DBRS Morningstar Assigns AAA (sf) Ratings to Auto ABS UK Loans plc, Discontinues Ratings on Two Repaid Notes

DBRS Ratings Limited (DBRS Morningstar) assigned AAA (sf) ratings to the Class A2a Notes and Class A3a Notes (collectively, the Rated Notes) issued by Auto ABS UK Loans plc (the Issuer).

DBRS Morningstar discontinued its AAA (sf) ratings on the Class A3b Notes and Class A4a Notes as a result of full repayment of the notes on the closing date.

DBRS Morningstar did not assign ratings to the Class A1b Notes or the subordinated notes issued in this transaction.

The rating actions reflect the restructuring of the existing transaction at the closing date, whereby the Class A1b Notes, the Class A3b Notes, and the Class A4a Notes were redeemed and new Class A1b Notes, Class A2a Notes and Class A3a Notes (collectively, the Senior Notes) were issued.

The Senior Notes are backed by a portfolio of approximately GBP 1,146 million receivables related to conditional sale and personal contract purchase (PCP) auto loan contracts granted by PSA Finance UK Limited (PSAF or the Seller) to borrowers in the United Kingdom of Great Britain and Northern Ireland. The underlying finance contracts relate to new and used passenger and light-commercial vehicles. PSAF also services the receivables.

NOTEABLE FEATURES
-- The transaction includes a revolving period of 24 months; during this time there are portfolio limits that restrict certain concentrations from exceeding specific thresholds.
-- The Rated Notes are indexed to the daily compounded Sterling Overnight Index Average (Sonia). Interest rate risk is mitigated through interest rate swaps provided by Lloyds Bank Corporate Markets plc and Wells Fargo Securities Limited.
-- Prior to an early amortisation event, the structure incorporates separate interest and principal waterfalls that facilitate the distribution of the available interest and available principal amounts. Following an early amortisation event, a single waterfall is adhered to that allows for sequential principal repayment of the Senior Notes and the subordinated notes.
-- Certain loan receivables related to PCP contracts include a guaranteed future value component (GFV or a final, optional balloon payment). The GFV affords the borrower an option to return the purchased vehicle at contract in lieu of settling in full or refinancing the final, optional balloon payment. As a result of the embedded option to return the vehicle to the seller, the transaction is exposed to residual value risk.
-- All underlying contracts are fixed rate. The pool contains both subsidised and nonsubsidised contracts. Where the manufacturer or dealer subsidises the customer interest rate, upon purchase of the receivable, the subsidy amount is deposited with the Issuer and is then released periodically (in line with the monthly instalments) into the general collection account.
-- Receivables are transferred to the Issuer at their principal balance outstanding amount. Portfolio limits are in place that ensure the weighted-average effective interest rate of the purchased receivables is at least 7.4%.
-- The margins paid on the Senior Notes during the revolving and amortisation periods is 0.7%. The transaction documents foresee the application of a step-up margin of 1.0% during the accelerated amortisation or post-enforcement periods.

TRANSACTION STRENGTHS
-- The transaction documents foresee the inclusion of certain portfolio limits that prevent adverse changes to the portfolio during the revolving period. Examples include restrictions on residual value (RV) exposure and timings, used vehicle concentration, length of weighted-average remaining term, and minimum portfolio interest rate.
-- The breach of certain asset performance triggers lead to an early amortisation event. These triggers are linked to, inter alia, delinquency and default ratios, voluntary termination and PCP handback rates, volumes of payment waivers, and minimum excess spread levels.
-- DBRS Morningstar considers the initial portfolio to be granular; the average outstanding balance is approximately GBP 8,300. The receivables have a diversified geographic distribution across the United Kingdom.
-- The portfolio is well seasoned with a weighted-average remaining term of approximately 30 months and a maximum contract term of 59 months.
-- The structure benefits from a general reserve, which, during the revolving period, is sized at 1.7% of the outstanding Senior Notes. Following an early amortisation event, amounts are dynamically released and made available as funds to the accelerated amortisation priority of payments (single waterfall). Following an early amortisation event, the general reserve is dynamically sized at 1.2% of the Senior Notes balance (with a floor of 0.3% of the initial Senior Notes balances) and therefore provides ongoing liquidity support to the structure.
-- Resulting from a foreseen minimum effective weighted-average interest rate of 7.4%, excess spread is potentially available to the transaction; during the revolving period and amortisation period, this is returned to the seller. Following an early amortisation event, excess spread is made available to the Issuer until all interest, principal, and fees have been repaid.
-- DBRS Morningstar considers commingling risk to be limited because of the frequency of the transfer of the collections. The availability of a commingling reserve upon breach of certain triggers, and a declaration of trust over the collection account in favour of the Issuer further mitigate this risk..

