DBRS Finalises Provisional Rating on Silver Arrow Merfina 2019-1 S.r.l.

DBRS Ratings Limited (DBRS) finalised its provisional rating of AA (sf) on the Class A Notes issued by Silver Arrow Merfina 2019-1 S.r.l. (the Issuer).

The transaction represents the issuance of Class A and Class B Notes (together, the Notes) backed by EUR 559 million of receivables related to auto loan contracts granted by Mercedes-Benz Financial Services Italia S.p.A. (MBFSI) to private and commercial borrowers in Republic of Italy. DBRS has not assigned a rating to the Class B Notes.

This is the first public auto loan securitisation transaction originated by MBFSI in Italy. However, DBRS has previously assigned ratings to transactions originated by Mercedes-Benz Bank AG in the Federal Republic of Germany. The receivables are serviced by MBFSI.

The rating is based on DBRS’s review of the following analytical considerations:

-- The transaction’s capital structure, including form and sufficiency of available credit enhancement.
-- Relevant credit enhancement in the form of subordination, a reserve fund and excess spread. Credit enhancement levels are sufficient to support DBRS’s projected expected cumulative net loss assumptions under various stressed cash flow assumptions for the Notes.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the transaction documents.
-- The originator and servicer’s capabilities with respect to originations, underwriting, servicing and financial strength.
-- DBRS conducted an operational risk review of MBFSI’s premises in Rome and deems it an acceptable servicer and originator.
-- The credit quality of the collateral and ability of the servicer to perform collection activities on the collateral.
-- The sovereign rating of Italy, currently rated BBB (high) with a Stable trend.
-- The legal structure and presence of legal opinions addressing the assignment of the assets to the Issuer and consistency with DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

The transaction was analysed in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is: “Rating European Consumer and Commercial Asset-Backed Securitisations”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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: https://www.dbrs.com/research/333487/rating-sovereign-governments.

The sources of data and information used for this rating include performance data relating to receivables provided by MBFSI. DBRS received historical gross loss and recovery data relating to MBFSI originations by quarterly vintage, on a cumulative basis, dating back to Q1 2014. As well as default and recovery data, MBFSI provided delinquency and prepayment data, which also goes back to Q1 2014, as well as detailed stratification tables of the portfolio selected by MBFSI as at 30 April 2019 and an amortisation schedule.

DBRS did not rely upon third-party due diligence in order to conduct its analysis.

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 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.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

This is the first rating action since the Initial Rating Date.

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 rating (the base case):

-- Expected Default Rate Used: Base case probability of default (PD) of 3.6%, a 25% and 50% increase on the base case PD.
-- Recovery Rate Used: Recovery Rate of 8.0% at the AA (sf) stress level, a 25% and 50% decrease in the base case Recovery Rate. Note that the percentage decreases in the recovery rates are assumed for the other stress recovery rate levels.
-- Loss Given Default (LGD) Used: LGD rate of 92.0% at the AA (sf) stress level, a 25% and 50% increase in the base case LGD.

DBRS concludes that for the Class A Notes:
-- A hypothetical increase of the base case PD by 25% ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the base case PD by 50% ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the LGD by 25%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase of the LGD by 50%, ceteris paribus, would not lead to a downgrade of the Class A Notes.
-- A hypothetical increase of the base case PD by 25% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the base case PD by 25% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the base case PD by 50% and a hypothetical increase of the LGD by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (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 Limited are subject to EU and US regulations only.

Lead Analyst: Alex Garrod, Senior Vice President, European ABS
Rating Committee Chair: Christian Aufsatz, Managing Director, Head of European Structured Finance
Initial Rating Date: 20 May 2019

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

-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Legal Criteria for European Structured Finance Transactions
-- Derivative Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Operational Risk Assessment for European Structured Finance Originators
-- Interest Rate Stresses 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.