DBRS Morningstar Assigns Provisional Ratings to Silver Arrow Canada LP 2022-1 Notes

DBRS Limited (DBRS Morningstar) assigned provisional ratings to the following notes to be issued by Silver Arrow Canada LP:

-- 2022-1 Class A-1 Asset-Backed Notes (the Class A-1 Notes) at AAA (sf)
-- 2022-1 Class A-2 Asset-Backed Notes (the Class A-2 Notes) at AAA (sf)
-- 2022-1 Class A-3 Asset-Backed Notes (the Class A-3 Notes; together with the Class A-1 Notes and Class A-2 Notes, the Notes) at AAA (sf)

The Notes will be supported by a portfolio of retail loan contracts secured by new and used luxury passenger cars, crossovers, and sport-utility vehicles (the Portfolio of Receivables). The loan contracts were originated by Mercedes-Benz Financial Services Canada Corporation (MBFSC) through its authorized dealer network in Canada.

Repayment of the Notes will be made from collections from the Portfolio of Receivables, which will primarily include scheduled payments and proceeds from vehicle sales in the case of obligor defaults.

The Notes will be repaid in sequential order with the Class A-1 Notes being repaid first, followed by the repayment of the Class A-2 Notes and, finally, the repayment of the Class A-3 Notes. The provisional ratings assigned are based on the full repayment of the Notes by their respective Final Scheduled Payment Dates.

The provisional ratings incorporate the following considerations:

(1) Credit Enhancement—Amount
On the Expected Closing Date, at least 2.75% of credit enhancement (2.50% over-collateralization (OC) and an amount at least equal to 0.25% in a Reserve Account, both expressed as a percentage of the Initial Adjusted Pool Balance) and excess spread, if any, will be available to offset collection shortfalls on a monthly basis.

(2) Credit Enhancement—Structure (Non-Amortizing)
The OC and the Reserve Account remain at their initial levels even as principal on the Notes is repaid. This deleveraging structure results in increased credit enhancement as the Portfolio of Receivables amortizes.

(3) Transaction Structure
The transaction structure ensures that the Target OC Amount is maintained before releasing excess collections to the Seller. The Adjusted Pool Balance is calculated as the difference between the Pool Balance and the Yield Supplement Overcollateralization Account (YSOA) amount on each payment date. The YSOA schedule is fixed as of the Cut-Off Date and is equal to the aggregate excess of (a) the present value of all payments on each receivable discounted at the annual percentage rate (APR) of said contract over (b) the present value of all payments on each receivable discounted at the higher of the contract APR and the Required Rate. It was set based on an amortization of the portfolio under a zero-prepayment and no-loss scenario under which additional yield from discounting the Receivables at the Required Rate would result in a minimum level of excess spread. As some level of prepayments is likely to occur, increasing the rate of amortization while the YSOA schedule remains fixed, DBRS Morningstar expects that the yield generated from the OC would increase against the Notes in such scenario.

(4) Obligor Profile, Performance, and Contract Terms
The obligors of the underlying loan contracts represent high-credit-quality customers, as the weighted-average (WA) FICO score is 790. Obligors with FICO scores below 650 constitute approximately 3.7% of the pool balance, and approximately 85.5% of the pool has a FICO score above or equal to 700. The strong credit profile is also supported by the consistently low historical credit losses and delinquency levels of the Seller’s owned and managed portfolio even throughout the pandemic. The Portfolio of Receivables also has a low WA original term at 57.8 months compared with the industry average of approximately 73 months. The majority (74.7%) of the contract terms fall between 37 months and 60 months with only 19.3% having a term between 61 and 72 months and only 0.4% having a term longer than 72 months.

(5) Operational and Brand Strength of Seller/Servicer
Mercedes-Benz and its related Canadian entities were upgraded to A (low) with Stable trends by DBRS Morningstar on November 18, 2021. As a subsidiary of Mercedes-Benz, MBFSC benefits from its parent’s strong financial standing and global presence, allowing it to leverage the experience and expertise of Mercedes-Benz’s other financial services companies worldwide to ensure sound and consistent underwriting standards and efficient servicing operations.

DBRS Morningstar’s cash flow analysis includes a conservative base-case cumulative net loss estimate. Available credit enhancement is able to withstand the stresses at levels commensurate with the assigned provisional ratings. The cash flow analysis was run to include the non-amortizing OC of 2.50%, the non-amortizing Reserve Account of 0.25%, and an estimated annual excess spread of 3.02% (net of 1% replacement servicer fee and indicative cost of funds). The reserve and excess spread amounts are subject to change and will be updated in the cash flow analysis once pricing is finalized.

There was no Environmental, Social, or Governance factor or consideration with a significant or relevant impact on the credit rating.

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 Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Retail Auto Loan and Lease Securitizations (October 27, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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