TRANSACTION CHALLENGES AND MITIGATING FACTORS
-- The Issuer is exposed to RV risk because of the inclusion of PCP receivables.
Mitigants: DBRS Morningstar, in accordance with the respective methodology, has assumed a RV decline and a conservative turn-in rate that recognise recent trends in vehicle realisation proceeds at contract maturity. DBRS Morningstar’s cash flow assumptions have considered a migration of the portfolio to the maximum PCP and balloon payment thresholds permissible under the transaction’s portfolio limits. The transaction documents foresee a dynamic increase to the general reserve linked to a deterioration of PSAF’s GFVs set when compared with the market value forecast as provided by the CAP Gold Book.
-- Receivables are subject to potential voluntary termination (VT) pursuant to section 99 of the UK Consumer Credit Act. DBRS Morningstar considers VT as the primary gross loss driver, in line with comparable UK auto transactions.
Mitigants: DBRS Morningstar received static vintage VT data and has considered PSAF’s historical performance in arriving at its assumptions.
-- The credit performance of the portfolio may be negatively affected by the Coronavirus Disease (COVID-19) pandemic.
Mitigants: DBRS Morningstar notes the portfolio is granular and consists entirely of private borrowers. DBRS Morningstar's current macroeconomic assessment of unemployment in in the United Kingdom assumes an increase in unemployment to 6.5% in 2021,which is marginally higher than the average observed during the historical reporting period used to derive default and recovery assumptions.

DBRS Morningstar based its ratings 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, excess spread and the availability of the general reserve. Credit enhancement levels are sufficient to support DBRS Morningstar-projected expected cumulative net losses and RV losses under various stress scenarios;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the ratings assigned to the Rated Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date;
-- PSAF’s capabilities with regard to originations, underwriting, 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 the United Kingdom of Great Britain and Northern Ireland 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
All underlying contracts are fixed rate, while floating rate notes have been issued. The Senior Notes are indexed to daily compounded SONIA. Interest rate risk for the Rated Notes is mitigated through interest rate swaps provided by Lloyds Bank Corporate Markets plc and Wells Fargo Securities Limited.

An amortising general reserve equal to GBP 15.6 million provides liquidity support and credit enhancement to the senior notes.

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

COUNTERPARTIES
The Issuer bank account is held at Santander UK plc. DBRS Morningstar privately rates Santander UK plc 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.

Lloyds Bank Corporate Markets plc and Wells Fargo Securities Limited are the swap counterparties for the transaction. DBRS Morningstar privately rates the swap counterparties. 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 continue to increase in the coming months for many asset-backed securities (ABS) transactions, some meaningfully. The ratings are 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 stresses to its expected recovery rates.

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.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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.

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 ratings 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. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 these ratings include PSAF and Banco Santander S.A.

DBRS Morningstar received the following data and information:
-- Static quarterly cumulative gross loss data from Q1 2008 and up to Q2 2020, split by product type and the inclusion and exclusion of voluntary terminations;
-- Static quarterly recovery data from Q1 2008 and up to Q2 2020, split by product type the inclusion and exclusion of voluntary terminations;
-- Origination and outstanding balances from Q1 2006 and up to Q2 2020, split by product type;
-- Monthly dynamic delinquencies and prepayments from January 2008 to June 2020, split by product type;
-- Loan-level data, the corresponding stratification tables, and portfolio amortisation profile as at 12 August 2020;
-- Portfolio stratification tables as at 29 September 2020;
-- PCP realisation data from January 2017 to June 2020, split into individual units and further split into brands; and
-- Monthly PCP turn-in data from January 2008 to June 2020, by units, split into termination reason and PCP new and used.

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.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on these financial instruments.

The last rating action on this transaction took place on 18 December 2019, when DBRS Morningstar confirmed its AAA (sf) ratings on the Class A3b Notes and Class A4a Notes.

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 for a worst case pool composition, as compared to the parameters used to determine the ratings:

-- Expected default: 3.7%
-- Expected recovery rate: 68%
-- Loss given default (LGD): 58% for the AAA (sf) scenario.
-- RV loss at maturity: 44.8% for the AAA (sf) scenario.

Scenario 1: 25% increase in RV haircut
Scenario 2: 50% increase in RV haircut
Scenario 3: 25% increase in both Expected Default and LGD
Scenario 4: 50% increase in both Expected Default and LGD
Scenario 5: 25% increase in both Expected Default and LGD and 25% increase in RV haircut
Scenario 6: 25% increase in both Expected Default and LGD and 50% increase in RV haircut
Scenario 7: 50% increase in both Expected Default and LGD and 25% increase in RV haircut
Scenario 8: 50% increase in both Expected Default and LGD and 50% increase in RV haircut

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Rated Notes: AA (sf), AA (low) (sf), AA (sf), AA (low) (sf), AA (low) (sf), A (high) (sf), A (high) (sf), 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: David Lautier, Senior Vice President
Initial Rating Date: 29 April 2016

DBRS Ratings Limited
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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 (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-finance-transactions
-- Rating European Structured Finance Transactions Methodology (21 July 2020)
https://www.dbrsmorningstar.com/research/364305/rating-european-structured-finance-transactions-methodology
-- 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
-- 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
-- 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
-- Derivative Criteria for European Structured Finance Transactions (24 September 2020)
https://www.dbrsmorningstar.com/research/367092/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].