Press Release

DBRS Morningstar Finalises Provisional Ratings on E-CARAT 12 plc

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June 10, 2021

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by E-CARAT 12 plc (the Issuer), a public limited company incorporated under the laws of England and Wales:

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

DBRS Morningstar did not assign a rating to the Class C Notes issued in this transaction. The ratings on the Class A Notes and Class B Notes (together, the Rated Notes) address the timely payment of interest and the ultimate repayment of principal by the legal final maturity date.

The transaction represents the issuance of notes backed by a portfolio of approximately GBP 380 million of fixed-rate receivables related to auto loan contracts granted by Vauxhall Finance plc (Vauxhall Finance; the Originator or the Seller) to borrowers in England, Wales, Scotland, and Northern Ireland. The underlying motor vehicles related to the finance contracts consist of both new and used passenger vehicles and light commercial vehicles. The receivables are serviced by Vauxhall Finance.

The underlying receivables consist of both conditional sale and personal contract purchase (PCP) auto loan 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.

The transaction includes a one-year revolving period during which time the Originator may offer additional receivables that the Issuer will purchase, provided that eligibility criteria and concentration limits set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as a breach of performance triggers, an insolvency of the Seller, or default of the servicer.

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, 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 Rated Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- Vauxhall Finance’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 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
The transaction allocates payments through separate interest and principal waterfalls and incorporates an amortising liquidity reserve funded by Vauxhall Finance on the issue date though a subordinated loan. Principal on the Rated Notes is paid fully sequentially with redemption of the Class B Notes only starting after the full repayment of the Class A Notes.

A liquidity reserve is fully funded upon closing and provides support to the payment of senior expenses and interest on the Rated Notes throughout the life of the transaction. The liquidity reserve amortises in line with the outstanding balance of the Rated Notes until equal to a floor of 0.5% of the initial balance of the Rated Notes. Subsequently, it becomes available to repay principal on the Class B Notes on the final Class B Notes interest payment date.

All underlying contracts pay a fixed rate while the Rated Notes pay a floating rate and are indexed to daily compounded Sterling Overnight Index Average. Interest rate risk for the Rated Notes is mitigated through an interest rate swap provided by BNP Paribas SA (BNPP).

COUNTERPARTIES
BNP Paribas Securities Services, London Branch has been appointed as the Issuer’s account bank for the transaction. DBRS Morningstar privately rates the counterparty and has concluded that it meets DBRS Morningstar’s minimum criteria to act in its capacity and the transaction documents contain provisions relating to the account bank consistent with DBRS Morningstar’s legal criteria. The Issuer's accounts include the transaction account, the liquidity reserve account, and any swap collateral account.

BNPP has been appointed as the interest rate swap counterparty for the transaction. DBRS Morningstar has a Long-Term Senior Debt Rating of AA (low) and a Long Term Critical Obligations Rating of AA (high) on BNPP. The hedging documents contain downgrade provisions consistent with DBRS Morningstar's derivative criteria.

DBRS Morningstar analysed the transaction structure in Intex Dealmaker.

CORONAVIRUS DISEASE (COVID-19) CONSIDERATIONS
The coronavirus 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 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 a moderate haircut to its expected 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 pounds sterling unless otherwise noted.

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

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.

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 considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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 Vauxhall Finance and BNPP acting in its capacity as arranger.

DBRS Morningstar received the following data and information:
-- Static monthly cumulative loss data from Q1 2014 to Q1 2021 that split credit defaults from voluntary terminations (VTs);
-- Dynamic recoveries from credit losses, VTs, and PCP handbacks from Q4 2010 to Q4 2020;
-- Dynamic origination, receivables, and prepayment data from Q1 2014 to Q1 2021;
-- RV realisation data from Q1 2017 to Q1 2021; and
-- A loan-level pool cut, stratification tables, and a theoretical amortisation schedule as at 28 May 2020.

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 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 ratings, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the ratings (the base case):

-- Expected default rate: 6.4%
-- Expected recovery rate: 77.6%.
-- Loss given default (LGD): 53.0% for the AAA (sf) scenario, 48.9% for the AA (sf) scenario.
-- RV loss: 41.2%. for the AAA (sf) scenario, 34.0% for the AA (sf) scenario.

Scenario 1: A 25% increase in the expected default and LGD.
Scenario 2: A 50% increase in the expected default and LGD
Scenario 3: A 25% increase in the RV loss.
Scenario 4: A 25% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 5: A 50% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 6: A 50% increase in the expected RV loss.
Scenario 7: A 25% increase in the expected default and LGD and a 50% increase in the RV loss.
Scenario 8: A 50% increase in the expected default and LGD and a 50% increase in the RV loss.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:
-- Class A Notes: AA (sf), A (high) (sf), AA (high) (sf), AA (low) (sf), A (high) (sf), AA (sf), AA (low) (sf), and A (sf).
-- Class B Notes: A (high) (sf), A (low) (sf), AA (low) (sf), A (sf), A (low) (sf), A (high) (sf), A (sf), and BBB (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.

These ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Alex Garrod, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 21 May 2021

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
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.

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].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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