DBRS Confirms and Downgrades Three Driver UK Multi-Compartment Transactions

DBRS Ratings Limited (DBRS) took the following rating actions on three Driver UK Multi-Compartment S.A. transactions originated and serviced by Volkswagen Financial Services (UK) Limited (VWFS):

Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK three (Driver UK 3):
-- Class A Notes confirmed at AAA (sf)
-- Class B Notes confirmed at A (high) (sf)

Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Private Driver UK 2016-1 (PD UK 2016-1):
-- Class A Notes downgraded to AA (high) (sf) from AAA (sf)
-- Class B Notes downgraded to A (sf) from A (high) (sf)

Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK four (Driver UK 4):
-- Class A Notes downgraded to AA (high) (sf) from AAA (sf) and rating discontinued
-- Class B Notes confirmed at A (high) (sf) and rating discontinued

The rating actions follow DBRS’s review of the transactions and, in the case of Driver UK 4, the Issuer’s request to discontinue-withdraw the ratings. The ratings on the notes address the timely payment of interest and ultimate payment of principal by the relevant Final Maturity Date.

The rating actions follow a review of the transactions after conducting an analysis of updated historical data provided by VWFS. The credit performance of the VWFS portfolio continues to be strong with low levels of hostile terminations (HTs) and related losses. However, DBRS has observed a change in the mix of personal contract purchase (PCP) agreements — specifically, in relation to the shift from three-year terms to four-year terms. In DBRS’s opinion, the increase in the weighted-average original term of these agreements increases the likelihood of voluntary terminations (VTs) as permitted in the United Kingdom under Sections 99 and 100 of the Consumer Credit Act. DBRS has observed consistently higher levels of VTs exercised by customers prior to the scheduled maturity dates, coinciding with VT thresholds being reached for four-year PCP agreements originated in 2014. For more details on the topic, please see the DBRS commentary “U.K. Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination”.

The Driver UK 3 notes benefit from additional credit enhancement (please see details below), which DBRS considers sufficient to cover additional loss assumptions.

DBRS also rates the notes issued by Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK five. DBRS’s annual review and rating confirmations for this transaction in March 2018 incorporated the updated historical data provided by VWFS. For more details, please see the DBRS press release “DBRS Confirms Ratings on Driver UK Multi-Compartment S.A. Acting for and on Behalf of its Compartment Driver UK Five”.

PORTFOLIO PERFORMANCE
As at May 2018, the portfolio performance of the three transactions are as follows:
-- For Driver UK 3, the 90+ delinquency ratio was 0.3% and cumulative net losses were 0.8%.
-- For Driver UK 4, the 90+ delinquency ratio was 0.2% and cumulative net losses were 0.3%.
-- For PD UK 2016-1, the 90+ delinquency ratio was 0.1% and cumulative net losses were 0.4%.

PORTFOLIO ASSUMPTIONS
During the review, DBRS updated its expected gross loss assumption to 6.5% (including VT and HT rates), which considers the updated historical data provided by VWFS and each transaction’s mix of PCP agreements.

DBRS assumed a base case recovery rate of 72.0% and kept the residual value haircuts constant.

CREDIT ENHANCEMENT
The transactions have sequential/pro rata amortisation structures whereby all principal payments from the receivables pay down the Class A Notes until Class A overcollateralisation (OC) reaches its target level of 30.0%. As at the May 2018 payment date, the OC for each class of notes is as follows:
-- Driver UK 3: Class A OC of 30.0% and Class B OC of 19.0%.
-- Driver UK 4: Class A OC of 30.0% and Class B OC of 21.1%.
-- PD UK 2016-1: Class A OC of 30.0% and Class B OC of 19.5%.

The transactions benefit from Cash Collateral Accounts with two separate ledgers. Amounts standing to the credit of the Interest Compensation Ledger are available to pay a compensation amount to the relevant issuer for interest shortfalls suffered as a result of early settlements of the receivables. Each General Cash Collateral Account covers senior fees, interest shortfalls and principal losses on the notes at the final payment date. The Cash Collateral Accounts are funded to their target levels of GBP 7.5 million for PD UK 2016-1 and Driver UK 4 and GBP 4.5 million for Driver UK 3.

