DBRS Confirms Rating on Bavarian Sky S.A. acting in respect of its Compartment German Auto Leases 4

DBRS Ratings Limited (DBRS) confirmed its AAA (sf) rating on the Class A Notes issued by Bavarian Sky S.A. acting in respect of its Compartment German Auto Leases 4 (the Issuer).

The confirmation reflects an annual review of the transaction and is based on the following analytical considerations, as described more fully below:

-- The overall portfolio performance as of the November 2017 payment date, with particular regard to low levels of cumulative net defaults and delinquencies;
-- Default, recovery and loss assumptions on the remaining receivables; and
-- The current level of credit enhancement (CE) available to the Class A Notes to cover the expected losses assumed in line with the AAA (sf) rating level.

The rating of the Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the Final Maturity Date in December 2022.

Bavarian Sky S.A. acting in respect of its Compartment German Auto Leases 4 is a securitisation of auto leases originated in Germany by BMW Bank GmbH (BMW Bank). The EUR 124.1 million portfolio as of the November 2017 payment date consisted of leases for the purchase of new (95.7%) and used (4.3%) vehicles, granted to both commercial (69.2%) and private individuals (30.8%). The residual values associated with the auto leases have not been securitised in this transaction.

PORTFOLIO PERFORMANCE AND ASSUMPTIONS
As of the November 2017 payment date, 30-day to 60-day delinquencies represented 0.2% of the aggregate discounted lease balance and 60-day to 90-day delinquencies represented less than 0.1%, while delinquencies greater than 90 days were 0.1%. The gross cumulative default ratio (as a percentage of the original portfolio and not including the proceeds from the sale of the vehicle) was 0.2%, of which 17.8% has been recovered.

DBRS conducted an analysis of the remaining collateral pool and updated its cumulative net loss assumption to 1.0% to reflect the current portfolio compsition.

CREDIT ENHANCEMENT AND RESERVES
CE is provided by overcollateralisation, the subordination of the Class B Notes and the Cash Reserve. CE for the Class A Notes increased to 74.8% in November 2017 from 7.8% at closing in December 2015. A cash trapping mechanism, where excess spread is used to pay down the Notes, has contributed to the increase in CE.

The transaction closed with the support of a non-amortising EUR 8.0 million Cash Reserve, funded with 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. The Cash Reserve has been maintained at its target level of 1.0% of the initial collateral balance since closing and represents 6.5% of the current collateral balance.

To mitigate against any potential commingling risks the Servicer undertakes to fund a Commingling Reserve either if the rating of the BMW Bank’s parent company (BMW AG) falls below specific thresholds as defined in the legal documentation or if BMW AG ceases to own, directly or indirectly, 100% of BMW Bank share capital. This reserve continues to be unfunded as no rating threshold triggers have been breached to date. The DBRS public Issuer Rating of BMW AG is currently at A (high).

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 rating 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 one-month Euribor and pay a fixed rate on each payment date based on a notional amount equal to the amount of principal outstanding of the Class A Notes.

DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ Bank) is the Swap Counterparty for this transaction. The DBRS public Critical Obligations Rating (COR) of DZ Bank at AA 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 to the rating 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 legal 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The sources of information used for this rating include monthly investor reports provided by BMW Bank.

DBRS does 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.

The last rating action on this transaction took place on 16 December 2016, when DBRS confirmed its rating on the Class A Notes at AAA (sf).

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”):

-- DBRS expected a lifetime 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 the credit ratings.

-- The Base Case of PD and LGD of the current pool of assets of receivables are 2.2% and 45.0%, 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 rating for the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. If the PD increases by 50%, the rating for the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating for the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. 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)

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: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Vito Natale, Senior Vice President
Initial Rating Date: 18 November 2015

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

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.