DBRS Confirms Rating of Bavarian Sky UK 1 plc

DBRS Ratings Limited (DBRS) confirmed its AAA (sf) rating of the Class A Notes issued by Bavarian Sky UK 1 plc (the Issuer).

The rating of the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in November 2025.

The rating action follows an annual review of the transaction and is based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults and losses.
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level.
-- No Early Amortisation Event has occurred.

Bavarian Sky UK 1 Plc is a securitisation of receivables related to personal contract purchase (PCP) auto loan contracts granted by BMW Financial Services (GB) Limited to individual borrowers in England, Wales and Scotland. The transaction closed in November 2017 and includes a 12-month revolving period, with the Class A Notes scheduled to begin amortising with the December 2018 payment date.

Under PCP contracts, equal monthly instalments on the loans are followed by an option to either take ownership of the vehicle at the end of the term by making the final balloon payment or returning the vehicle; this feature exposes the Issuer to market risk and residual value (RV) risks. Furthermore, the UK Consumer Credit Act affords the borrowers with the opportunity to prematurely terminate the loan agreements once half of the contract value has been paid; these voluntary terminations (VT) additionally expose the transaction to the above risks.

PORTFOLIO PERFORMANCE
As of the November 2018 payment date, one- to two-month and two- to three-month delinquencies represented 0.14% and 0.09% of the portfolio balance, respectively, while loans more than three months delinquent represented 0.04%. The Cumulative Net Loss Ratio was 0.73%.

PORTFOLIO ASSUMPTIONS
DBRS maintained its expected gross loss assumption at 6.8% (combined default and VT losses) from closing. DBRS assumed a base case recovery rate of 73.9% and kept the RV haircut constant at 37.2%.

CREDIT ENHANCEMENT
As of the November 2018 payment date, credit enhancement to the Class A Notes was 26.0%, remaining stable since the DBRS initial rating because of the transaction’s revolving period, which ended with the current payment date. Credit enhancement is provided by subordination of the junior obligations and the cash reserve account.

The transaction benefits from a non-amortising cash reserve, currently at its target level of GBP 4.3 million. The cash reserve is available to cover senior expenses and interest payments on the Class A and Class B Notes.

Elavon Financial Services DAC, U.K. Branch (Elavon) acts as the account bank for the transaction. Based on the DBRS private rating of Elavon, the downgrade provisions outlined in the transaction documents, and the transaction structural mitigants, DBRS considers the risk arising from the exposure to Elavon to be consistent with the rating assigned to the Class A Notes, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

SMBC Nikko Capital Markets Limited acts as the swap counterparty for the transaction, with its obligations under the swap agreement guaranteed by its parent company, Sumitomo Mitsui Banking Corporation (SMBC). DBRS's public rating of SMBC at “A” is consistent with the First Rating Threshold as 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 rating 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.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 this rating include investor reports provided by U.S. Bank Trustees Limited and servicer reports provided by BMW Financial Services (GB) Limited.

DBRS did not rely upon third-party due diligence in order to conduct its analysis. At the time of the initial rating, 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 purpose 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.

The last rating action on this transaction took place on 20 November 2017, when DBRS finalised its provisional rating of the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Joana Seara da Costa.

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 rating (the “Base Case”):

-- DBRS expected a lifetime base case PD and 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 and LGD of the current pool of loans for the Issuer are 6.8% and 26.1%, respectively.
-- An RV Loss Rate of 37.2% was applied at the AAA (sf) rating level.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD, LGD and RV loss increase by a certain percentage over the base case assumptions. For example, if the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to AA (sf), assuming no change in the RV loss. If the RV loss increases by 50%, the rating of the Class A Notes would be expected to fall to AA (low) (sf), assuming no change in the PD and LGD. Furthermore, if the PD, LGD and RV loss all increase by 50%, the rating of the Class A Notes would be expected to fall to A (high) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and LGD, expected rating of AA (sf)
-- 25% increase in RV Loss Rate, expected rating of AA (sf)
-- 50% increase in RV Loss Rate, expected rating of AA (low) (sf)
-- 25% increase in RV Loss Rate and 25% increase in PD and LGD, expected rating of AA (sf)
-- 25% increase in RV Loss Rate and 50% increase in PD and LGD, expected rating of AA (low) (sf)
-- 50% increase in RV Loss Rate and 25% increase in PD and LGD, expected rating of A (high) (sf)
-- 50% increase in RV Loss Rate and 50% increase in PD and LGD, expected rating of A (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 US regulations only.

Lead Analyst: Joana Seara da Costa, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 16 October 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.

-- 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
-- Operational Risk Assessment for European Structured Finance Originators

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.