DBRS Finalises Provisional Rating to Bavarian Sky UK 1 plc

DBRS Ratings Limited (DBRS) finalised a provisional rating of AAA (sf) previously assigned to the Class A Floating Rates Notes (Class A Notes) issued by Bavarian Sky UK 1 plc (the Issuer). The Class B Notes were not rated by DBRS.

The transaction represents the issuance of notes backed by receivables related to personal contract purchase (PCP) auto loan contracts granted by BMW Financial Services (GB) Limited (BMW FS, or Seller) to borrowers in England, Wales or Scotland (customers from Northern Ireland are not included). Only PCP contracts are included in the portfolio.

The Class A Notes benefit from credit enhancement in the form of subordination from the Class B Notes (25.2%) and a non-amortising cash reserve. On the Issue Date, BMW FS has granted the Issuer a loan to fund the cash reserve equivalent to 0.8% of the collateral balance (1.1% of the Class A Notes).
The transaction includes a revolving period of 12 months; during this time, there are concentration limits that restrict the portfolio from exceeding specific thresholds. Asset performance triggers are also included that, if breached, would lead to an early amortisation event.
This is the first public rating assigned by DBRS in relation to the issuance of notes backed by auto loans originated by BMW FS in the United Kingdom; DBRS has previously assigned ratings to other BMW sponsored programmes in both Germany and France.
The receivables are serviced by BMW FS.

The rating is based on a review by DBRS of the following analytical considerations:
• Transaction capital structure including form and sufficiency of available credit enhancement;
• Credit enhancement levels are sufficient to support DBRS-projected expected cumulative net losses and residual value losses under various stress scenarios;
• The ability of the transaction to withstand stressed cash flow assumptions 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;
• BMW FS’s capabilities with regard to originations, underwriting, servicing and its financial strength;
• DBRS conducted an operational risk review of BMW FS’s premises in Farnborough, 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 of Great Britain and Northern Ireland, currently at AAA; and
• 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 and non-consolidation of the special-purpose vehicle with the Seller.

The transaction cash flow structure was analysed in Intex DealMaker.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology applicable to the rating 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. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 data and information used for this rating include performance and portfolio data relating to the PCP loans originated by BMW FS. DBRS received the following sets of data sourced and provided by BMW FS, which also acts as Arranger:

-- Static quarterly cumulative default and recovery data (with voluntary termination performance included separately) from Q1 2006 and up to Q2 2017, split by new/used vehicles and private/corporate clients;
-- Dynamic monthly portfolio delinquencies from February 2008 and up to June 2017;
-- Origination and default volumes from Q1 2006 and up to Q2 2017, split by new/used vehicles and private/corporate clients;
-- Portfolio vehicle realisation data for both voluntary terminations and PCP handbacks from January 2008 to June 2017; and
-- PCP early settlement / prepayment frequency and maturity data by month from Q1 2006 to Q2 2017.

DBRS was also provided with detailed stratification tables related to the portfolio as at 31 October 2017.

DBRS did not rely upon third-party due diligence in order to conduct its analysis at the time of the initial rating. DBRS was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

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

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

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 (the “Base Case”):

-- Expected Default Rates Used: Expected default of 6.8%, a 25% and 50% increase.
-- Loss Given Default (LGD) Used: LGD of 50% at the AAA (sf) stress level, a 25% and 50% increase.
-- Residual Value (RV) Haircut: RV Haircut of 44.5% at the AAA (sf) level, a 25% and 50% increase.

DBRS concludes that:
-- A hypothetical increase in the expected default and LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to a AA (sf) rating.
-- A hypothetical increase in the expected default and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to a AA (low) (sf) rating.
-- A hypothetical increase in the RV Haircut by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to a AA (high) (sf) rating.
-- A hypothetical increase in the RV Haircut by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to a AA (sf) rating.
-- A hypothetical increase in the expected default, LGD and RV Haircut by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to a AA (sf) rating.
-- A hypothetical increase in the expected default and LGD by 50%, with a hypothetical increase of the RV Haircut by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to a A (high) (sf) rating.
-- A hypothetical increase in the expected default and LGD by 25%, with a hypothetical increase of the RV Haircut by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to a AA (low) (sf) rating.
-- A hypothetical increase in the expected default, LGD, and RV Haircut by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to a A (sf) rating.

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 and US regulations only.

Lead Analyst: Alexander Garrod, Senior Vice President – Global Structured Finance
Rating Committee Chair: Chuck Weilamann, Managing Director – Head of US ABS
Initial Rating Date: 16 October 2017

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 Backed Securitisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- 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