DBRS Downgrades Ratings on Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK five

DBRS Ratings Limited (DBRS) downgraded the following ratings on the notes issued by Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK five (the Issuer):

-- Class A Notes downgraded to AA (high) (sf) from AAA (sf)
-- Class B Notes downgraded to A (sf) from A (high) (sf)

The ratings on the Class A Notes and Class B Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in July 2025.

The rating actions follow a review of the transaction after conducting an analysis of updated historical portfolio data provided by Volkswagen Financial Services (UK) Limited (VWFS) in March 2019. While the credit performance of the VWFS portfolio continues to be strong with low levels of hostile terminations (HTs), DBRS has observed a continued increase in voluntary terminations (VTs) exercised by personal contract purchase (PCP) customers prior to the scheduled maturity dates, as permitted in the United Kingdom under Sections 99 and 100 of the Consumer Credit Act, with the increase largely related to the shift from three-year PCP terms to four-year terms. For more details on the topic, please see the DBRS commentary “U.K. Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination”.

The Issuer is a securitisation collateralised by a portfolio of auto loan receivables granted by VWFS to retail and commercial customers residing in Great Britain. The transaction includes both hire purchase (HP) loans (3.1% of the current pool balance) and PCP agreements (96.9%), secured by new (79.7%) and used (20.3%) vehicles.

Under HP contracts, the outstanding balance typically amortises in equal monthly instalments, and at the end of the agreement, vehicle ownership is transferred to the obligor after the payment of an additional fee. In the case of PCP agreements, equal monthly instalments are followed by an option to either take ownership of the vehicle by making the final balloon payment or returning the vehicle; this feature exposes the transaction to residual value (RV) risk.

The amortisation profile of the pool indicates a concentration of maturities toward the end of the expected life of the transaction. DBRS considers that the combination of the sustained increase in portfolio VT levels, the anticipated VT timings and scheduled PCP maturities exposes the transaction to increased tail risk that is not fully mitigated by the transaction structure at the current rating levels assigned to the Class A Notes and Class B Notes.

PORTFOLIO PERFORMANCE
As of the March 2019 payment date, 31- to 60-day delinquencies and 61- to 90-day delinquencies represented 0.5% and 0.1% of the portfolio discounted balance, respectively, while delinquencies greater than 90 days were 0.1%. The cumulative net loss ratio was 0.4%.

PORTFOLIO ASSUMPTIONS
DBRS updated its expected gross loss assumption to 8.2% (including HTs and VTs) from 7.0%, which considers the updated historical data provided by VWFS and the portfolio product-type composition. DBRS assumed a base case recovery rate of 68.0%.

CREDIT ENHANCEMENT
The transaction has a sequential/pro rata amortisation structure whereby collections from the receivables pay down the Class A Notes until Class A overcollateralisation (OC) reaches its target level of 30.0%, followed by the Class B Notes until the Class B OC reaches its target level of 22.4%. As of the March 2019 payment date, both the Class A Notes and Class B Notes OC was at their respective target levels.

The transaction structure includes a cash collateral account with two separate ledgers:
-- The general cash collateral account is available to cover senior expenses, missed interest payments on the notes and, as soon as the portfolio balance is reduced to zero or on the relevant final maturity date, to repay principal on the notes. This account was funded at closing with GBP 5.3 million and its target balance is equal to 1.2% of the aggregate discounted receivables balance, subject to a floor of GBP 4.4 million. As of March 2019, the general cash collateral account had a balance of GBP 4.4 million.
-- The interest compensation ledger is available to compensate the Issuer for interest shortfalls suffered as a result of early settlements. As of March 2019, the ledger had a balance of GBP 3.0 million.

Citibank N.A., London branch acts as the account bank for the transaction. Based on the DBRS private rating of Citibank N.A., London branch, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS considers the risk arising from the exposure to the account bank 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.

Credit Agricole Corporate & Investment Bank (CA-CIB) acts as the swap counterparty for the transaction. DBRS's private rating of CA-CIB is above the first rating threshold as described 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 ratings 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.

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/333487/rating-sovereign-governments.pdf.

The sources of data and information used for these ratings include investor reports provided by VWFS and loan-level data provided by the European DataWarehouse GmbH.

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 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 27 March 2018, when DBRS confirmed the ratings on the Class A Notes and Class B Notes at AAA (sf) and A (high) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Clare Wootton.

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):

-- Probability of Default (PD): Base Case of 8.2%, with a 25% and 50% increase on the Base Case PD.
-- Loss Given Default (LGD): Base Case of 32.0%, whereas 40.3% and 45.6% LGD were used at A (sf) and AA (high) (sf) scenarios, respectively. Each scenario with a 25% and 50% increase in the LGD.
-- RV Loss: 35.5% and 28.2% for the AA (high) (sf) and A (sf) scenarios, respectively. Each scenario with a 25% and 50% increase in the RV Loss.

Class A Notes Risk Sensitivity:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50% and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (sf).

Class B Notes Risk Sensitivity:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 50% and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to B (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: Clare Wootton, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 22 February 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

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.