DBRS Morningstar Finalises Provisional Rating of Silver Arrow France 2020-1

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional rating of AAA (sf) on the Class A Notes issued by Silver Arrow France 2020-1 (the Issuer), a French Fonds Commun de Titrisation (FCT).

DBRS Morningstar did not assign ratings to the Class B notes or the residual units issued in this transaction.

The rating on the Class A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date.

The Class A Notes are collateralised by loan and lease receivables, including the residual value (RV) component for the leases. The receivables relate to auto loan and lease agreements (contrats de location avec option d'achat and credit bail) granted by Mercedes-Benz Financial Services France SA (MBFSF or the seller) to private individuals and small business borrowers or lessees resident or incorporated in the Republic of France.

MBFSF is a wholly owned subsidiary of Mercedes-Benz France SAS, which in turn is a wholly owned subsidiary of the Daimler AG. A pledge without dispossession (gage sans dépossession) over the leased vehicles has been granted by the seller in favour of the Issuer to guarantee any and all present and future obligations of the seller under the seller performance undertakings. The management company will be entitled to enforce the pledge upon the occurrence of any default in respect of any seller performance undertaking. The Issuer is managed by Eurotitrisation and the receivables are serviced by MBFSF (the servicer).

The transaction is static and the notes will begin to amortise on the first interest payment date.

DBRS Morningstar based its rating on a review of the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, reserve funds, and excess spread;
-- Credit-enhancement levels are sufficient to support DBRS Morningstar’s projected cumulative net loss and RV loss assumptions under various stressed cash flow assumptions for the Class A Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- MBFSF’s capabilities with regard to originations, underwriting, and servicing as well as the availability of a named backup servicer at closing;
-- The transaction parties’ financial strength with regard to their respective roles;
-- The credit quality of the collateral and historical and projected performance of the Seller’s portfolio;
-- The sovereign rating of the Republic of France, currently at AA (high) with a Stable trend; and
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction incorporates a single waterfall that facilitates the distribution of the available distribution amount. The notes amortise sequentially subject to a note-specific target principal redemption amount.

A nonamortising general reserve, equal to 0.5% of the initial Class A and Class B Notes balance, is available to the structure. The general reserve provides liquidity to the Class A notes while also ultimately providing credit enhancement to the notes. It is available to repay principal on the notes when the outstanding principal balance of the portfolio reaches zero.

All underlying contracts are fixed rate while floating-rate notes have been issued. The Class A Notes are indexed to one-month Euribor. Interest rate risk for the Class A Notes is mitigated through an interest rate swap provided by Skandinaviska Enskilda Banken AB (publ).

DBRS Morningstar analysed the transaction cash flow structure in Intex DealMaker.

COUNTERPARTIES
The Issuer bank account is held at BNP Paribas Securities Services (BP2S). DBRS Morningstar privately rates BP2S and concluded that it meets the minimum criteria to act in its capacity as the account bank. The transaction contains downgrade provisions relating to the account bank consistent with DBRS Morningstar criteria.

Skandinaviska Enskilda Banken AB (publ) is the swap counterparty for the transaction. The DBRS Morningstar public Long-Term Issuer Rating of Skandinaviska Enskilda Banken AB (publ) is at A (high) with a Stable trend. The hedging documents contain downgrade provisions consistent with DBRS Morningstar criteria.

CORONAVIRUS CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may increase in the coming months for many asset-backed security (ABS) transactions, some meaningfully. The rating is based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar applied a haircut to its expected recovery rate and applied additional stresses to expected default rates associated with commercial customers.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were updated on 10 September 2020. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/366543/dbrs-morningstar-global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

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.

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360734.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating is “Rating European Consumer and Commercial Asset-Backed Securitisations” (3 September 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.
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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include Daimler AG, Mercedes-Benz Financial Services France SA and their agent Société Générale S.A.

DBRS Morningstar received the following data and information:
-- Static quarterly cumulative gross loss data from Q1 2015 to Q2 2020 further split into credit/lease, new/used, retail private credit and lease, retail small business credit and lease subsets;
-- Static quarterly recovery data from Q1 2015 to Q2 2020 further split into credit/lease, new/used, retail private credit and lease, retail small business credit and lease subsets;
-- Dynamic monthly prepayment data from January 2015 to June 2020;
-- Dynamic delinquency data from January 2015 to September 2020;
-- Dynamic portfolio balances from January 2015 to June 2020;
-- Dynamic originations from January 2015 to June 2020;
-- Pool stratification tables as at 30 September 2020;
-- The portfolio amortisation profile related to the selected pool;
-- Annual RV realisation data from 2015 to 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.

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.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios compared to the parameters used to determine the rating:

-- Expected default: 6.1%.
-- Expected recovery rate: 54.9%.
-- Loss given default (LGD): 61.6% for the AAA (sf) scenario.
-- RV Loss at maturity: 34% for the AAA (sf) scenario.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes:

Scenario 1: 25% increase in RV haircut, expected rating of AA (high) (sf)
Scenario 2: 50% increase in RV haircut, expected rating of AA (sf)
Scenario 3: 25% increase in both PD and LGD, expected rating of AA (sf)
Scenario 4: 50% increase in both PD and LGD, expected rating of AA (low) (sf)
Scenario 5: 25% increase in both PD and LGD and 25% increase in RV haircut, expected rating of AA (sf)
Scenario 6: 25% increase in both PD and LGD and 50% increase in RV haircut, expected rating of AA (low) (sf)
Scenario 7: 50% increase in both PD and LGD and 25% increase in RV haircut, expected rating of A (high) (sf)
Scenario 8: 50% increase in both PD and LGD and 50% increase in RV haircut, expected rating of A (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: Miklos Halasz, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 15 October 2020

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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 (3 September 2020), https://www.dbrsmorningstar.com/research/366294/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Legal Criteria for European Structured Finance Transactions (11 September 2019) https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-financetransactions.
-- Rating European Structured Finance Transactions Methodology (21 July 2020) https://www.dbrsmorningstar.com/research/357428/rating-european-structured-financetransactions-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020) https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-europeanstructured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020) https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-europeanstructured-finance-originators.
--Derivative Criteria for European Structured Finance Transactions (24 September 2020) https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structuredfinance-transactions.
-- Interest Rate Stresses for European Structured Finance Transactions (28 September 2020) https://www.dbrsmorningstar.com/research/367292/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].