In March 2016, in order to increase the credit enhancement of the notes, a second Subordinated Loan of GBP 8.0 million was granted to Driver UK 3. The proceeds of this loan were applied towards the funding of an additional non-amortising reserve account that will be available to cover principal losses on the notes on the final payment date.

The Bank of New York Mellon - London Branch (BNY Mellon London) is the account bank for PD UK 2016-1 and Driver UK 3, while Citibank N.A., London Branch (Citibank) is the account bank for Driver UK 4. The DBRS public rating of BNY Mellon London of AA with a Stable trend and the private rating of Citibank are consistent with the Minimum Institution Rating, given the ratings assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Crédit Agricole Corporate and Investment Bank (CACIB) is the swap counterparty of Driver UK 3, and DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank) is the swap counterparty of Driver UK 4. The private rating of CACIB and the Long Term Critical Obligations Rating of DZ Bank of AA with a Stable trend are above the First Rating Threshold defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is the “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 transactions legal documents was not conducted as the legal documents have remained unchanged since the most recent rating actions.

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 data and information used for these ratings include data provided by VWFS and European DataWarehouse GmbH.

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

At the time of the initial ratings, 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 these ratings 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 Driver UK 3 took place on 27 September 2017, when DBRS confirmed the ratings of the Class A and Class B Notes at AAA (sf) and A (high) (sf), respectively.

The last rating action on Driver UK 4 took place on 27 September 2017, when DBRS confirmed the ratings of the Class A and Class B Notes at AAA (sf) and A (high) (sf), respectively.

The last rating action on PD UK 2016-1 took place on 26 June 2017, when DBRS confirmed the ratings of the Class A and Class B Notes at AAA (sf) and A (high) (sf), respectively.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available at www.dbrs.com.

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the ratings for the transactions (the Base Case):

-- PD: Base Case of 6.5%, a 25% and 50% increase on the Base Case PD.
-- Loss Given Default (LGD): Base Case of 28%, whereas 48% was used at AAA (sf), 45% at AA (high) (sf), 39% at A (high) (sf) and 38% at A (sf).
-- Residual Value (RV) Loss: 42.8% at AAA (sf), 35.4% for the AA (high), 25.8% and A (high) (sf) and 24.3% at A (sf). Each scenario with a 25% and 50% increase in the RV Loss.

DRIVER UK 3
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 Class A Notes to AA (high) (sf).
-- 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 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 (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 A (high) (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 (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 A (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 A Notes 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 lead to a downgrade of the Class B Notes to A (sf).
-- 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 (low) (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 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).

DRIVER UK 4
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 Class A Notes to AA (low) (sf).
-- 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).
-- A hypothetical increase of the RV Loss Rate by 25%, 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 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 A (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 A (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (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 A Notes to A (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 (low) (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 a downgrade of the Class B Notes to A (low) (sf).
-- 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 25%, 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 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 BBB (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 B Notes to BBB (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 (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).

PD UK 2016-1
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 Class A Notes to AA (low) (sf).
-- 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 (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 (low) (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 A (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 A (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (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 A (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 BBB (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 a downgrade of the Class B Notes to BBB (high) (sf).
-- 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).
-- A hypothetical increase of the RV Loss Rate by 25%, 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 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 BBB (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 (low) (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 (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 (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 B Notes to BB (high) (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 and U.S. regulations only.

Driver UK 3 Lead Analyst: Joana Seara da Costa, Assistant Vice President
Driver UK 4 Lead Analyst: Joana Seara da Costa, Assistant Vice President
PD UK 2016-1 Lead Analyst: Andrew Lynch, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director

Driver UK 3 Initial Rating Date: 1 September 2015
Driver UK 4 Initial Rating Date: 14 October 2016
PD UK 2016-1 Initial Rating Date: 27 June 2016

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
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.

-- Legal Criteria for European Structured Finance Transactions
-- Master European Structured Finance Surveillance Methodology
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Interest Rate Stresses for European Structured Finance Transactions
-- 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.