DBRS Morningstar Confirms Rating on Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-1

DBRS Ratings Limited (DBRS Morningstar) confirmed its AAA (sf) rating on the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-1 (the Issuer).

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

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the March 2021 payment date.
-- Probability of default (PD), loss given default (LGD), and residual value (RV) haircut assumptions on the remaining receivables.
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level.
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The Issuer is a securitisation of auto loan contracts, granted to individuals and companies in England, Wales, Scotland, and Northern Ireland by Mercedes-Benz Financial Services UK Limited (MBFS), which is wholly owned by Daimler AG and which also acts as servicer. The pool consists of Personal Contract Purchase (PCP) loans and Hire Purchase (HP) loans granted for the purchase of new and used vehicles. The transaction closed in April 2020, has a static collateral and is subject to residual value risk through the presence of PCP loans. The receivables do not include the financing of ancillary products such as insurance components. The legal final maturity is on the payment date in December 2025.

PORTFOLIO PERFORMANCE
Delinquencies are low and have been decreasing since closing with loans that are two to three months in arrears and above three months in arrears representing 0.2% and 0.1% of the outstanding portfolio balance, respectively. According to the transaction documents, defaulted loans are defined as loans that are more than three instalments in arrears or that have been declared defaulted by the Servicer. As of the March 2021 payment date, the cumulative default ratio represented 2.9% with 1.9% related to voluntary terminations (VT) and 1.0% related to credit defaults. Cumulative recoveries represented 59.5% of the cumulative defaulted amount. The performance of the portfolio remains within DBRS Morningstar’s expectations. Payment holidays granted in the context of the coronavirus pandemic are nonmaterial, as of the March 2021 payment date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar reviewed the remaining receivables and maintained its base case PD assumption at 7.0% and RV haircut at AAA (sf) at 44.8% and increased its LGD assumption at AAA (sf) to 53.9% from 51.5% at closing. The transaction is subject to voluntary termination (VT) risk, as under the UK Consumer Credit Act, the borrower has the right to terminate a consumer loan agreement after having paid at least half of the total amount payable, provided that the vehicle returns to the finance provider in good condition. As of the March 2021 payment date, 72.6% of the portfolio consisted of PCP receivables which have an original term equal to or longer than four years, which poses an increased VT risk, as shown in DBRS Morningstar’s “UK Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination” commentary. DBRS Morningstar factored this risk into its base case PD and LGD assumptions. DBRS Morningstar also included adjustments related to the coronavirus pandemic in its assumptions.

CREDIT ENHANCEMENT

Credit enhancement to the Class A Notes consists of the subordination of the Class B Notes and has increased to 41.8% from 26.7% since closing.

The transaction benefits from a nonamortising reserve that provides liquidity support to the Class A Notes through the life of the transaction and can be used towards repayment of the Class A Notes upon the outstanding portfolio balance being reduced to zero. As of the March 2021 payment date, the reserve was funded at its target amount of GBP 5.4 million. DBRS Morningstar deems the commingling and set-off risks to be limited in this transaction.

Elavon Financial Services DAC (Elavon) acts as the account bank for the transaction. Based on the DBRS Morningstar private rating of Elavon, 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 rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ Bank) acts as the swap counterparty for the transaction. DBRS Morningstar's Long Term Critical Obligations Rating of DZ Bank at “AA” is above the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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 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 an additional haircut to its base case recovery rate.

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 17 March 2021. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/375376/global-macroeconomic-scenarios-march-2021-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 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 the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology applicable to the rating is the “Master European Structured Finance Surveillance Methodology” (8 February 2021). 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 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 investor reports and loan-level data provided by Mercedes-Benz Financial Services UK.

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

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 at www.dbrsmorningstar.com.

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 rating (the Base Case):

-- DBRS Morningstar expected a lifetime base case PD, LGD, and RV haircut for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD of the current pool of loans for the Issuer is 7.0%. The LGD and RV haircut at the AAA (sf) rating level are 53.9% and 44.8%, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD, LGD, and the RV haircut increase by a certain percentage over the base case assumption. For example, if the RV haircut increases by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf), assuming no change in both the PD and LGD. If both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in the RV haircut. Furthermore, if the PD, LGD and the RV haircut all increase by 50%, the rating of the Class A Notes would be expected to fall to AA (high) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in both PD and LGD, expected rating of AAA (sf)
-- 50% increase in both PD and LGD, expected rating of AAA (sf)
-- 25% increase in both PD and LGD and 25% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in both PD and LGD and 50% increase in RV haircut, expected rating of AA (high) (sf)
-- 50% increase in both PD and LGD and 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in both PD and LGD and 50% increase in RV haircut, expected rating of AA (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Natalia Coman, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 9 April 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.

-- Master European Structured Finance Surveillance Methodology (8 February 2021)
https://www.dbrsmorningstar.com/research/373435/master-european-structured-finance-surveillance-methodology
-- 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/364305/rating-european-structured-finance-transactions-methodology
-- 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
-- Legal Criteria for European Structured Finance Transactions (6 April 2021) https://www.dbrsmorningstar.com/research/376314/legal-criteria-for-european-structured-finance-transactions
-- 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
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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].