DBRS Takes Rating Actions on Two SC Germany Auto Transactions

DBRS Ratings GmbH (DBRS) took the following rating actions on the notes issued by SC Germany Auto 2014-2 UG (haftungsbeschränkt) (Auto 2014-2) and SC Germany Auto 2016-2 UG (haftungsbeschränkt) (Auto 2016-2):

Auto 2014-2:
-- Class A Notes upgraded to AA (low) (sf) from A (high) (sf)

Auto 2016-2:
-- Class A Notes confirmed at A (sf)

The rating actions follow an annual review of the transactions and are 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;
-- In respect of Auto 2016-2, no purchase termination events have occurred;
-- Current available credit enhancement (CE) to the rated notes to cover the expected losses at their respective rating levels.

The ratings on the respective Class A Notes address the timely payment of interest and ultimate payment of principal on or before the respective legal final maturity dates (August 2030 for Auto 2014-2 and July 2032 for Auto 2016-2).

Auto 2014-2 and Auto 2016-2 are securitisations of German auto loan receivables originated to private borrowers by Santander Consumer Bank AG (SCB), a subsidiary of Santander Consumer Finance S.A. (SCF), which also acts as the servicer in the transactions.

As of the June 2019 payment date, the EUR 2.03 billion Auto 2014-2 portfolio consisted of loans for both new (38.1% of the outstanding collateral balance) and used (61.9%) vehicles and closed in September 2014. The EUR 1.50 billion Auto 2016-2 portfolio consisted of loans for both new (37.8%) and used (62.2%) vehicles and closed in July 2016.

PORTFOLIO PERFORMANCE
As of the June 2019 payment date, loans more than 90 days delinquent in Auto 2014-2 were 0.1% of the outstanding principal balance. Gross cumulative defaults stood at 0.3% of the aggregated original portfolio, of which 20.8% have been recovered so far. Loans more than 90 days delinquent in Auto 2016-2 were 0.1% of the outstanding principal balance. Gross cumulative defaults stood at 0.2% of the aggregated original portfolio, of which 12.5% have been recovered so far.

REVOLVING PERIOD
Both transaction structures allowed for additional portfolios to be purchased during a four-year revolving period, which ended in September 2018 for Auto 2014-2 and is due to end in July 2020 for Auto 2016-2. There are concentration limits and purchase termination events in place to mitigate potential portfolio performance deterioration, allowing for amortisation to begin earlier than scheduled if certain triggers are breached. To date, no termination events have occurred.

PORTFOLIO ASSUMPTIONS
For Auto 2014-2, DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has updated its base case PD and LGD assumptions to 2.4% and 65.4%, respectively, based on applicable updated performance data available from the originator.

For Auto 2016-2, DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and has maintained its base case PD and LGD assumptions at 2.7% and 63.6%, respectively.

CREDIT ENHANCEMENT
As of the June 2019 payment date, CE to the Class A Notes in Auto 2014-2 was provided by the subordination of the unrated Class B Notes and has increased to 5.2% from 3.5% at closing. CE to the Class A Notes in Auto 2016-2 is provided by the subordination of the unrated Class B Notes and has remained at 4.0% since closing, as the transaction is still in its revolving period.

The transaction structures include non-amortising liquidity reserves, funded at closing with the proceeds of the subordinated loans provided by the seller. These reserves are available to cover senior expenses and interest payments on the Class A Notes. The reserve funds are currently at their target levels of EUR 30.0 million and EUR 15.0 million, equivalent to 1.00% of the initial aggregate notes balance of Auto 2014-2 and Auto 2016-2, respectively.

Both deals are exposed to potential commingling and set-off risks, as collections are transferred to the account bank on a monthly basis and debtors may hold deposits with the originator. As a mitigant, SCB has undertaken to fund both a commingling and set-off reserve if the DBRS rating of SCB’s parent company – SCF – falls below specific thresholds as defined in the legal documentation, or if ownership thresholds are breached. To date, these reserves continue to be unfunded, as none of the rating triggers have been breached.

BNP Paribas Securities Services, Luxembourg Branch (BNP-Luxembourg) acts as the account bank for Auto 2014-2, while Banco Santander S.A., Frankfurt Branch (Santander-Frankfurt) acts as the account bank for Auto 2016-2. Based on the respective DBRS private ratings of BNP-Luxembourg and Santander-Frankfurt and other mitigating factors inherent in the transaction structures, DBRS considers the risk arising from the exposures to the account banks to be consistent with the rating assigned to the respective Class A Notes in the transactions, as described in DBRS's "Legal Criteria for European Structured Finance Transactions" methodology.

The transaction structures were analysed in Intex DealMaker.

Notes:
All figures are in euros 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 transactions 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 actions.

Other methodologies referenced in these transactions 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 monthly investor and servicer reports provided by SCB 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 ratings, DBRS was not 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 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 these transactions took place on 27 July 2018, when DBRS confirmed its ratings on the Class A Notes in Auto 2014-2 at A (high) (sf) and the Class A Notes in Auto 2016-2 at A (sf).

The lead analyst responsibilities for these transactions have been transferred to Daniel Rakhamimov.

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 ratings, DBRS considered the following stress scenarios as compared with the parameters used to determine the ratings (the Base Case):

-- DBRS expected a lifetime base case PD and LGD for the pools 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.

-- For Auto 2014-2, the base case PD and LGD assumptions for the remaining collateral pool are 2.4% and 65.4%, respectively. For Auto 2016-2, the base case PD and LGD assumptions for the remaining collateral pool are 2.7% and 63.6%, respectively.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the Auto 2014-2 Class A Notes would be expected to remain at AA (low) (sf), ceteris paribus. If the PD increases by 50%, the rating of the Auto 2014-2 Class A Notes would be expected to remain at AA (low) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the rating of the Auto 2014-2 Class A Notes would be expected to decrease to A (low) (sf).

Auto 2014-2 Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in LGD, expected rating of AA (low) (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

Auto 2016-2 Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD, expected rating of BBB (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BB (high) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (low) (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 GmbH are subject to EU and US regulations only.

Lead Analyst: Daniel Rakhamimov, Senior Financial Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 9 September 2014 (Auto 2014-2); 25 July 2016 (Auto 2016-2)

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of these transactions 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 Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations

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 these credits or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.