Press Release

DBRS Morningstar Assigns Provisional Credit Rating to Bavarian Sky S.A., acting in respect of its Compartment German Auto Leases 8

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October 10, 2023

DBRS Ratings GmbH (DBRS Morningstar) assigned a provisional credit rating of AAA (sf) to the Class A Notes to be issued by Bavarian Sky S.A., acting in respect of its Compartment German Auto Leases 8 (the Issuer).

DBRS Morningstar did not assign a provisional credit rating to the Class B Notes (together with the Class A Notes, the Notes) also expected to be issued in this transaction.

The credit rating on the Class A Notes addresses the timely payment of scheduled interest and the ultimate repayment of principal by the legal final maturity date.

The provisional credit rating is based on information provided to DBRS Morningstar by the Issuer and its agents as of the date of this press release. This credit rating will be finalised upon a review of the final version of the transaction documents and of the relevant legal opinions. If the information therein were substantially different, DBRS Morningstar may assign a different final credit rating to the Class A Notes.

CREDIT RATING RATIONALE
The transaction represents the issuance of Notes backed by a preliminary pool of approximately EUR [•] million of receivables related to auto leases granted by BMW Bank GmbH (BMW Bank; the Originator, the Seller or the Servicer), to private individual and commercial lessees resident or incorporated in the Federal Republic of Germany. The underlying motor vehicles related to the auto leases consist of both new and used vehicles and motorbikes. BMW Bank also services the receivables.

DBRS Morningstar based its provisional credit rating 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, cash reserve account, and excess spread;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected cumulative net loss (CNL) under various stressed cash flow assumptions for the Class A Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- BMW Bank’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 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 has an initial revolving period of 12 months, during which additional receivables could be purchased subject to eligibility criteria and portfolio concentration limits. The transaction incorporates a single waterfall that outlines the allocation of the available distribution amount consisting of, inter alia, collections representing interest, principal, and unsecured recoveries. The Notes will amortise sequentially, and there will be no payment of principal on the Class B Notes until the Class A Notes have been repaid in full.

The transaction benefits from a cash reserve that will be funded on the closing date. The cash reserve is available to cover senior fees, senior net interest rate swap payments, and interest on the Class A Notes. In certain scenarios, the cash reserve also ultimately provides credit enhancement to the Class A Notes. The nonamortising cash reserve is set at 1.1% of the discounted outstanding lease balance at closing, i.e., EUR [•] million.

COUNTERPARTIES
The Bank of New York Mellon, Frankfurt Branch (BONY-FB) has been appointed to act as the account bank for the transaction. DBRS Morningstar privately rates BONY-FB and concluded that the bank meets the criteria to act in this capacity. The Issuer account incorporates sub-accounts that include the operating account, cash reserve account, the commingling reserve account, and the servicing reserve account. The transaction documents are expected to contain downgrade provisions 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. This risk is mitigated by an interest rate swap hedging the Class A Notes. Skandinaviska Enskilda Banken AB (publ) (SEB) has been appointed as the swap counterparty for the transaction. DBRS Morningstar has a Long-Term Issuer rating of A (high) with a Stable trend and a Long Term Critical Obligations Rating of AA with a Stable trend on SEB. The hedging documents are expected to contain downgrade provisions consistent with DBRS Morningstar's criteria.

DBRS Morningstar’s credit rating on the Class A Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. For the Class A Notes the associated financial obligations are the related interest amounts and the related principal amounts.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an Issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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/416784/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 credit rating is: “Rating European Consumer and Commercial Asset-Backed Securitisations” (19 October 2022), https://www.dbrsmorningstar.com/research/404212/rating-european-consumer-and-commercial-asset-backed-securitisations.

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

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 credit 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/421590.

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 sources of data and information used for these credit ratings include the Originator and its agents. DBRS Morningstar received the following data:
-- Static cumulative default data covering Q1 2015 to Q2 2023, split into commercial and private subsets;
-- Monthly dynamic prepayment and delinquency data, originations, and outstanding balances from January 2015 to June 2023;
-- Preliminary pool stratification tables as at 31 August 2023 and its related theoretical amortisation schedule.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

DBRS Morningstar was supplied with one or more third-party assessments. However, this did not impact the credit rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

This credit rating concerns an expected-to-be issued new financial instrument. This is the first DBRS Morningstar credit rating on this financial instrument.

Information regarding DBRS Morningstar credit 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 credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Expected default rate: 1.4%
-- Expected recovery rate: 10.0%
-- Loss given default (LGD): 94.0% for the AAA (sf) scenario

Scenario 1: 25% increase in LGD
Scenario 2: 50% increase in LGD
Scenario 3: 25% increase in 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 credit ratings under the eight stress scenarios would be:
-- Class A Notes: AAA (sf), AAA (sf), AAA (sf), AA (high) (sf), AAA (sf), AAA (sf), AA (high) (sf), and AA (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: https://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jose Escandell, Senior Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 10 October 2023

DBRS Ratings GmbH, Sucursal en España
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Tel. +34 (91) 903 6500

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 credit rating methodologies used in the analysis of this transaction can be found at: https://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: https://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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