Press Release

DBRS Morningstar Assigns Ratings to VCL Master Netherlands B.V.

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November 25, 2021

DBRS Ratings GmbH (DBRS Morningstar) assigned ratings to various series of notes issued by VCL Master Netherlands B.V. (the Issuer), as follows:

-- Series 2016-2, Class A Notes at AAA (sf);
-- Series 2016-3, Class A Notes at AAA (sf);
-- Series 2016-4, Class A Notes at AAA (sf);
-- Series 2016-5, Class A Notes at AAA (sf);
-- Series 2016-6, Class A Notes at AAA (sf);
-- Series 2021-1, Class A Notes at AAA (sf).

The Issuer is a private company with limited liability incorporated under the laws of the Netherlands as a special-purpose entity, specifically for the purpose of the securitisation programme, which was established on 26 May 2016. The programme represents issuance of up to EUR 1,500 million of Class A Notes and Class B Notes (the Notes) under which the Issuer may from time to time issue asset-backed floating-rate notes denominated in euro during the revolving period.
The ratings on the series of Class A Notes address the timely payment of interest and the ultimate repayment of principal by the legal final maturity date.

DBRS Morningstar did not assign ratings to the series of Class B Notes issued in this transaction. DBRS Morningstar had previously assigned ratings to certain series of Class A Notes and Class B Notes under this programme. On 27 November 2018, DBRS Morningstar took the following rating actions:

-- Series 2016-2, Class A Notes confirmed at AAA (sf) and discontinued;
-- Series 2016-3, Class A Notes confirmed at AAA (sf) and discontinued;
-- Series 2016-4, Class A Notes confirmed at AAA (sf) and discontinued;
-- Series 2016-5, Class A Notes confirmed at AAA (sf) and discontinued;
-- Series 2016-6, Class A Notes confirmed at AAA (sf) and discontinued;
-- Series 2016-1, Class B Notes confirmed at A (high) (sf) and discontinued;
-- Series 2016-2, Class B Notes confirmed at A (high) (sf) and discontinued.

The Notes are ultimately backed by receivables related to lease instalments and residual values (RVs) related to auto lease agreements granted by Volkswagen Pon Financial Services B.V. (the Seller or VWPFS), a subsidiary of Volkswagen AG, to commercial or private lessees in the Netherlands.

DBRS Morningstar based its ratings on 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 overcollateralisation (OC).
-- Credit enhancement levels are sufficient to support DBRS Morningstar's 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.
-- VWPFS’ 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 Kingdom of The Netherlands, currently at AAA with a Stable trend.
-- 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 Issuer issued the Notes and made available to the Seller initial issuer advances equal to the present value of the aggregate purchase price of the purchased vehicles. Subsequently, the Issuer and Seller entered into hire purchase agreements whereby the Issuer purchased vehicles and the associated lease receivables from VWPFS as the Seller. The Issuer repays the hire purchase agreements in monthly instalments using all proceeds from the underlying lease agreements with the final instalment aligned with the expected RV of the vehicle. On each payment date during the revolving period, the Seller may sell additional vehicles and lease receivables under the hire purchase agreements through the settlement of the issuer advance and the issuance of additional issuer advances subject to eligibility criteria, concentration limits, performance triggers, and other conditions set out in the transaction documents.

The transaction incorporates a single waterfall and a mixed sequential/pro rata amortisation structure. After the revolving period, collections arising from the lease receivables are available to pay down the Class A Notes (in accordance with the relevant priority of payments). Once the Class A OC percentage reaches and maintains its target of 41.0% after the revolving period, collections can also be used to redeem the Class B Notes. Once the Class B OC percentage reaches its target of 33.0% after the revolving period, the available distribution amounts are then allocated on a pro rata basis to the Notes unless specified triggers are breached, as outlined in the transaction documents.

The transaction benefits from liquidity support provided by the cash collateral account, initially funded to an amount equal to EUR 9,129,600 or 1.2% of the Notes, and floored at the lower of: (1) 0.6% of the maximum aggregated discounted receivables balance and (2) the aggregate outstanding principal balance of the Notes at the end of the monthly period. The reserve amortises in line with the target, but the Issuer will top up the reserve upon the issuance of the additional notes.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

COUNTERPARTIES
Elavon Financial Services DAC is the account bank for the transaction. DBRS Morningstar has a private rating on Elavon Financial Services DAC, which meets DBRS Morningstar’s criteria to act in such capacity. The transaction documents contain downgrade provisions consistent with DBRS Morningstar’s criteria with respect to Elavon Financial Services DAC’s role as account bank.

The transaction is exposed to interest rate risk due to the mismatch between the fixed-rate assets and the floating-rate liabilities, and the risk is mitigated by interest rate swap agreements for the Notes provided by DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ Bank). DBRS Morningstar has a Long-Term Senior Debt Rating of AA (low) and a Long Term Critical Obligations Rating of AA on DZ Bank. The hedging documents include downgrade provisions consistent with DBRS Morningstar's criteria.

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 ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

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 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.

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 “Rating European Consumer and Commercial Asset-Backed Securitisations” (29 October 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://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/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 the ratings include VWPFS, provided through the transaction arranger, ING Bank N.V.

DBRS Morningstar received the following data and information:
-- Static monthly cumulative gross loss data from 1 January 2009 to 1 July 2021
-- Static monthly cumulative net loss data from 1 January 2009 to 1 July 2021
-- Delinquency data from 31 January 2014 to 31 August 2021
-- Data on vehicle realisation proceeds from 31 January 2016 to 31 August 2021.

DBRS Morningstar was also provided with detailed stratification tables as of 31 October 2021.

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.

On 31 May 2016, DBRS Morningstar finalised it provisional ratings on the following series of notes:

-- Series 2016-1, Class A Notes: AAA (sf);
-- Series 2016-2, Class A Notes: AAA (sf);
-- Series 2016-3, Class A Notes: AAA (sf);
-- Series 2016-4, Class A Notes: AAA (sf);
-- Series 2016-5, Class A Notes: AAA (sf);
-- Series 2016-1, Class B Notes: A (high) (sf);
-- Series 2016-2, Class B Notes: A (high) (sf).

The last rating action on the above series of the Class A Notes and Class B Notes took place on 27 November 2018, when DBRS Morningstar confirmed and subsequently discontinued the ratings. The discontinuations were taken by DBRS Morningstar at the request of the Issuer.

The Series 2021-1, Class A Notes were issued on 26 April 2021. This is the first DBRS Morningstar rating on this financial instrument.

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 to the parameters used to determine the ratings (the base case):
-- Expected Default Rate (PD): 2.1%
-- Recovery Rate: 62.1%
-- Loss Given Default (LGD): 62.4% for the AAA (sf) scenario
-- RV loss: 40% 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 ratings under the eight stress scenarios are:
-- Class A Notes: AA (sf), AA (sf), AA (sf), AA (low) (sf), A (high) (sf), A (high) (sf), A (sf), and A (low) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://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: Sofia Borysko, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date for the Series 2016-2, Class A Notes, Series 2016-3, Class A Notes, Series 2016-4, Class A Notes, Series 2016-5, Class A Notes and Series 2016-6, Class A Notes: 4 May 2016
Initial Rating Date for the Series 2021-1, Class A Notes: 25 November 2021

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
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: https://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: https://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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