%, a 25% and 50% on Base Case PD
-- Loss Given Default (LGD): Base Case of 30.00%, a 25% and 50% on Base Case PD
-- Residual Value (RV) Loss: Base Case of 42.82% for the Class A notes and 26.27% for the Class B notes. In both scenarios, a 25% and 50% in RV Loss was applied.

DBRS concludes that for the Class A Notes:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to Class A Notes maintaining a AAA (sf) rating.
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead a downgrade of the Class A Notes to AA (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 50% and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).

DBRS concludes that for the Class B Notes:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to the Class B Notes maintaining a A (high) (sf) rating.
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to A (sf) rating.
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead a downgrade of the Class B Notes to A (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead a downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50% and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (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: Eric Levassor
Initial Rating Date: 1 September 2015
Initial Rating Committee Chair: Chuck Weilamann

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

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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
-- Derivative Criteria for European Structured Finance Transactions
-- Unified Interest Rate Model for European Securitisations

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