DBRS Morningstar Assigns Provisional Ratings to BMW Canada Auto Trust, Series 2022-1

DBRS Limited (DBRS Morningstar) assigned the following provisional ratings to the Class A-1, Class A-2, and Class A-3 Notes, Series 2022-1 (collectively, the Notes) to be issued by BMW Canada Auto Trust:

-- Class A-1 Notes, Series 2022-1 (the Class A-1 Notes) at AAA (sf)
-- Class A-2 Notes, Series 2022-1 (the Class A-2 Notes) at AAA (sf)
-- Class A-3 Notes, Series 2022-1 (the Class A-3 Notes) at AAA (sf)

The Notes will be supported by a portfolio of retail closed-end lease contracts of new passenger cars and sport-activity vehicles (the Portfolio of Assets). The lease contracts were originated by authorized BMW dealers in Canada.

Repayment of the Notes will be made from collections from the Portfolio of Assets, which includes scheduled monthly lease payments (including residual value payments in the case of customer-retained vehicles) as well as proceeds from vehicle sales either at the end of the lease term or earlier, in the case of prepayments and defaults. Proceeds from excess mileage and wear-and-tear charges, if any, also form part of the collections used to repay the Notes.

The pass-through structure repays the Notes as monthly principal payments are collected from the Portfolio of Assets. The Notes will be repaid in sequential order, with the Class A-1 Notes being repaid first, followed by repayment of the Class A-2 Notes and then the Class A-3 Notes. The ratings assigned are based on the full repayment of the Notes by their respective Maturity Dates.

The ratings incorporate the following considerations:

HIGH LEVEL OF CREDIT ENHANCEMENT
On the Expected Closing Date, at least 15.50% of credit enhancement will be available (at least 0.25% of cash and 15.25% of overcollateralization (OC)). Excess collections will be applied monthly to repay outstanding principal of the Notes until the OC reaches the Target OC of 17.25%, which is expected by month five based on scheduled payments. In addition, an estimated 4.10% (annualized) of excess spread, net of the indicative cost of funds and the Replacement Servicer Fee provision, will be available to offset any collection shortfalls on a monthly basis.

NON-AMORTIZING CREDIT ENHANCEMENT
The requirement to maintain the cash account and the OC amounts at their target levels provides a deleveraging structure as the principal on the Notes is repaid. Residual values represent the largest risk in closed-end auto lease securitizations, and the exposure to such risk is highest at contract maturity. Non-amortizing credit enhancement ensures that an increasing level of protection is available to offset potential vehicle disposition losses as these contracts mature.

CONSERVATIVE ADVANCE RATE ON RESIDUAL VALUES
The Base Residual Value is determined by using the lower of the contract residual values and the Automotive Lease Guide’s (ALG) estimated values as of March/April 2022. The reference to the ALG values in setting the advance rate on the Notes ensures that expected embedded losses (negative equity in relation to residual values) are not funded on the closing date, effectively reducing residual value risk in the Portfolio of Assets. ALG projects its residual values primarily based on auction proceeds and forecasts of economic factors, such as used vehicle supply. Overall, the ALG values represent an independent estimate of the expected wholesale value of the vehicles in the portfolio at maturity.

STRONG OBLIGOR PROFILE
The obligors of the underlying lease contracts represent high-credit-quality customers, as the weighted-average FICO score is 811. Approximately 61.8% of the pool has a FICO score of 800 or greater. The strong credit profile is also supported by low credit losses and delinquency levels of the Seller’s owned and managed portfolio in the last six years. DBRS Morningstar also notes that the majority of the underlying lease contracts were originated during the Coronavirus Disease (COVID-19) pandemic. Given the ability of these obligors to obtain financing amid the pandemic, DBRS Morningstar expects these obligors to be more resilient to the ongoing economic impacts.

ESTABLISHED REMARKETING STRATEGY
BMW Canada Inc. (BMW Canada or the Seller) has an established vehicle remarketing strategy to maximize the disposition proceeds and minimize the time to remarket the vehicles should they be returned at or prior to maturity. Historical trends demonstrate BMW Canada’s ability to leverage its dealer network and other dealer groups across Canada to purchase off-lease vehicles. Certified pre-owned and pull-ahead programs offered by BMW Canada improve the management and value of off-lease inventory, and the strategy of selling directly to the dealers reduces the reliance on remarketing vehicles through physical auctions, which generally yield lower proceeds. In 2016, BMW Canada implemented a business strategy that focuses on dealership preference to purchase vehicles through the online auction channel, resulting in an increase in online auction sales and a decrease in physical auction sales compared with previous years. The enhancement levels support a 100% turn-in rate and disposition through third-party auctions applying a 30% haircut to SV, assuming the more attractive channels are unavailable.

OPERATIONAL AND BRAND STRENGTH OF SELLER
On September 28, 2021, DBRS Morningstar changed the trend on the Issuer Rating of BMW AG as well as the Senior Unsecured Debt rating of its subsidiary, BMW Canada, to Stable from Negative while confirming the ratings at A (high). The trend change reflects the ongoing solid financial performance of the Company despite meaningful challenges associated with the progression of the coronavirus pandemic last year. Moreover, despite prevailing headwinds (notably including the global semiconductor shortage), the Company’s financial risk assessment is estimated to remain strong in the context of the current ratings, which remain supported by BMW’s solid business risk assessment as a globally leading premium automotive original equipment manufacturer. As a subsidiary of BMW, BMW Canada benefits from its parent’s strong financial standing, global presence, and brand value, allowing it to leverage the experience and expertise of BMW’s other financial services companies worldwide to ensure sound and consistent underwriting standards and efficient servicing operations. As of December 2021, BMW Canada’s market share increased slightly to 1.9% from 1.7% the year prior, with sales up 20.2% from the prior year.

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 ratings.

No Environmental, Social, or Governance (ESG) factors 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 www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Auto Retail 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577