DBRS Morningstar Finalizes Provisional Ratings on BMW Canada Auto Trust, Series 2023-1

DBRS Limited (DBRS Morningstar) finalized provisional ratings on BMW Canada Auto Trust, Series 2023-1 (the Notes) issued by BMW Canada Auto Trust, as follows:

-- Class A-1 Notes, Series 2023-1 (the Class A-1 Notes) at AAA (sf)
-- Class A-2 Notes, Series 2023-1 (the Class A-2 Notes) at AAA (sf)
-- Class A-3 Notes, Series 2023-1 (the Class A-3 Notes) at AAA (sf)

The Notes are 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 Final Scheduled Payment Dates.

The ratings incorporate the following considerations:

1. High level of credit enhancement
   On the Closing Date, 15% of credit enhancement is available (0.25% of cash and 14.75% of overcollateralization (OC)). Excess collections will be applied monthly to repay outstanding principal of the Notes until the OC reaches the target OC of 16.75%, which is expected by month four based on scheduled payments. In addition, 4.07% (annualized) of excess spread, net of the cost of funds and the Replacement Servicer Fee provision, will be available to offset any collection shortfalls on a monthly basis.

2. Non-amortizing credit enhancement
   The requirement to maintain the cash account and the OC amounts at their target levels provides a deleveraging structure as 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.

3. Conservative advance rate on residual values
   The Base RV is determined by using the lower of the contract residual values and the ALG-estimated values as of May/June 2023. 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.

4. Strong obligor profile
   The obligors of the underlying lease contracts represent high-credit-quality customers, as the WA FICO score is 796. Approximately 54% 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 five years.

5. Established remarketing strategy
   BMW Canada 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 Base RV, assuming the more attractive channels are unavailable.

6. Operational and brand strength of the Seller
   On September 28, 2022, DBRS Morningstar confirmed the Issuer Rating of BMW as well as the Senior Unsecured Debt rating of its subsidiary, BMW Canada, at A (high) with Stable Trends. The confirmations reflect BMW's solid business risk assessment as a leading global manufacturer of premium automotive vehicles. Moreover, despite prevailing headwinds, including the global semiconductor shortage, supply base challenges, rising inflation and interest rates, and geopolitical uncertainty, the Company’s financial performance has remained strong. 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 2022, BMW Canada’s market share remained at 2.1%.

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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (May 17, 2022).

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

The principal methodology applicable to the ratings is Rating Canadian Auto Retail Loan and Lease Securitizations (October 26, 2022; https://www.dbrsmorningstar.com/research/404314).

Other methodologies referenced in this transaction are listed at the end of this press release.

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/413218.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

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

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

Operational Risk Assessments for Canadian Structured Finance (April 4, 2023)
https://www.dbrsmorningstar.com/research/412270/operational-risk-assessments-for-canadian-structured-finance

Legal Criteria for Canadian Structured Finance (June 22, 2022)
https://www.dbrsmorningstar.com/research/398729/legal-criteria-for-canadian-structured-finance

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