DBRS Assigns New Ratings to VCL Master Residual Value S.A., acting through its Compartment 2

DBRS Ratings Limited (DBRS) assigned new ratings to the following notes issued by VCL Master Residual Value S.A., acting on behalf of its Compartment 2 (the Issuer):

-- Series 2018-1 Class A Notes rated AAA (sf)
-- Series 2018-2 Class A Notes rated AAA (sf)
-- Series 2018-1 Class B Notes rated A (high) (sf)

DBRS concurrently confirmed the following ratings previously assigned to the Issuer:

-- Series 2015-1 Class A Notes at AAA (sf)
-- Series 2015-2 Class A Notes at AAA (sf)
-- Series 2015-3 Class A Notes at AAA (sf)
-- Series 2015-4 Class A Notes at AAA (sf)
-- Series 2015-5 Class A Notes at AAA (sf)
-- Series 2015-6 Class A Notes at AAA (sf)
-- Series 2016-1 Class A Notes at AAA (sf)
-- Series 2016-2 Class A Notes at AAA (sf)
-- Series 2016-4 Class A Notes at AAA (sf)
-- Series 2017-1 Class A Notes at AAA (sf)
-- Series 2015-1 Class B Notes at A (high) (sf)
-- Series 2015-2 Class B Notes at A (high) (sf)
-- Series 2015-3 Class B Notes at A (high) (sf)
-- Series 2016-1 Class B Notes at A (high) (sf)
-- Series 2016-3 Class B Notes at A (high) (sf)
-- Series 2017-1 Class B Notes at A (high) (sf)

The rating actions follow the execution of an amendment agreement that includes:

-- The issuance of new Class A Notes under Series 2018-1 and 2018-2 and Class B Notes under Series 2018-1;
-- The setup of new hedging agreements for the new and outstanding notes;
-- A 12-month extension of the revolving period for the outstanding notes;
-- Tap issuances of the Class A Series 2015-1, 2015-2, 2015-4, 2015-6, 2016-1, and 2016-4 Notes following the repurchase of VCL Master Residual Value, acting through its Compartment 1;
-- Tap issuance of Class A Series 2015-5 and Class B Series 2015-1, 2015-2, 2016-3 and 2017-1 Notes; and
-- Updated note margins on the outstanding notes.

The notes are backed by EUR 6.4 billion of assets, including cash expectancy rights related to residual values of motor vehicle lease contracts originated by Volkswagen Leasing GmbH (VWL).

The ratings are based on DBRS’s review of the following analytical considerations:
-- The program’s capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement in the form of subordination, overcollateralisation and a fully funded liquidity reserve from the issuance date.
-- Credit enhancement levels are sufficient to support the expected cumulative net loss assumption projected under various stress scenarios at a AAA (sf) and A (high) (sf) standard for the series of Class A Notes and Class B Notes, respectively.
-- The ability of the structure to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested.
-- The program counterparties’ capabilities with regard to originations, underwriting, servicing and its financial strength.
-- DBRS conducted an operational risk review of VWL at their premises in Brunswick, Germany and deems it to be an acceptable servicer.
-- The credit quality and industry diversification of the collateral and historical and projected performance of the seller’s portfolio.
-- The sovereign rating of the Federal Republic of Germany, currently rated AAA with a Stable trend by DBRS.
-- The consistency of the transaction’s legal structure with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology and presence of legal opinions addressing the assignment of the assets to the Issuer.

The transaction’s cash flow structure was analysed in Intex DealMaker

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “Rating 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 cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis is and continues to be 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 “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 these ratings include performance data relating to receivables provided by VWL directly or through their agent, Credit Agricole Corporate and Investment Bank. DBRS received historical net loss data relating to VWL’s originations by monthly vintages on a cumulative basis dating back to 2007. DBRS received residual value data on aggregated basis related to the entire origination of VWL dating back to 2007. Data was also provided relating to delinquencies dating back to 2010. Portfolio stratifications on the updated portfolio were provided in the latest investor report.

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 the 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.

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

The last rating action on this transaction took place on 25 September 2017 when DBRS assigned ratings to the Series 2017-1, Class A and Class B Notes, confirmed its ratings on the outstanding notes and discontinued two ratings on notes that were repaid in full.

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):

-- Probability of Default Rates Used: Base Case PD of 1.75%, a 25% and 50% increase on the base case PD.
-- Recovery Rates Used: Recovery rate of 40% at the AAA (sf) stress level and 50% at the A (high) (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.
-- Residual Value (RV) Loss: Base Case of 41% for the Class A Notes, and 32% for the Class B Notes. In both scenarios, a 25% and 50% increase in RV Loss was applied.

DBRS concludes that for the Class A Notes:
-- A hypothetical increase in the PD and LGD by 25%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase of the PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high).
--A hypothetical increase in the RV loss by 25%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase in the RV loss by 50%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase in the PD and LGD, and RV loss by 25%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase in the PD and LGD by 50%, with a hypothetical increase in RV loss by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high).
-- A hypothetical increase in the PD and LGD by 25%, with a hypothetical increase in RV loss by 50%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase in the PD and LGD, and RV loss by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to AA (high).

DBRS concludes that for the Class B Notes:
-- A hypothetical increase in the PD and LGD by 25%, ceteris paribus, would not lead to a downgrade of the Class B Notes.
-- A hypothetical increase of the PD and LGD by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to A.
--A hypothetical increase in the RV loss by 25%, ceteris paribus, would not lead to a downgrade of the Class B Notes.
-- A hypothetical increase in the RV loss by 50%, ceteris paribus, would not lead to a downgrade of the Class B Notes.
-- A hypothetical increase in the PD and LGD, and RV loss by 25%, ceteris paribus, would not lead to a downgrade of the Class B Notes.
-- A hypothetical increase in the PD and LGD by 50%, with a hypothetical increase in RV loss by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to A.
-- A hypothetical increase in the PD and LGD by 25%, with a hypothetical increase in RV loss by 50%, ceteris paribus, would not lead to a downgrade of the Class B Notes.
-- A hypothetical increase in the PD and LGD, and RV loss by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to A.

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
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 25 June 2017

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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 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.