DBRS Morningstar Finalises Provisional Ratings on Auto ABS Spanish Loans 2022-1 FT

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following notes issued by Auto ABS Spanish Loans 2022-1 FT (the Issuer):

-- Class A Notes at AA (low) (sf)
-- Class B Notes at A (sf)
-- Class C Notes at BBB (sf)
-- Class D Notes at BB (high) (sf)
-- Class E Notes at B (sf)

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

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in February 2032. The ratings on the Class B Notes, Class C Notes, Class D Notes, and Class E Notes (together with the Class A Notes, the Rated Notes) address the ultimate payment of interest and the ultimate repayment of principal by the legal final maturity date.

This transaction represents the issuance of notes backed by a portfolio of approximately EUR 700 million of fixed-rate receivables related to amortising and balloon auto loans granted by PSA Financial Services Spain, E.F.C., S.A, (PSA or the Originator) to private individuals residing in Spain for the acquisition of new or used vehicles. The Originator also services the portfolio. The Class F Notes funded the cash reserve.

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, excess spread, and the availability of the cash reserve;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected cumulative net losses and residual value (RV) losses under various stressed cash flow assumptions for the Rated Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- PSA’s financial strength and its capabilities with regard to originations, underwriting, and servicing;
-- The transaction parties’ financial strength with regard to their respective roles;
-- DBRS Morningstar’s operational risk review of PSA, which it deemed to be an acceptable servicer;
-- The credit quality of the collateral and historical and projected performance of the seller’s portfolio; and
-- The expected 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 are expected to address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction is subject to a revolving period of seven months, during which time the seller may offer additional receivables and their related RV purchase option receivables. The Issuer can purchase these receivables so long as the eligibility criteria, global portfolio limits, and other conditions set out in the transaction documents are met. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers, the Originator’s insolvency, or the servicer’s replacement.

The transaction allocates payments on a combined interest and principal priority of payments basis and benefits from an amortising EUR 5.9 million cash reserve funded through the subscription proceeds of the Class F Notes. The cash reserve can be used to cover senior costs, payments under the interest rate swap agreement, and interest on the Rated Notes. The cash reserve is part of the Issuer’s available funds.

The repayment of the Rated Notes will start after the end of the revolving period on the first principal payment date in January 2023 on a pro rata basis unless certain events such as the breach of performance triggers, the servicer’s insolvency, or the servicer’s termination occur (Subordination Events). Under these circumstances, the principal repayment of the Rated Notes will become fully sequential, and the switch is not reversible. The Class F Notes will be repaid with available funds up to their target amortisation amount.

Interest and principal payments on the notes will be made monthly on the 28th of every month. The Rated Notes pay interest indexed to one-month Euribor whereas the total portfolio pays a fixed-interest rate. The interest rate risk arising from the mismatch between the Issuer’s liabilities and the portfolio is hedged through an interest rate swap agreement provided by Banco Santander SA (Banco Santander).

COUNTERPARTIES
The Issuer bank account is held at BNP Paribas Securities Services, Spanish Branch (BNPSS). Based on DBRS Morningstar’s private rating on BNPSS, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to BNPSS to be consistent with the rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

Banco Santander is the swap counterparty for the transaction. DBRS Morningstar’s public Long-Term Issuer Rating on Banco Santander is at A (high) with a Stable trend. The hedging documents are expected to contain downgrade provisions consistent with DBRS Morningstar’s criteria.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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.

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 these ratings include the Originator, the Issuer, and the management company, Titulización de Activos S.G.F.T., S.A. (TdA).

DBRS Morningstar received the following data and information:
-- Static gross losses and recovery data; data was provided separately for used/new vehicles, amortising loans, and new vehicles balloon loans;
-- Dynamic origination, delinquency, and prepayment data;
-- Loan-by-loan portfolio data and summarised stratification tables as at 18 April 2022;
-- Loan-by-loan RV data based on the Eurotaxx valuation; and
-- A theoretical amortisation of the provisional 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: 2.5%
-- Expected recovery rate: 57.5%.
-- Loss given default (LGD): 60.9% for the AA (low) (sf) scenario, 57.9% for the A (sf) scenario, 53.3%for the BBB (sf) scenario,50.2% for the BB (high) (sf) scenario and 44.1% for the B (sf) scenario.
-- RV loss: 34.4% for the AA (low) (sf) scenario, 28.8% for the A (sf) scenario, 24.1%for the BBB (sf) scenario,13.4% for the BB (high) (sf) scenario and 0.7% for the B (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 will be:
-- Class A Notes: AA (low) (sf), A (high) (sf), AA (low) (sf), A (high) (sf), A (high) (sf), A (high) (sf), A (high) (sf), and A (sf).
-- Class B Notes: A (low) (sf), A (low) (sf), A (low) (sf), A (low) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), and BB (sf).
-- Class C Notes: BBB (sf), BBB (low) (sf), BBB (sf), BBB (low) (sf), BBB (low) (sf), BBB (low) (sf), BBB (low) (sf), and BB (high) (sf).
-- Class D Notes: BB) (sf), BB (sf), BB(sf), BB (sf), BB (low) (sf), BB (sf), BB (low) (sf), and B (high) (sf).
-- Class E Notes: B (low (sf), B (sf) for scenario 3, and B (low) (sf) for scenario 6, no quantitative ratings are achieved for other scenarios.

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: María López, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date: 6 May 2022

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
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.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (29 October 2021), https://www.dbrsmorningstar.com/research/387042/rating-european-consumer-and-commercial-asset-backed-securitisations.
-- Rating European Structured Finance Transactions Methodology (19 May 2022), https://www.dbrsmorningstar.com/research/397034/rating-european-structured-finance-transactions-methodology.
-- Legal Criteria for European Structured Finance Transactions (29 July 2021), https://www.dbrsmorningstar.com/research/382171/legal-criteria-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.
-- 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.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/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].