DBRS Assigns Provisional Ratings to Silver Arrow Canada LP 2018-1 Notes

DBRS Limited (DBRS) assigned provisional ratings to the following notes to be issued by Silver Arrow Canada LP:

-- 2018-1 Class A-1 Asset Backed Notes (the Class A-1 Notes) provisionally rated AAA (sf)
-- 2018-1 Class A-2 Asset Backed Notes (the Class A-2 Notes) provisionally rated AAA (sf)
-- 2018-1 Class A-3 Asset Backed Notes (the Class A-3 Notes; together with the Class A-1 Notes and Class A-2 Notes, the Notes) provisionally rated AAA (sf)

The Notes will be supported by a portfolio of retail loan contracts secured by new and used luxury passenger cars, crossovers and sport-utility vehicles (the Portfolio of Receivables). The loan contracts were originated by Mercedes-Benz Financial Services Canada Corporation (MBFSC) through its authorized dealer network in Canada.

Repayment of the Notes will be made from collections from the Portfolio of Receivables, which will primarily include scheduled payments and proceeds from vehicle sales in the case of obligor defaults.

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) Credit Enhancement – Amount
The level of credit enhancement provided by overcollateralization (OC) (2.50% of the Initial Adjusted Pool Balance; approximately $10,413,574.17 on the Closing Date), the Reserve Account (0.25% of the Initial Adjusted Pool Balance) and an estimated annual excess spread of 2.98%, net of cost of funds and the 1.00% Servicing Fee, which will be available to offset collection shortfalls on a monthly basis.

(2) Credit Enhancement – Structure (Non-Amortizing)
The level of OC and the Reserve Account remain at their initial levels even as principal on the Notes is repaid. This deleveraging structure results in increased credit enhancement as the Portfolio of Receivables amortizes.

(3) Transaction Structure
The transaction structure ensures that the Target OC Amount is maintained before releasing excess collections to the Seller. The Adjusted Pool Balance is calculated as the difference between the Pool Balance and the Yield Supplement Overcollateralization Amount (YSOA) amount on each payment date. The YSOA schedule will be fixed as of the Cut-Off Date and is equal to the aggregate excess of (a) the present value of all payments on each receivable with a contract annual percentage rate (APR) less than the Required Rate of 7.00%, discounted at the APR of said contract over (b) the present value of all payments on each receivable with a contract APR less than the Required Rate, discounted at the Required Rate. It will be set based on an amortization of the portfolio under a zero-prepayment and no-loss scenario and under which additional yield from discounting the Receivables at the Required Rate would result in initial estimated excess spread of 2.98%. As some level of prepayments are likely to occur, increasing the rate of amortization while the YSOA schedule remains fixed, DBRS expects that the yield generated from the OC would increase against the Notes in such scenario.

(4) Obligor Profile
The obligors of the underlying loan contracts represent high-credit-quality customers, as the WA FICO score is 798. Obligors with FICO scores below 650 constitute approximately 2.9% of the pool balance, and approximately 87.6% of the pool has a FICO score of greater than or equal to 700. The strong credit profile is also supported by low and consistent historical credit losses and delinquency levels, and the Seller’s owned and managed portfolio.

(5) Operational and Brand Strength of Seller/Servicer
Daimler and its related Canadian entities were upgraded to “A” with Stable trends by DBRS on November 29, 2017. The rating upgrade recognizes the Company’s improved earnings over recent years, which strengthened its financial position, as well as its strong business profile as a highly established premium automotive manufacturer and the world’s leading truck producer. As a subsidiary of Daimler, MBFSC benefits from its parent’s strong financial standing and global presence, allowing it to leverage the experience and expertise of Daimler’s other financial services companies worldwide to ensure sound and consistent underwriting standards and efficient servicing operations.

DBRS’s cash flow analysis includes a conservative base case cumulative net loss estimate. Available credit enhancement is able to withstand the stresses at levels commensurate with the assigned provisional ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Canadian Retail Auto Loan and Lease Securitizations (October 2017) and Legal Criteria for Canadian Structured Finance (July 2018), 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 relevant internal documents of the rated entity or its related entities in connection with this rating action.

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