DBRS Upgrades and Confirms Ratings of VCL 24

DBRS Ratings Limited (DBRS) took the following rating actions on the Class A Notes and Class B Notes (together, the Notes) issued by VCL Multi-Compartment S.A. acting for and on behalf of its Compartment VCL 24 (the Issuer or VCL 24):

-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AAA (sf) from AA (sf)

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults and losses as of the September 2018 payment date.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- The increased levels of credit enhancement (CE) available to the Notes to cover the expected losses assumed in line with the AAA (sf) rating level.

The ratings address the timely payment of interest and the ultimate payment of principal on or before the final maturity date in August 2022.

VCL 24 is a securitisation of German auto leases originated by Volkswagen Leasing GmbH (VWL). As of the September 2018 payment date, the EUR 376.3 million portfolio, excluding defaulted and written down leases, comprised leases for the purchase of new (95.7% of the portfolio by outstanding discounted balance), used (1.8%) and demonstration (2.5%) vehicles, granted to both retail (69.3%) and corporate (30.7%) customers.

PORTFOLIO PERFORMANCE AND ASSUMPTIONS
As of the September 2018 payment date, 30-day to 60-day delinquencies were 0.6% of the outstanding discounted balance; 60-day to 90-day delinquencies were 0.2%; and delinquencies greater than 90 days were 0.4% of the outstanding discounted balance. Cumulative net losses, as defined in the transaction documents, were 0.08% of the original outstanding discounted balance.

DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has maintained its base case PD and LGD assumptions at 1.7% and 30.0%, respectively.

CREDIT ENHANCEMENT
CE for the Notes is provided by overcollateralisation, subordination of the respective junior obligations and the general reserve fund. In September 2018, CE for the Class A Notes increased to 15.2% from 7.4% at closing in November 2016, while the CE for the Class B Notes increased to 10.4% from 5.1%.

The transaction benefits from a general reserve fund available to cover senior fees and the interest due on the Notes, funded at closing with part of the proceeds of a subordinated loan. In the event of Issuer default, it can also be used to cover principal payments on the rated Notes. At closing, the reserve was funded with an amount equal to 1.2% of the original portfolio discounted balance and can be amortised down to the minimum between EUR 12.5 million and the aggregate outstanding principal amount of the Notes. Since the closing date, the general reserve fund has always been maintained at its target level and is currently at EUR 12.5 million.

A swap structure is in place to hedge the interest rate mismatch between the Class A and Class B Notes, indexed to one-month Euribor, and the fixed interest rate payments from the collateral portfolio. The Bank of Nova Scotia is the counterparty of the swap agreements. The DBRS Issuer Rating of the Bank of Nova Scotia at AA complies with the First Rating Threshold defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

BNP Paribas Securities Services, Luxembourg Branch (BPSS) acts as the Account Bank for the transaction. DBRS’s private rating of BPSS complies with the minimum institution rating, given the ratings assigned to the Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

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

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 monthly investor reports provided by VWL.

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 this transaction took place on 8 November 2017, when DBRS confirmed the AAA (sf) rating of the Class A Notes and upgraded the Class B Notes to AA (sf) from A (high) (sf).

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 ratings (the “Base Case”):

-- DBRS expected a lifetime base case portfolio default rate (PD) and loss given default (LGD) for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.

-- The base case PD of the current pool of assets is 1.7%, while the LGD is 58.0% at the AAA (sf) rating level.

-- The risk sensitivity overview below illustrates the ratings expected for the Class A and Class B Notes if the PD and LGD increase by certain percentages over the base case assumptions. For example, if the LGD increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf) while the rating of the Class B Notes would be expected to decrease to AA (high) (sf), all else being equal. If the PD increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf) while the rating of the Class B Notes would be expected to decrease to AA (high) (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected decrease to AA (high) (sf) while the rating of the Class B Notes would be expected to decrease to AA (sf), all else being equal.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)

Class B Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (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: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 6 October 2016

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The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- 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.