DBRS Finalises Provisional Ratings Assigned to Driver UK five

DBRS Ratings Limited (DBRS) has today finalised provisional ratings assigned to the notes issued by Driver UK Multi-Compartment S.A., acting for and on behalf of its Compartment Driver UK five (the Issuer) as follows:

-- Class A Notes: AAA (sf)
-- Class B Notes: A (high) (sf)

The transaction represents the issuance of notes backed by receivables relating to auto loan contracts granted by Volkswagen Financial Services (UK) Limited (VWFS) to retail and commercial customers in England, Wales and Scotland. The receivables are serviced by VWFS. The securitised portfolio comprises receivables related to both hire purchases and personal contract purchases (PCPs) granted for the acquisition of either new or used motor vehicles. Particularly under PCPs, the receivables comprise residual value (RV) risk deriving from the option of borrowers to hand back the financed vehicle under specific circumstances.

The transaction benefits from a six-month revolving period, during which the notes will not amortise and the collections deriving from portfolio amortisation may be used to purchase additional receivables, subject to provisions of the transaction documents, or accumulated on the issuer’s accounts.

The ratings are based on a review by DBRS of the following analytical considerations:

-- Transaction capital structure and form and sufficiency of available credit enhancement.
-- Relevant credit enhancement in the form of subordination and a reserve fund.
-- Credit enhancement levels are sufficient to support the expected credit and residual value net loss assumptions projected under various stress scenarios at AAA (sf) and A (high) (sf) standards for the Class A and Class B Notes, respectively.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested.
-- VWFS’s financial strength and its capabilities with respect to originations, underwriting and servicing.
-- The credit quality of the collateral and ability of the servicer to perform collection activities on the collateral.
-- The operational risk review conducted on VWFS by DBRS to conclude that it is an acceptable servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality and industry diversification of the collateral and historical and projected performance of the seller’s portfolio.
-- The sovereign rating of the United Kingdom, currently at AAA.
-- The legal structure and presence of legal opinions addressing the assignment of assets to the Issuer and the consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions”.

The transaction was modelled in Intex DealMaker.

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 cashflow analysis were both conducted. However, due to the inclusion of a revolving period in the transaction and no change in assumptions, the initial analysis based on worst-case replenishment criteria set forth in the transaction legal documents was assumed.

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 information used for these ratings include performance and portfolio data relating to the auto loans originated by VWFS and loan-by-loan residual value realisation upon turn-in. In particular, DBRS received quarterly gross loss, net loss, amortisation and early settlement static vintage analysis relating to originations from Q3 2002 to Q4 2016. Dynamic data was also provided relating to delinquencies, as well as a set of stratification tables detailing a portfolio selected by VWFS as at 28 February 2017. All data was sourced by VWFS directly or through the transaction arrangers Volkswagen Financial Services AG and BNP Paribas S.A., London Branch.

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

DBRS was 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Information regarding DBRS ratings, including definitions, policies and methodologies, is 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 to the parameters used to determine the rating:

-- Probability of Default (PD) Rates Used: Expected PD of 4.2%. A 25% and 50% increase on the base case PD.
-- Loss Given Default (LGD) Used: Expected LGD of 30% whereas 40% and 50% LGD were used at A (high) (sf) and AAA (sf) scenarios, respectively. Both scenarios with a 25% and 50% increase in the LGD.
-- Recovery Rate Used: Expected Recovery Rate of 70% whereas 60% and 50% Recovery Rates were applied to the A (high) (sf) and AAA (sf) scenarios, respectively.
-- RV: 45.2% and 35.7% for the AAA (sf) and A (high) (sf) scenarios, respectively. Both scenarios with a 25% and 50% increase in the RV Loss.

DBRS concludes that for the Class A Notes:

-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a downgrade of the rating to AA (sf).
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the rating to A (high) (sf).
-- A hypothetical increase of the RV Loss by 25%, ceteris paribus, would lead to a downgrade of the rating to AA (sf).
-- A hypothetical increase of the RV Loss by 50%, ceteris paribus, would lead to a downgrade of the rating to AA (low) (sf).
-- A hypothetical increase of the PD and LGD rates by 25% and of the RV Loss by 25%, ceteris paribus, would lead to a downgrade of the rating to AA (low) (sf).
-- A hypothetical increase of the PD and LGD rates by 50% and of the RV Loss by 25%, ceteris paribus, would lead to a downgrade of the rating to A (sf).
-- A hypothetical increase of the PD and LGD rates by 25% and of the RV Loss by 50%, ceteris paribus, would lead to a downgrade of the rating to A (high) (sf).
-- A hypothetical increase of the PD and LGD rates by 50% and of the RV Loss by 50%, ceteris paribus, would lead to a downgrade of the rating to A (sf).

DBRS concludes that for the Class B Notes:

-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would not lead to a downgrade of the A (high) (sf) rating.
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the rating to A (sf).
-- A hypothetical increase of the RV Loss by 25%, ceteris paribus, would lead to a downgrade of the rating to A (sf).
-- A hypothetical increase of the RV Loss by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase of the PD and LGD rates by 25% and of the RV Loss by 25%, ceteris paribus, would lead to a downgrade of the rating to A (sf).
-- A hypothetical increase of the PD and LGD rates by 50% and of the RV Loss by 25%, ceteris paribus, would lead to a downgrade of the rating to A (low) (sf).
-- A hypothetical increase of the PD and LGD rates by 25% and of the RV Loss by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (sf).
-- A hypothetical increase of the PD and LGD rates by 50% and of the RV Loss by 50%, ceteris paribus, would lead to a downgrade of the rating to BBB (low) (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.

Lead Analyst: Matthew Nyong, Senior Financial Analyst
Initial Rating Date: 22 February 2017.
Rating Committee Chair: Christian Aufsatz, Managing Director

DBRS Ratings Limited
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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

-- Rating European Consumer and Commercial Asset Backet 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