DBRS Finalises Provisional Ratings Assigned to Silver Arrow S.A., acting in respect of its Compartment 9

DBRS Ratings Limited (DBRS) finalised the provisional rating of AAA (sf) assigned to the Class A Notes (the Notes) issued by Silver Arrow S.A., acting in respect of its Compartment 9 (the Issuer).

The transaction represents the issuance of Class A and Class B notes backed by approximately EUR 807 million of receivables related to auto loan contracts granted by Mercedes-Benz Bank AG (MBB) to private and commercial borrowers in Germany. The transaction represents ongoing issuance of auto loans originated by MBB in Germany. The receivables are serviced by MBB.

The rating is based on DBRS’s review of the following analytical considerations:

-- Transaction capital structure, including 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 net loss assumptions projected under various stress scenarios at the AAA (sf) standard for the Notes.
-- The transaction’s ability to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested.
-- MBB’s financial strength and its capabilities with respect to originations, underwriting and servicing.
-- The credit quality of the collateral and the servicer’s ability to perform collection activities on the collateral.
-- The operational risk review conducted on MBB 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 as well as historical and projected performance of the seller’s portfolio.
-- The sovereign rating of the Federal Republic of Germany at AAA with a Stable trend.
-- 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” methodology.

Recently, diesel has come under considerable scrutiny in Germany. In February 2017, the European Commission announced that 28 air quality zones in Germany (including Stuttgart, Munich, Hamburg and Cologne) were in breach of air pollution limits for Nitrogen Dioxide (NO2 – one of the main harmful pollutants of diesel engines).

Consequently, in May 2018 the highest German federal administrative court ruled in favour of granting German cities the power to ban diesel cars with immediate effect. Any bans imposed would be on vehicles that do not meet certain Euro-emission standards. Following the ruling, at the time of this presale report being published, Hamburg and Aachen have become the first German cities to impose bans, with diesel vehicles which do not meet the latest emission standards (Euro 6) banned in particular areas of the cities.

While the proportion of diesel vehicles in the portfolio is relatively high at approximately 69%, a large proportion of diesel vehicles actually meet current standards, and would not be at risk of any bans which have (or may be) been imposed. However, approximately 10% of the portfolio (circled above) does not meet such standards, and is at risk of being banned from cities. For more information on this topic, please refer to DBRS’s “ Diesel Bans: Rhetoric Louder than the Downside Impact on German Auto ABS” commentary at https://www.dbrs.com/research/330069/diesel-bans-rhetoric-louder-than-the-downside-impact-on-german-auto-abs

In auto loan ABS transactions, bans on diesel vehicles pose a risk of declining recovery rates on defaulted receivables, and incremental risk around loans with balloon payments arising from potential falls in vehicle prices compared with their contractual balloons. In DBRS’s analysis, rating-specific recovery rates are used to capture any volatility in the German used vehicle auto market leading to any decline in vehicle sales proceeds on defaulted receivables.

The transaction was analysed in Intex DealMaker.

Notes:
All figures are in euros 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.

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 data relating to receivables provided by MBB. DBRS received historical gross loss and recovery data relating to MBB originations by quarterly vintages, on a cumulative basis, dating back to the first quarter of 2013. As well as default and recovery data, MBB provided delinquency and prepayment data, which also goes back to the first quarter of 2010, as well as detailed stratification tables of the portfolio selected by MBB as at 30 April 2017, and an amortisation schedule.

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 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 was disclosed to MBB.

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 (the base case):

-- Expected Default Rates Used: Base case probability of default (PD) of 1.77%, a 25% and 50% increase on the base case PD.
-- Recovery Rates Used: Recovery Rate of 45% at the AAA (sf) stress level, a 25% and 50% decrease in the base case Recovery Rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.
-- Loss Given Default (LGD) Used: LGD Rate of 55% at the AAA (sf) stress level, a 25% and 50% increase in the base case LGD.

DBRS concludes that for the Class A Notes:
-- A hypothetical increase of the base case PD by 25% or a hypothetical increase of the LGD by 25%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase of the base case PD by 50% or a hypothetical increase of the LGD by 50%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase of the base case PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high) (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: Matthew Nyong, Senior Financial Analyst – EU ABS
Rating Committee Chair: Chuck Weilamann, Managing Director – Head of US ABS
Initial Rating Date: 5 July 2018

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.

-- 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 Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses for European Stuctured 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.

This press release was amended 8 August 2018 to include the United States to the following disclosure: "Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only."