Press Release

DBRS Morningstar Finalises Provisional Ratings on VCL Multi-Compartment S.A., acting for and on behalf of its Compartment VCL 35

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March 25, 2022

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes issued by VCL Multi-Compartment S.A., acting for and on behalf of its Compartment VCL 35 (the Issuer):

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

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 ratings on both the Class A Notes and Class B Notes (together, the Notes) address the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date.

The ratings are based on information provided to DBRS Morningstar by the Issuer and its agents as of the date of this press release.

The Notes are collateralised by a static portfolio of approximately EUR 1 billion in receivables related to automotive lease contracts. The transaction only captures the monthly lease instalment element of each lease and does not include the residual value (RV) element, which is normally realised through the ultimate sale of the vehicle at the end of the lease contract. Volkswagen Leasing GmbH (VWL) granted the lease contracts to lessees resident or incorporated in the Federal Republic of Germany. VWL is a wholly owned indirect subsidiary of Volkswagen AG. The underlying motor vehicles related to the lease contracts consist of both new and used passenger and light-commercial vehicles. VWL services the receivables.

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, a reserve fund, and overcollateralisation (OC);
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected cumulative net loss under various stressed cash flow assumptions for the Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- VWL’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 on the Federal Republic of Germany, currently at AAA 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 transaction documents foresee a mixed sequential/pro rata amortisation structure. Initially, all collections from the lease receivables will pay down the Class A Notes (in accordance with the relevant priority of payments). Once the Class A OC percentage reaches 12.25%, the Class B Notes will begin to amortise. Once the Class B OC percentage reaches 7.5%, principal payments on the Notes will be allocated on a pro rata basis, unless specified performance triggers are breached, as outlined in the transaction documents.

The transaction benefits from liquidity support provided by an amortising cash reserve, with an initial balance of EUR 12 million (equal to 1.2% of the initial outstanding discounted receivables balance). The target balance of the reserve on subsequent payment dates is the higher of (1) 1.2% of the aggregate discounted receivables balance and (2) the lower of (a) EUR 10 million or (b) the aggregate outstanding principal amount of the Notes. The reserve is available to cover the payment of senior expenses, swap payments, and interest on the Notes prior to being replenished. The reserve also provides credit enhancement to the Notes. It is available to repay principal on the Notes when the portfolio’s aggregate discounted receivables balance reaches zero.

On 9 September 2021, the European Court of Justice ruled in relation to certain cases (C-33/20, C-155/20, and C-187/20) addressing the rights of consumers in Germany to revoke their finance contracts. According to the ruling, the absence of certain mandatory information (relating to default interest and prepayment fees) in the contracts is not compliant with the EU Consumer Credit Directive and, as such, the right to revoke extends past the standard 14-day period (i.e., indefinitely). As this ruling may result in economic incentives for consumers to withdraw from their contracts, it could negatively affect German auto ABS securitisations. DBRS Morningstar is closely monitoring these developments and the impact of the decision on affected transactions. For further details, please refer to the commentary titled "The European Court Resolves Debate on Consumer Rights in Germany but Questions Remain", which can be found at: https://www.dbrsmorningstar.com/research/384995/the-european-court-resolves-debate-on-consumer-rights-in-germany-but-questions-remain.

COUNTERPARTIES
The Bank of New York Mellon, Frankfurt Branch (BNYM Frankfurt) has been appointed as the Issuer’s account bank for the transaction. DBRS Morningstar maintains private ratings on BNYM Frankfurt. The transaction documents contain downgrade provisions relating to the account bank consistent with DBRS Morningstar’s criteria.

The transaction is exposed to interest rate risk due to the mismatch between the fixed-rate assets and the floating-rate liabilities. The risk is mitigated by two interest rate swaps hedging each of the Notes. Skandinaviska Enskilda Banken AB (publ) (SEB Bank) has been appointed as the swap counterparty for the transaction. DBRS Morningstar has a Long-Term Issuer rating of A (high) and a Long Term Critical Obligations Rating of AA on SEB Bank. The hedging documents include downgrade provisions consistent with DBRS Morningstar's criteria.

DBRS Morningstar analysed the transaction cash flow 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 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 24 March 2022. 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/394150/baseline-macroeconomic-scenarios-for-rated-sovereigns-march-2022-update 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.

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: 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 these ratings include the originator and its agent, BofA Securities Europe SA.

DBRS Morningstar received the following data and information:
-- Static cumulative net loss data from October 2011 to September 2021;
-- Total portfolio-level dynamic delinquency data from January 2010 to September 2021;
-- Summarised stratification tables for the pool as at 28 February 2022; and
-- The portfolio amortisation profile related to the selected pool.

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 newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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 rate: 1.4%
-- Expected recovery rate: 60.0%
-- Loss given default (LGD): 61.6% for the AAA (sf) scenario and 56.8% for the AA (low) (sf) scenario

-- Scenario 1: 25% increase in LGD
-- Scenario 2: 50% increase in LGD
-- Scenario 3: 25% increase in Probability of Default (PD)
-- Scenario 4: 50% increase in PD
-- Scenario 5: 25% increase in PD and 25% increase in LGD
-- Scenario 6: 25% increase in PD and 50% increase in LGD
-- Scenario 7: 50% increase in PD and 25% increase in LGD
-- Scenario 8: 50% increase in PD and 50% increase in LGD

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios would be, respectively:
-- Class A Notes: AAA (sf), AA (high) (sf), AAA (sf), AA (high) (sf), AA (high) (sf), AA (sf), AA (sf), AA (low) (sf)
-- Class B Notes: AA (low) (sf), A (sf), AA (low) (sf), A (sf), A (sf), A (sf), A (sf), 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 Limited for use in the United Kingdom.

Lead Analyst: Sofia Borysko, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 16 February 2022

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: 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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