Press Release

DBRS Morningstar Upgrades Ratings on Asset-Backed European Securitisation Transaction Eighteen S.r.l.

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November 11, 2021

DBRS Ratings GmbH (DBRS Morningstar) upgraded the ratings on the bonds issued by Asset-Backed European Securitisation Transaction Eighteen S.r.l. as follows:

-- Class A Notes upgraded to AAA (sf) from AA (sf)
-- Class B Notes upgraded to AA (high) (sf) from A (high) (sf)
-- Class C Notes upgraded to A (sf) from BBB (high) (sf)

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal by the legal final maturity date. The ratings on the Class B and Class C Notes address the timely payment of interest when the most-senior outstanding notes, otherwise the ultimate payment of interest and the ultimate payment of principal by the legal final maturity date.

The upgrades follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the October 2021 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the notes to cover the expected losses at their respective rating levels; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The transaction is a securitisation of auto lease receivables granted to individuals and companies in Italy for the use of new vehicles. The receivables were originated by FCA Bank S.p.A. (FCA Bank), a joint venture that is 50.0% owned by FCA Italy Spa and 50.0% owned by Crédit Agricole Consumer Finance. Under the lease receivable, the lessee has the option to purchase the vehicle upon the final residual value (RV) instalment; however, the transaction is exempt from RV risk as the RV portion of the lease receivable is not securitised. The transaction nevertheless benefits from the interest accrued on the RV portion.

The transaction included a six-month revolving period that ended at the April 2021 payment date. Since then, the portfolio has been amortising. The legal final maturity date of the transaction is on the November 2033 payment date.

PORTFOLIO PERFORMANCE
Arrears have been low since closing. As of the October 2021 payment date, loans two to three months in arrears and the 90+-day delinquency ratio were both at 0.1% of the portfolio outstanding balance. Under the servicer’s definition, loans are classified as defaulted once the borrower becomes insolvent, the loans are written off by the servicer, or they exceed 240 days in arrears. Under this definition, defaults were minimal at 0.03% of the portfolio outstanding balance and occurred just at the October 2021 payment date. Coronavirus-related payment holidays are reported on a cumulative basis and were residual at EUR 541,213 or 0.2% of the total receivables purchased balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Following the end of the revolving period, DBRS Morningstar conducted a loan-by-loan analysis of the remaining pool of receivables and decreased its base case PD to 2.0% from 3.7% at the initial rating. The decrease is due to the assumption based on the current portfolio as opposed to a potential migration of the portfolio according to the replenishment criteria as at the initial rating, and is driven by a lower weighted-average life of 1.2 years compared with 2.0 years at the initial rating. DBRS Morningstar maintained its base case LGD assumption 84.7%. DBRS Morningstar’s assumptions incorporate adjustments applied in the context of the coronavirus pandemic.

CREDIT ENHANCEMENT
The credit enhancement for each class of notes consists of the subordination of its respective junior notes.

As of the October 2021 payment date, the credit enhancement (CE) increased as follows since the initial rating:
-- CE to the Class A Notes increased to 14.7% from 10.7%,
-- CE to the Class B Notes increased to 10.2% from 7.5%, and
-- CE to the Class C Notes increased to 5.3% from 3.9%.

The ratings upgrade on the notes result from the combination of the increased CE since the end of the revolving period and the decreased base case PD assumption past the revolving period, which was assessed under a potential portfolio migration.

The transaction benefits from a nonamortising cash reserve, currently at its target amount of EUR 3.2 million. The cash reserves provide liquidity support to the notes and credit support upon the legal final maturity date.

BNP Paribas Securities Services, Milan branch (BNPSS Milan) acts as the account bank for the transaction. Based on DBRS Morningstar private rating’s on BNPSS Milan, 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 ratings assigned to the notes, as described in DBRS Morningstar's "Legal 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 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 ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

For this transaction, DBRS Morningstar applied a 1.5 times (x) or a 2.0x adjustment factor on the underlying one-year probability of defaults for obligors in mid-high or high-risk industries based on their perceived exposure to the adverse disruptions of the coronavirus, as per DBRS Morningstar’s “European Structured Credit Transactions’ Risk Exposure to Coronavirus (COVID-19) Effect” commentary released on 18 May 2020, wherein DBRS Morningstar discussed the overall risk exposure of the small and medium-size sector to the coronavirus and provided a framework for identifying the transactions that are more at risk and more likely to be affected by the fallout of the pandemic on the economy. For more details, please see: https://www.dbrsmorningstar.com/research/361098/european-structured-credit-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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 2 November 2021, DBRS Morningstar updated its 8 May 2020 commentary outlining the impact of the coronavirus crisis on the performance of DBRS Morningstar-rated auto ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/387320/european-auto-abs-recovery-performance-update and https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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 euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 these ratings include loan-level data provided by European DataWarehouse GmbH, investor reports, and additional information provided by FCA Bank.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, 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.

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

The lead analyst responsibilities for this transaction have been transferred to Daniele Canestrari.

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):

-- DBRS Morningstar expected a lifetime base case PD and LGD 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 and LGD assumption are 2.0% and 84.7%, respectively.
-- The risk sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increased by 50%, the rating of the Class A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increased by 50%, the rating for the Class A Notes would be expected to fall to AA (sf), assuming no change in the LGD. Furthermore, if the PD and LGD increased by 50% and 50%, respectively, the rating of the Class A Notes would be expected to fall to AA (low) (sf).

Class A Notes Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AA (high) (sf)
-- 50% increase in PD, expected rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AA (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AA (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AA (low) (sf)

Class B Notes Sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)

Class C Notes Sensitivity:
-- 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of BBB (high) (sf)
-- 50% increase in PD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BBB (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 Limited for use in the United Kingdom.

Lead Analyst: Daniele Canestrari, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 11 November 2020

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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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