DBRS Morningstar Confirms Ratings of Auto ABS UK Loans plc

DBRS Ratings Limited (DBRS Morningstar) confirmed its AAA (sf) ratings of the Class A3b and Class A4a Notes (the senior notes) issued by Auto ABS UK Loans plc (the Issuer). The ratings of the senior notes address the timely payment of interest and ultimate repayment of principal by the legal final maturity date.

The confirmations follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of November 2019.
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the receivables.
-- Current available credit enhancement to the senior notes to cover the expected losses at the AAA (sf) rating level.
-- No revolving termination events have occurred.

The Issuer is a securitisation of personal contract purchase (PCP) and Conditional Sale (CS) auto loan contracts granted by PSA Finance UK Limited (PSA Finance) to borrowers in England, Scotland, Wales, and Northern Ireland. The transaction is currently in its revolving period, which is scheduled to terminate in November 2020.

PORTFOLIO PERFORMANCE
As of November 2019, two- to three-month arrears represented 0.2% of the outstanding portfolio balance, up from 0.1% in November 2018. Loans more than three months in arrears represented 0.0%, down from 0.1% in November 2018. Cumulative defaults were 0.4% and cumulative voluntary terminations were 2.0%.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar conducted an analysis of the receivables and updated its base case assumptions based on updated historical performance data available from the originator. DBRS Morningstar updated its base case PD and LGD assumptions to 3.9% and 26.8%, respectively. Given that the transaction is still in its revolving period, the assumptions continue to be based on the worst-case pool composition. A Residual Value (RV) haircut of 45.1% was assumed at the AAA (sf) rating level.

CREDIT ENHANCEMENT
As of the November 2019 payment date, credit enhancement to the senior notes was 20.2%, stable since the 2018 restructure date due to the revolving period. Credit enhancement consists of subordination of the junior notes.

The transaction benefits from a reserve fund, which is currently funded to its target level of GBP 15.6 million. The reserve fund covers senior fees and interest shortfall on the senior notes.

Santander UK Plc (Santander) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of Santander, 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 ratings assigned to the senior notes, as described in DBRS Morningstar's Legal Criteria for European Structured Finance Transactions methodology.

Banco Santander, S.A. (Banco Santander), HSBC France S.A. (HSBC), and Wells Fargo Securities International Limited (Wells Fargo) act as the swap counterparties for the transaction. DBRS Morningstar's Long-Term Critical Obligations Rating of Banco Santander at AA (low), and private ratings of HSBC and Wells Fargo, are above the First Rating Threshold as described in DBRS Morningstar's Derivative Criteria for European Structured Finance Transactions methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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 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 continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 these ratings include investor reports provided by BNP Paribas Securities Services SCA/London and performance data provided by PSA Finance UK Limited.

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 purposes of providing these ratings 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 18 December 2018 where DBRS Morningstar assigned a rating of AAA (sf) to the Class A4a Notes and confirmed its rating of the Class A3b 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 assets, as well as an RV haircut. 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 3.9% and 26.8%, respectively.
-- The RV haircut applied at the AAA (sf) rating level is 45.1%.

Senior Notes Risk Sensitivity:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would result in a downgrade of the Senior Notes to AA (high) (sf).
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would result in a downgrade of the Senior Notes to AA (low).
-- A hypothetical increase of the RV loss by 25%, ceteris paribus, would result in a downgrade of the Senior Notes to AA (high) (sf).
-- A hypothetical increase of the RV loss by 50%, ceteris paribus, would result in a downgrade of the Senior Notes to AA (sf).
-- A hypothetical increase of the RV loss by 25%, and a hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would result in a downgrade of the Senior Notes to AA (sf).
-- A hypothetical increase of the RV loss by 25%, and a hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would result in a downgrade of the Senior Notes to A (high) (sf).
-- A hypothetical increase of the RV loss by 50%, and a hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would result in a downgrade of the Senior Notes to A (sf).
-- A hypothetical increase of the RV loss by 50% and a hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would result in a downgrade of the Senior Notes to A (low).

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: 29 April 2016

DBRS Ratings Limited
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Registered and incorporated under the laws of England and Wales: Company No. 7139960.

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
-- Operational Risk Assessment for European Structured Finance Originators

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].