DBRS Morningstar Confirms Ratings on Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK five

DBRS Ratings Limited (DBRS Morningstar) confirmed its ratings on the notes issued by Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK five (the Issuer), as follows:

-- Class A Notes at AA (high) (sf)
-- Class B Notes at A (sf)

The ratings on the notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in July 2025.

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;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels.

The Issuer is a securitisation of auto loan receivables granted by Volkswagen Financial Services (UK) Limited (VWFS) to retail and commercial customers residing in Great Britain. The transaction includes both hire purchase (HP) loans (2.4% of the current pool balance) and personal contract purchase (PCP) agreements (97.6%), secured by new (80.5%) and used (19.5%) vehicles, as of the February 2020 payment date.

Under HP contracts, the outstanding balance typically amortises in equal monthly instalments, and at the end of the agreement, vehicle ownership is transferred to the obligor after the payment of an additional fee. In the case of PCP agreements, equal monthly instalments are followed by an option to either take ownership of the vehicle by making the final balloon payment or returning the vehicle; this feature exposes the transaction to residual value (RV) risk.

DBRS Morningstar observes that, given the seasoning of the transaction, the majority of the outstanding balance reflects RVs associated with PCP contract maturities concentrated towards the end of 2020.

Due to the pro rata repayment structure that extends principal repayments in amortisation to the subordinate loan, the notes are not protected by additional credit enhancement built up during the preceding phase of amortisation, and thus customer behaviour, performance of the used vehicle market, and manufacturers support to sales (typically provided through dealers) are crucially entangled with cash flows expected at maturity.

DBRS Morningstar deems the additional risk to be mitigated by the likelihood of support provided by the manufacturer and the sector; however, in light of the current economic uncertainty, decreased consumer demand and the possibility of a short-term suspension of some businesses that might extend to the automotive sector, the significant and concentrated exposure to RVs around the final quarter of 2020 could negatively affect the ratings.

DBRS Morningstar will continue to monitor the transaction in accordance with its existing methodologies.

PORTFOLIO PERFORMANCE
As of the March 2020 payment date, 31- to 60-day delinquencies and 61- to 90-day delinquencies represented 0.5% and 0.2% of the portfolio discounted balance, respectively, while delinquencies greater than 90 days were 0.1%. The cumulative net loss ratio was 1.5%.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar maintained its expected gross loss assumption at 8.2% (including hostile and voluntary terminations, HTs and VTs) and its expected recovery rate at 68.0%.

CREDIT ENHANCEMENT
The transaction has a sequential/pro rata amortisation structure whereby collections from the receivables initially paid down the Class A Notes until Class A overcollateralisation (OC) reached its target level of 30.0%, followed by the Class B Notes until the Class B OC reached its target level of 22.4%. Since then, and as of the March 2020 payment date, the notes have been repaid on a pro rata basis. Should the Credit Enhancement Increase Condition be breached, the structure will revert to sequential amortisation.

The transaction structure includes a cash collateral account with two separate ledgers:
-- The general cash collateral account is available to cover senior expenses, interest payments on the notes and, as soon as the portfolio balance is reduced to zero or on the relevant final maturity date, to repay principal on the notes. This account was funded at closing with GBP 5.3 million and is currently at its floor level of GBP 4.4 million.
-- The interest compensation ledger is available to compensate the Issuer for interest shortfalls suffered as a result of early settlements. The ledger currently has a balance of GBP 3.0 million.

Citibank N.A., London branch acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of Citibank N.A., London branch, 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 notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Credit Agricole Corporate and Investment Bank (CA-CIB) acts as the swap counterparty for the transaction. DBRS Morningstar's private rating of CA-CIB is above the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar used Intex DealMaker to analyse the transaction structure.

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 pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (December 2019). 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 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” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include monthly investor reports provided by VWFS and loan-level data provided by the European DataWarehouse GmbH.

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 26 March 2019, when DBRS Morningstar downgraded the ratings on the Class A Notes and Class B Notes to AA (high) (sf) and A (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Natalia Coman.

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

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- Probability of Default (PD): base case of 8.2%, with a 25% and 50% increase on the base case PD.
-- Loss Given Default (LGD): base case of 32.0%, whereas 40.3% and 45.6% LGD were used at the A (sf) and AA (high) (sf) rating levels, respectively. Each scenario with a 25% and 50% increase in the LGD.
-- RV Loss: 35.5% and 28.2% at the AA (high) (sf) and A (sf) rating levels, respectively. Each scenario with a 25% and 50% increase in the RV Loss.

Class A Notes Risk Sensitivity:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to A (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 50% and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class A Notes to BBB (low) (sf).

Class B Notes Risk Sensitivity:
-- A hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (high) (sf).
-- A hypothetical increase of the PD and LGD rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BBB (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD rates by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (high) (sf).
-- A hypothetical increase of the RV Loss Rate by 25%, and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (sf).
-- A hypothetical increase of the RV Loss Rate by 50%, and a hypothetical increase of the PD and LGD Rates by 25%, ceteris paribus, would lead to a downgrade of the Class B Notes to BB (low) (sf).
-- A hypothetical increase of the RV Loss Rate by 50% and a hypothetical increase of the PD and LGD Rates by 50%, ceteris paribus, would lead to a downgrade of the Class B Notes to B (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 U.S. regulations only.

Lead Analyst: Natalia Coman, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 22 February 2017

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.

-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Master European Structured Finance Surveillance Methodology (13 December 2019), https://www.dbrsmorningstar.com/research/354616/master-european-structured-finance-surveillance-methodology
-- Operational Risk Assessment for European Structured Finance Servicers (24 September 2019), https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- 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
-- 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
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019), https://www.dbrsmorningstar.com/research/350908/dbrs-publishes-updated-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.dbrsmorningstar.com/research/278375.

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