DBRS Morningstar Assigns Rating to Silver Arrow UK 2020-2

DBRS Ratings Limited (DBRS Morningstar) assigned a AAA (sf) rating to the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-2 (the Issuer). The Issuer is a public limited company incorporated under the laws of Luxembourg and governed by Luxembourg securitisation law, acting as a special-purpose entity specifically for the purpose of this transaction.

DBRS Morningstar does not rate the Class B Notes 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 maturity.

The Class A Notes are collateralised by a static portfolio of approximately GBP 676 million receivables related to personal contract purchase (PCP) and hire purchase (HP) auto loan contracts granted by Mercedes-Benz Financial Services UK Limited (MBFS, or the Seller) to borrowers in England, Wales, Scotland, and Northern Ireland.

MBFS is a wholly owned indirect subsidiary of Daimler AG. The underlying motor vehicles related to the finance contracts consist of both new and used passenger and light-commercial vehicles. MBFS services the receivables.

The underlying receivables consist of both HP agreements and PCP agreements with guaranteed future values (GFV). The GFV affords the borrower an 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 residual value (RV) risk.

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 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;
-- MBFS’s capabilities with regard to originations, underwriting, and servicing and its financial strength;
-- 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 United Kingdom, 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 benefits from a single waterfall that outlines the allocation of the available distribution amount including collections representing interest, principal, and recoveries. The Notes amortise sequentially subject to a note-specific target principal redemption amount that permits available excess spread to be used.

A nonamortising general reserve account equal to 0.8% of the portfolio balance at the cutoff date 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 daily compounded Sterling Overnight Index Average (Sonia). Interest rate risk for the Class A Notes is mitigated through an interest rate swap provided by DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank AG).

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

COUNTERPARTIES
Elavon Financial Services DAC (Elavon) has been appointed to act as account bank for the transaction. Based on DBRS Morningstar’s private rating of Elavon and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the rating assigned, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DZ Bank AG has been appointed as a swap counterparty. The DBRS Morningstar Long-Term Issuer Rating on DZ Bank AG is at AA (low) with a Stable trend. The transaction documents contain downgrade provisions relating to the swap counterparty that are consistent with DBRS Morningstar’s "Derivative Criteria for European Structured Finance Transactions" methodology.

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 continue to 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 last 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 British pound sterling 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.

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 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 the Seller and the arranger, Santander Corporate and Investment Banking.

DBRS Morningstar received the following data and information:
--Static quarterly cumulative gross loss and recovery data from Q1 2013 and up to Q3 2020, split by new/used vehicles and by product type for credit defaults and voluntary terminations;
--Dynamic monthly delinquency and prepayment data at a portfolio level from January 2013 to August 2020;
--Loan-level characteristics and stratification data as at 31 October 2020;
--Aggregated annual PCP RV realisation data from 2015 to mid-2020 outlining volumes and sales results; and
--The portfolio amortisation profile related to the selected pool.

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 does not audit or independently verify the data or information it receives in connection with the rating process.

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly issued financial instrument. This is the first DBRS Morningstar rating on this financial instrument.

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 as compared to the parameters used to determine the rating:
-- Expected default (credit defaults and voluntary terminations): 7.0%
-- Expected recovery rate: 80%
-- Loss given default (LGD): 51.5% for the AAA (sf) scenario.
-- RV loss at maturity: 44.8%. 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 (sf)
Scenario 2: 50% increase in RV haircut, expected rating of AA (low) (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 (low) (sf)
Scenario 6: 25% increase in both PD and LGD and 50% increase in RV haircut, expected rating of A (high) (sf)
Scenario 7: 50% increase in both PD and LGD and 25% increase in RV haircut, expected rating of AA (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: 20 November 2020

DBRS Ratings Limited
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Tel. +44 (0) 20 7855 6600

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.
-- Rating European Structured Finance Transactions Methodology (21 July 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/364305/rating-european-structured-finance-transactions-methodology.
-- Operational Risk Assessment for European Structured Finance Originators (30 September 2020), https://www.dbrsmorningstar.com/research/367603/operational-risk-assessment-for-european-structured-finance-originators.
-- Operational Risk Assessment for European Structured Finance Servicers (19 November 2020), https://www.dbrsmorningstar.com/research/370270/operational-risk-assessment-for-european-structured-finance-servicers.
--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].