Press Release

DBRS Morningstar Assigns Provisional Credit Rating to Silver Arrow S.A., acting in respect of its Compartment 16

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November 02, 2023

DBRS Ratings GmbH (DBRS Morningstar) assigned a provisional credit rating of AAA (sf) to the Class A Notes to be issued by Silver Arrow S.A., acting in respect of its Compartment 16 (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 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 securitisation transaction constitutes the issuance of Notes backed by a pool of approximately EUR [545] million of fixed rate receivables related to auto loans granted by Mercedes-Benz Bank GmbH (MBB; the Originator, the Seller or the Servicer), to private individual and commercial borrowers resident or incorporated in the Federal Republic of Germany. The underlying motor vehicles related to the auto loans consist of both new and used vehicles. MBB also services the receivables.

DBRS Morningstar’s provisional credit rating is based on the following analytical considerations:
-- The transaction’s structure, including the form and sufficiency of available credit enhancement to withstand stressed cash flow assumptions and repay the Issuer’s financial obligations according to the terms under which the Class A Notes are expected to be issued.
-- The credit quality of MBB’s portfolio, the characteristics of the collateral, its historical performance and DBRS Morningstar projected behaviour under various stress scenarios.
-- MBB's capabilities with respect to originations, underwriting, servicing, and its position in the market and financial strength.
-- The operational risk review of MBB, which DBRS Morningstar deems to be an acceptable servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The expected consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.
-- The expected consistency of the transaction’s hedging structure with DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.
-- The sovereign rating on the Federal Republic of Germany, currently rated at AAA with a Stable trend by DBRS Morningstar.

TRANSACTION STRUCTURE
The transaction is static, and the Class A Notes will begin to amortise from the first interest payment date. 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 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 nonamortising general reserve that will be funded on the closing date. The general reserve is available to cover senior fees, senior net interest rate swap payments, and interest on the Class A Notes, while also ultimately providing credit enhancement to the Notes. The general reserve is set at 0.9% of the aggregate outstanding loan principal balance at closing, i.e., EUR [•] million.

COUNTERPARTIES
Elavon Financial Services DAC (Elavon) has been appointed to act as the account bank for the transaction. DBRS Morningstar privately rates Elavon and concluded that the bank meets the criteria to act in this capacity. The Issuer’s account includes the operating ledger, the general reserve ledger, the commingling reserve ledger, the set-off reserve ledger, the swap collateral ledger, and the servicing fee reserve ledger. 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., which meets the criteria to act in this capacity. 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 Class A interest amount and the Class A principal redemption amount.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents 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
Environmental (E) Factors

Approximately 49% of the receivables relate to vehicles equipped with a diesel engine. Following a judgement of the European Court of Justice (Case C-100/21), the German Federal Court of Justice ruled in the second quarter of 2023 that vehicle purchasers of certain diesel vehicles are entitled to claim damages against the manufacturer if it has intentionally or negligently equipped vehicles with inadmissible emissions defeat devices. The decision may increase the number of lawsuits for damages, that if successful could pose additional risks associated with these vehicles, including bans and recalls. These risks may lead to changes in expected vehicle valuations and borrowers' behaviour that could subsequently influence future default, recovery, and prepayment activity. DBRS Morningstar considers that this comparatively higher exposure to diesel vehicles is a credit negative, relevant environmental factor within its analysis, namely the E factor “Carbon and Greenhouse Gas (GHG) Costs”.

There were no 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/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” (22 October 2023), https://www.dbrsmorningstar.com/research/422276/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.

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 quarterly cumulative gross loss and recovery data from Q2 2018 to Q2 2023;
-- Dynamic monthly prepayment and delinquency data from April 2018 to June 2023;
-- Portfolio stratification tables as at 30 September 2023; and
-- Theoretical amortisation schedule and Yield OC 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 http://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: 1.8%
-- Expected recovery rate: 70.0%
-- Loss given default (LGD): 54.5% 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: AA (high) (sf), AA (sf), AA (high) (sf), AA (sf), AA (sf), A (high) (sf), A (high) (sf), and A (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: David Lautier, Senior Vice President
Initial Rating Date: 2 November 2023

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 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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