Press Release

DBRS Morningstar Finalises Provisional Credit Ratings on Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK seven

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October 25, 2023

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional credit ratings on the following classes of notes (the Rated Notes) issued by Driver UK Multi-Compartment S.A. acting for and on behalf of its Compartment Driver UK seven (the Issuer):

-- Class A Notes AAA (sf)
-- Class B Notes at A (high) (sf)

The credit ratings on both the Rated Notes address the timely payment of scheduled interest and the ultimate repayment of principal by the final maturity date.

CREDIT RATING RATIONALE
The transaction represents the issuance of Rated Notes backed by a portfolio of approximately GBP 500 million in receivables related to hire purchase (HP), personal contract purchase (PCP), and lease purchase (LP) auto loans granted by Volkswagen Financial Services (UK) Limited (VWFSUK; the Originator or the Seller) to borrowers in England, Wales, Northern Ireland, and Scotland. The underlying motor vehicles related to the finance contracts consist of new and used passenger and light-commercial vehicles. VWFSUK also services the receivables.

DBRS Morningstar based its credit ratings on a review of the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement to withstand stressed cash flow assumptions and repay the Rated Notes;
-- VWFSUK’s capabilities with regard to originations, underwriting, servicing, and 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;
-- DBRS Morningstar's sovereign rating on the United Kingdom, currently at AA with a Stable trend; and
-- The 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 address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction includes a six-month revolving period wherein the Issuer may purchase additional receivables 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 recoveries.

The transaction benefits from liquidity support provided by a cash reserve, with an initial balance of GBP 6.5 million (equal to 1.6% of the aggregate nominal amount of the Rated Notes at closing). The target balance of the reserve on subsequent payment dates is the higher of (1) 1.6% of the aggregate nominal amount of the Rated Notes outstanding at the end of the monthly period and (2) the lower of (a) 1.0% of the initial nominal amount of the Rated Notes and (b) the aggregate nominal amount of the Rated Notes outstanding at the end of the monthly period. The reserve is available to cover the payment of senior expenses, swap payments, and interest on the Rated Notes. The reserve also provides credit enhancement to the Rated Notes and is available to repay principal on the Rated Notes when the portfolio’s aggregate discounted receivables balance reaches zero.

All underlying contracts are fixed rate while the Rated Notes pay a floating rate. The Rated Notes are indexed to compounded daily Sonia. Interest rate risk for the Rated Notes is mitigated through an interest rate swap with the Royal Bank of Canada (RBC).

COUNTERPARTIES
The Bank of New York Mellon, London branch (BONYM-LB) has been appointed as the account bank for the transaction. DBRS Morningstar concludes that BONYM-LB meets the minimum criteria to act in this capacity. The transaction documents contain downgrade provisions relating to the account bank consistent with DBRS Morningstar’s legal criteria.

RBC has been appointed as the swap counterparty for the transaction. DBRS Morningstar’s public Long-Term Issuer Rating on RBC is AA (low) with a Stable trend, which meets the criteria to act in such capacity. The hedging documents contain downgrade provisions consistent with DBRS Morningstar’s criteria.

DBRS Morningstar’s credit ratings on the Rated Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related interest payments amounts and the related principal outstanding balances.

DBRS Morningstar’s credit ratings do 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 British pound sterling unless otherwise noted.

The principal methodology applicable to the credit ratings 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. Because of 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:
-- Quarterly static cumulative gross loss data from Q3 2002 to Q3 2023 split by credit defaults and voluntary terminations (VTs) on a total portfolio basis and split into product and new/used subsets;
-- Quarterly static cumulative net loss data from Q3 2002 to Q3 2023 split by credit defaults and VTs on a total portfolio basis and split into product and new/used subsets;
-- Quarterly origination amounts from Q3 2002 to Q3 2023 split into product and new/used subsets;
-- Monthly dynamic prepayment data from June 2008 to June 2023;
-- Monthly dynamic delinquency data from June 2007 to June 2023, split into product and new/used subsets;
-- Monthly PCP handback data from July 2002 to June 2023;
-- Monthly recovery performance data detailing cash and vehicle sale recoveries up to 18 months and over 18 months split into credit and VT recoveries, product, and new/used subsets;
-- Monthly VT handback data from July 2002 to June 2023 split into product and new/used subsets;
-- Stratification data of the portfolio as at 30 September 2023; and,
-- Loan-level portfolio data as at 30 September 2023 and its related 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 these credit ratings 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.

These credit ratings concern newly issued financial instruments. These are the first DBRS Morningstar credit ratings on these financial instruments.

This is the first credit rating action since the Initial Rating Date.

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

-- Expected default rate: 4.3%
-- Expected recovery rate: 75.5%
-- Loss given default (LGD): 52.8% for the AAA (sf) scenario, 45.3% for the A (high) (sf) scenario
-- Residual value (RV) Loss: 42.2% for the AAA (sf) scenario, 30.1% for the A (high) (sf) scenario

Scenario 1: A 25% increase in the expected default and expected LGD rates.
Scenario 2: A 50% increase in the expected default and expected LGD rates.
Scenario 3: A 25% increase in the expected RV loss.
Scenario 4: A 25% increase in the expected default and expected LGD rates and a 25% increase in the RV loss.
Scenario 5: A 50% increase in the expected default and expected LGD rates and a 25% increase in the RV loss.
Scenario 6: A 50% increase in the RV loss.
Scenario 7: A 25% increase in the expected default and expected LGD rates and a 50% increase in the RV loss.
Scenario 8: A 50% increase in the expected default and expected LGD rates and a 50% increase in the RV loss.

DBRS Morningstar concludes that the expected credit ratings under the eight stress scenarios would be:
-- Class A Notes: AA (sf), AA (low) (sf), AA (sf), AA (low) (sf), A (high) (sf), A (high) (sf), A (sf), A (sf)
-- Class B Notes: A (sf), BBB (high) (sf), BBB (low) (sf), BBB (high) (sf), BBB (high) (sf), BB (high) (sf), BBB (low) (sf), BBB (low) (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.

These credit ratings are endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Miklos Halasz, Assistant Vice President
Rating Committee Chair: Gareth Levington, Managing Director
Initial Rating Date: 11 September 2023

DBRS Ratings Limited
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London EC1Y 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

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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