DBRS Morningstar Finalises Provisional Ratings on E-CARAT 11 plc

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by E-CARAT 11 plc (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (sf)
-- Class C Notes at A (sf)
-- Class D Notes at BBB (high) (sf)
-- Class E Notes at BB (high) (sf)
-- Class F Notes at BB (sf)
-- Class G Notes at B (low) (sf)

DBRS Morningstar does not rate the Class H Notes issued in this transaction.

The rating of the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal maturity date. The ratings on the Class B, Class C, Class D, Class E, Class F, and Class G Notes address the ultimate payment of interest and ultimate repayment of principal by the legal maturity date while junior to other outstanding classes of notes, but the timely payment of interest when they are the senior-most tranche.

The ratings are based on 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 defaults, recoveries, and residual value (RV) 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 of Vauxhall Finance plc (Vauxhall Finance), 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 notes are backed by a portfolio of approximately GBP 500 million of fixed-rate receivables related to auto loan contracts granted by Vauxhall Finance to borrowers in England, Wales, Scotland, and Northern Ireland. The underlying motor vehicles related to the finance contracts consist of both new and used passenger vehicles and light commercial vehicles. Vauxhall Finance services the receivables.

The underlying receivables consist of both conditional sale and personal contract purchase (PCP) auto loan agreements with guaranteed future values (GFV). The GFV affords the borrower the option to hand back the underlying vehicle at contract maturity as an alternative to repaying or refinancing the final balloon payment; this feature directly exposes the Issuer to RV risk.

The transaction includes a one-year revolving period during which time the originator may offer additional receivables that the Issuer will purchase provided that 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 a breach of performance triggers, an insolvency of the seller, or default of the servicer.

TRANSACTION STRUCTURE
The transaction allocates payments through separate interest and principal priorities of payment and incorporates an amortising liquidity reserve funded by Vauxhall Finance through a subordinated loan. The liquidity reserve is available to the Issuer only in a restricted scenario where the principal collections are not sufficient to cover the shortfalls in senior costs (servicer fees and operating expenses), swap payments, and Class A interest and, if not deferred, Class B, Class C, and Class D interest payments. During the revolving period and the normal redemption period, all amounts in excess of the target amount will be returned directly to the subordinated lender and will not become available to the transaction. The target amount of the liquidity reserve after the Class D Notes have been redeemed is zero.

Following the revolving period, if no sequential redemption event has occurred, principal funds are allocated on a pro rata basis to all notes. A sequential redemption event considers net loss performance, the debit balance of the principal deficiency ledger, and whether the clean-up call option has been exercised. Following a sequential redemption event, the principal redemption of the notes becomes fully sequential and non-reversible.

The Class A, Class B, Class C, Class D, Class E, Class F, and Class G Notes pay interest indexed to the compounded daily 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 a swap agreement with BNP Paribas SA (BNP Paribas; rated AA (low) with a Stable trend by DBRS Morningstar).

COUNTERPARTIES
HSBC Bank plc (HSBC) has been appointed as the Issuer’s account bank for the transaction. Based on the DBRS Morningstar private rating of HSBC, the downgrade provisions outlined in the transaction documents, and structural mitigants, DBRS Morningstar considers the risk arising from the exposure to HSBC to be consistent with the rating assigned to the rated notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

BNP Paribas acts as the swap counterparty for the transaction. DBRS Morningstar's Long-Term Senior Debt Rating of AA (low) and Long Term Critical Obligations Rating of AA (high) for BNP Paribas is consistent with the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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

The principal methodology applicable to the ratings is “Rating European Consumer and Commercial Asset-Backed Securitisations” (13 January 2020).

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.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at http://www.dbrsmorningstar.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.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include performance data relating to the receivables provided by the seller directly or through the arranger, BNP Paribas.

DBRS Morningstar received static monthly cumulative loss data from January 2010 up to August 2019 that split credit defaults from voluntary terminations; origination balances from January 2010 to August 2019; monthly recovery experience from credit losses, voluntary terminations, and PCP handbacks from January 2017 to August 2019; and prepayment frequency data on a monthly basis from January 2010 up to August 2019.

The data that DBRS Morningstar received was consistently split by product type (conditional sale and PCP) and new/used vehicles. Stratification and pool information was also provided as at the end of December 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 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 ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

PORTFOLIO ASSUMPTIONS
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 ratings.

-- Expected default (credit defaults and voluntary terminations) of 5.9%.
-- Expected recovery rate of 78%.
-- Loss given default (LGD): 53%, 48%, 42%, 38%, 31%, and 25%, respectively, for AAA (sf), AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) scenarios.
-- RV loss at maturity of 43%, 36%, 28%, 22%, 15%, and 8%, respectively, for AAA (sf), AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) scenarios.

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

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are, respectively, as follows:

-- Class A Notes: AA (sf), AA (low) (sf), AA (high) (sf), AA (sf), A (high) (sf), AA (high) (sf), AA (low) (sf), A (high) (sf)
-- Class B Notes: A (high) (sf), A (sf), AA (low) (sf), A (high) (sf), A (low)) (sf), A (high) (sf), A (sf), BBB (high) (sf)
-- Class C Notes: A (low) (sf), BBB (high) (sf), A (sf), BBB (high) (sf), BBB (sf), A (low) (sf), BBB (sf), BBB (low) (sf)
-- Class D Notes: BBB (sf), BB (high) (sf), BBB (sf), BBB (low) (sf), BB (high) (sf), BBB (low) (sf), BB (high) (sf), BB (sf)
-- Class E Notes: BB (high) (sf), BB (sf), BB (high) (sf), BB (sf), BB (low) (sf), BB (sf), BB (sf), BB (low) (sf)
-- Class F Notes: BB (sf), B (high) (sf), B (low) (sf), BB (low) (sf), B (high) (sf), B (low) (sf), B (high) (sf), B (high) (sf)
-- Class G Notes: Below B (low) (sf), B (low) (sf), B (low) (sf), Below B (low) (sf), B (low) (sf), Below B (low) (sf), Below B (low) (sf), B (low) (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 U.S. regulations only.

Lead Analyst: Alexander Garrod, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 24 February 2020

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
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.dbrsmorningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset-Backed Securitisations, (13 January 2020)
https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology, (28 February 2020)
https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019),
https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions.
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020), https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers.
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019),
https://www.dbrsmorningstar.com/research/351557/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.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].