DBRS Morningstar Confirms Rating of Bavarian Sky UK 1 plc

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

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

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

-- Portfolio performance, in terms of delinquencies, defaults and losses, as of October 2019;
-- Probability of default (PD), loss given default (LGD) and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level.

The Issuer is a securitisation of receivables related to personal contract purchase (PCP) auto loan contracts granted by BMW Financial Services (GB) Limited (BMW FS) to individual borrowers in England, Wales and Scotland. The transaction closed in November 2017 and included a 12-month revolving period that ended in November 2018. The Class A Notes have been amortising since 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 October 2019 payment date, one- to two-month and two- to three-month delinquencies both represented 0.2% of the outstanding portfolio balance. Loans more than three months delinquent also represented 0.2% of the outstanding portfolio balance. The Cumulative Net Loss Ratio, which considers credit defaults, VTs, PCP returns and ancillary costs, amounted to 1.6% of the aggregate initial and subsequent portfolios balance.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar updated its base case PD assumption (combined defaults and VTs) to 14.0% and maintained its base case LGD assumption at 26.2%, while the RV haircut rate was kept constant at 37.2% at the AAA (sf) rating level. The increased PD is driven by the high level of VTs observed to date, totalling GBP 60.9 million since closing (7.9% of the aggregate initial portfolios balance) as of the October 2019 payment date.

CREDIT ENHANCEMENT
Credit enhancement is provided by subordination of the junior notes. As of the October 2019 payment date, credit enhancement to the Class A Notes was 51.1%, up from 26.0% at the DBRS Morningstar initial rating, following the end of the revolving period in November 2018 and the start of amortisation.

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, UK Branch (Elavon UK) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of Elavon UK, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar 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 Morningstar'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 Morningstar's public rating of SMBC at A (high) is consistent with the First Rating Threshold as defined in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

The transaction 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 the “Master European Structured Finance Surveillance Methodology”. DBRS Morningstar 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 “Global Methodology for Rating Sovereign Governments” at: https://www.dbrs.com/research/350410/global-methodology-for-rating-sovereign-governments.

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 FS.

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

At the time of the initial rating, 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 purpose 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.

The last rating action on this transaction took place on 20 November 2018, when DBRS Morningstar confirmed the rating of the Class A Notes at AAA (sf).

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

Information regarding DBRS Morningstar 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 Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar 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 14.0% and 26.2%, 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 assumption. For example, if the RV loss increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. If the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to AA (sf), ceteris paribus. 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 AA (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of AAA (sf)
-- 50% increase in PD and LGD, expected rating of AA (sf)
-- 25% increase in RV Loss, expected rating of AAA (sf)
-- 50% increase in RV Loss, expected rating of AAA (sf)
-- 25% increase in PD and LGD and 25% increase in RV Loss, expected rating of AA (high) (sf)
-- 25% increase in PD and LGD and 50% increase in RV Loss, expected rating of AA (high) (sf)
-- 50% increase in PD and LGD and 25% increase in RV Loss, expected rating of AA (sf)
-- 50% increase in PD and LGD and 50% increase in RV Loss, expected rating of AA (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: Clare Wootton, Senior Financial Analyst
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

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].