DBRS Morningstar Finalises Provisional Rating on Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2021-2

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional rating of AAA (sf) on the Class A Notes (together with the Class B Notes, the Notes) issued by Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2021-2 (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.

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. DBRS Morningstar did not assign a rating to the Class B Notes also issued in this transaction.

The Class A Notes are collateralised by a static portfolio of approximately GBP 530 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 resident or incorporated 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.

PCP agreements include a component related to 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 portfolio also includes certain receivables regulated by the UK Consumer Credit Act (CCA). Pursuant to sections 99 and 100 of the CCA, obligors may voluntarily terminate (VT) their loan agreement once one-half of the monies due under the agreement has been paid. MBFS’ sale of a vehicle returned after the obligor exercises its right to VT may result in recoveries less than what remains outstanding under the financing contract. This feature directly exposes the Issuer to VT 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, a reserve fund, and excess spread;
-- Credit enhancement levels that 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 the Class A Notes in accordance with their terms;
-- MBFS’ 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 on the 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 incorporates a single waterfall that outlines the allocation of the available distribution amount consisting of, inter alia, collections representing interest, principal, and recoveries. The Notes amortise sequentially subject to a note-specific target principal redemption amount.

A nonamortising general reserve account equal to 0.5% of the Class A Notes balance at the cut-off 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 the issued notes are floating rate. 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 Skandinaviska Enskilda Banken AB (SEB).

COUNTERPARTIES
Elavon Financial Services DAC (Elavon) has been appointed to act as account bank for the transaction. DBRS Morningstar maintains a private rating on Elavon. The transaction documents contain downgrade provisions relating to the account bank consistent with DBRS Morningstar’s criteria.

SEB has been appointed as the swap counterparty. The DBRS Morningstar Long-Term Issuer Rating on SEB is A (high) with a Stable trend. The transaction documents contain downgrade provisions relating to the swap counterparty that are consistent with DBRS Morningstar’s criteria.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

CORONAVIRUS DISEASE (COVID-19) CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to 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. 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 moderate haircut to its expected recovery rate.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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: “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.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for this rating include the originator and its agent, Merrill Lynch International.

DBRS Morningstar received the following data and information:
-- Static quarterly cumulative gross credit and VT loss and credit and VT recovery data from Q3 2016 and up to Q2 2021, split into new/used and PCP/HP subsets;
-- Dynamic monthly delinquency and prepayment data at a portfolio level from January 2015 to June 2021;
-- Loan-level characteristics and stratification data as at 30 September 2021 and the related amortisation profile; and
-- Aggregated annual PCP RV realisation data from 2013 to 2020 outlining volumes and sales results.

DBRS Morningstar did not rely on 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.

Sensitivity Analysis: 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):

-- Expected default (credit defaults and voluntary terminations): 6.1%
-- Expected recovery rate: 80%
-- Loss given default (LGD): 51.5% for the AAA (sf) scenario.
-- RV loss at maturity: 43.5% for the AAA (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 rating under the eight stress scenarios will be:
-- Class A Notes: AA (sf), AA (low) (sf), AA (high) (sf), AA (low) (sf), A (high) (sf), AA (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. 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: Miklos Halasz, Assistant Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 7 October 2021

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 (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-for-european-structured-finance-transactions.
-- Rating European Structured Finance Transactions Methodology (30 July 2021), https://www.dbrsmorningstar.com/research/382486/rating-european-structured-finance-transactions-methodology.
-- Operational Risk Assessment for European Structured Finance Servicers (16 September 2021), https://www.dbrsmorningstar.com/research/384513/operational-risk-assessment-for-european-structured-finance-servicers.
-- Operational Risk Assessment for European Structured Finance Originators (16 September 2021), https://www.dbrsmorningstar.com/research/384512/operational-risk-assessment-for-european-structured-finance-originators.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- 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].