DBRS Assigns Provisional Ratings to MBARC Credit Canada Inc. 2018-A Notes

DBRS Limited (DBRS) assigned the following provisional ratings to the 2018-A Class A-1, Class A-2 and Class A-3 Asset Backed Notes (collectively, the Notes) issued by MBARC Credit Canada Inc.:

-- 2018-A Class A-1 Asset Backed Notes (the Class A-1 Notes) provisionally rated AAA (sf)
-- 2018-A Class A-2 Asset Backed Notes (the Class A-2 Notes) provisionally rated AAA (sf)
-- 2018-A Class A-3 Asset Backed Notes (the Class A-3 Notes) provisionally rated AAA (sf)

The Notes will be supported by a portfolio of retail closed-end lease contracts of primarily new passenger cars, cross-over and sport-utility vehicles (the Portfolio of Assets). The lease contracts were originated by authorized Mercedes-Benz dealers in Canada.

Repayment of the Notes will be made from collections from the Portfolio of Assets, which generally include scheduled monthly lease payments (including residual value payments in the case of customer-retained vehicles) as well as proceeds from vehicle sales either at the end of the lease term or earlier in the case of prepayments and defaults. Proceeds from excess mileage and wear-and-tear charges, if any, also form part of the collections used to repay the Notes.

Monthly payment of interest and principal will be made with the amortization schedule of the Notes based on the amortization of the Portfolio of Assets. The Notes will be repaid in sequential order with the Class A-1 Notes being repaid first, followed by the repayment of the Class A-2 Notes and, finally, the repayment of the Class A-3 Notes. The provisional ratings assigned are based on the full repayment of the Notes by their respective Final Scheduled Payment Dates.

The provisional ratings incorporate the following considerations:

(1) High Level of Credit Enhancement
-- Initially, 15.5% overcollateralization (building to 17.0%), 0.25% cash and approximately 4.08% (annualized) excess spread.
-- Non-amortizing enhancement provides a deleveraging structure.

(2) Operational and Brand Strength of Seller
-- Daimler AG and its related Canadian entities have been upgraded to “A” with Stable trends by DBRS, with very strong brand awareness and sales performance.

(3) Strong Demand in Luxury Vehicle Segment
-- Increasing demand for luxury vehicles continues to support strong residual values in Canada. Mercedes-Benz Canada experienced double-digit sales growth and remained a market share leader with 2.5% of sales at the end of 2017.

(4) Conservative Advance Rate on Residual Values
-- The Base Residual Value is determined by using the lowest of the contract residual value and a third-party-estimated value by Automotive Lease Guide (ALG) at lease inception and updated ALG value as of January 2018, eliminating funding of embedded residual value losses.

(5) Strong Obligor Profile
-- The obligors of the underlying lease contracts represent high credit quality customers with a weighted-average FICO score of 796.

(6) Efficient Remarketing Strategy
-- Mercedes-Benz Financial Services Canada Corporation established an efficient vehicle remarketing strategy to maximize the disposition proceeds and minimize the time to remarket the vehicles when returned.

DBRS’s cash flow analysis included stresses on credit and residual value loss exposures, vehicle turn-in rates and prepayments, which indicate that the credit enhancement available provides sufficient protection to the Notes to warrant the ratings assigned.

Notes:
The principal methodologies are Rating Canadian Auto Retail Loan and Lease Securitizations and Legal Criteria for Canadian Structured Finance, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.