DBRS Morningstar Assigns Provisional Rating to Auto ABS UK Loans 2019 Plc

DBRS Ratings Limited (DBRS Morningstar) assigned a provisional rating of AAA (sf) to the Class A Notes expected to be issued by Auto ABS UK Loans 2019 Plc (the Issuer). DBRS Morningstar does not rate the Class B Notes in this transaction.

The provisional rating is based on information provided to DBRS Morningstar by the Issuer and its agents as of the date of this press release. The rating can be finalised upon review of final information, data, legal opinions and the executed version of the governing transaction documents. To the extent that the information or the documents provided to DBRS Morningstar as of this date differ from the final information, DBRS Morningstar may assign a different final rating to the Class A Notes.

The Class A Notes are backed by a portfolio of approximately GBP 361 million of receivables related to personal contract purchase (PCP) and conditional sale (CS) auto loan contracts granted by PSA Finance UK Limited (the originator) to borrowers residing in England, Scotland, Wales or Northern Ireland. The originator will also service the portfolio.

The transaction includes a 12-month revolving period; during this time, the originator may offer additional receivables that the Issuer can purchase provided that the eligibility criteria and concentration limits set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers, insolvency of the originator or replacement of the servicer.

The transaction allocates available funds through a combined interest and principal priority of payments and the Class A Notes benefit from credit enhancement in the form of subordination from the Class B Notes (20.5%) and a reserve fund. On the issue date, the originator will grant the Issuer a loan to fund the reserve fund initially equivalent to 1.5% of the outstanding Class A Notes. Following the amortisation of 50% of the Class A Notes, the general reserve is dynamically sized at 3.0% of the outstanding Class A Notes balance (with a floor of 1.0% of the initial Class A Notes balance) and therefore provides ongoing liquidity support to the structure.

At the end of scheduled revolving period, the notes are redeemed sequentially. The Class A Notes pay a margin over an index compounded daily SONIA (i.e., the Sterling Overnight Index Average) whereas the portfolio pays a fixed-interest rate. The interest rate risk arising from the mismatch between the Issuer’s liabilities and the portfolio is hedged through an interest rate swap provided by Banco Santander S.A.

This is the third public transaction rated by DBRS Morningstar in relation to the issuance of notes backed by auto loans originated by PSA Finance UK Limited in the United Kingdom.
The rating is based upon DBRS Morningstar’s review of the following analytical considerations:

-- The transaction capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS Morningstar’s projected expected net losses and residual value losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the notes.
-- The seller, originator and servicer’s capabilities with respect to originations, underwriting, servicing and financial strength.
-- DBRS Morningstar’s operational risk review on PSA Finance UK Limited’s premises, which it deemed to be an acceptable servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral and historical and projected performance of the seller’s portfolio.
--DBRS Morningstar’s sovereign rating of the United Kingdom of Great Britain and Northern Ireland, at AAA with a Stable trend.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology, the presence of legal opinions that address the true sale of the assets to the Issuer and non-consolidation of the Issuer with the seller.
The transaction cash flow structure was analysed in Intex DealMaker.

Notes:
All figures are in British pound sterling unless otherwise noted.

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

DBRS Morningstar 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 is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 “Global Methodology for Rating Sovereign Governments” methodology at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

The data and information used for this rating include performance and portfolio data relating to the receivables provided by the originator directly or through the arranger, Banco Santander, S.A.

DBRS Morningstar received data from Q1 2006 to Q2 2019 split by new/used vehicles, PCP/CS contracts and private/limited company clients relating to quarterly static cumulative default and recovery data (with voluntary termination performance included separately) alongside origination and default volumes. DBRS Morningstar also received loan-level and portfolio vehicle realisation data for PCP handbacks from Q1 2006 to Q2 2019 and PCP early settlement/prepayment frequency and maturity data by month from Q1 2007 to Q2 2019.

DBRS Morningstar was also provided with detailed stratification tables related to the portfolio as at 22 October 2019.

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

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 Morningstar rating on this financial instrument.

Information regarding DBRS Morningstar 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 Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating:
-- Probability of Default (PD) Used: Expected PD of 3.6%, a 25% and 50% increase on the applicable PD.
-- Loss Given Default (LGD) Used: Expected LGD of 27.2, 54.5% for a AAA (sf) scenario, a 25% and 50% increase on the applicable LGD.
-- Residual Value (RV) Haircut: RV haircut of 45% for a AAA (sf) scenario, a 25% and 50% on the applicable RV haircut.

Scenario 1: A 25% increase in the expected default and expected LGD.
Scenario 2: A 50% increase in the expected default and expected LGD.
Scenario 3: A 25% increase in the expected RV haircut.
Scenario 4: A 25% increase in the expected default and expected LGD and a 25% increase in the RV haircut.
Scenario 5: A 50% increase in the expected default and expected LGD and a 25% increase in the RV haircut.
Scenario 6: A 50% increase in the RV haircut.
Scenario 7: A 25% increase in the expected default and expected LGD and a 50% increase in the RV haircut.
Scenario 8: A 50% increase in the expected default and expected LGD and a 50% increase in the RV haircut.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:

-- Class A Notes: AAA (sf), AA (high) (sf), AAA (sf), AA (high) (sf), AA (sf), AA (sf), AA (low) (sf), A (high) (sf).

For further information on DBRS Morningstar 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: Alexander Garrod, Senior Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 8 November 2019

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960

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 Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Interest Rate Stresses for European Structured Finance Transactions

A description of how DBRS Morningstar 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 [email protected].

This press release was modified on 22 November 2019 to correct that DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.