Morningstar DBRS Assigns Provisional Credit Ratings to MBARC Credit Canada Inc. 2024-A Notes

DBRS Limited (Morningstar DBRS) assigned the following provisional credit ratings to the notes (collectively, the Notes) to be issued by MBARC Credit Canada Inc.:

-- 2024-A Class A-1 Asset Backed Notes (the Class A-1 Notes) provisionally rated AAA (sf)
-- 2024-A Class A-2 Asset Backed Notes (the Class A-2 Notes) provisionally rated AAA (sf)
-- 2024-A Class A-3 Asset Backed Notes (the Class A-3 Notes) provisionally rated AAA (sf)

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

Repayment of the Notes will be made from collections from the Portfolio of Assets, which generally include 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.

Monthly payments of interest and principal will be made with the amortization schedule of the Notes based on the amortization of 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 repayment of the Class A-3 Notes. The provisional credit ratings are based on the full repayment of the Notes by their respective Final Scheduled Payment Dates.

The provisional credit ratings incorporate the following considerations:

(1) HIGH LEVEL OF CREDIT ENHANCEMENT
Initially, 15.00% of hard credit enhancement, which consists of 0.25% cash and 14.75% overcollateralization (OC). By applying excess collections available monthly to repay outstanding principal of the Notes, the OC amount will build to 16.75% of the initial securitization value. No cash will be released to the Issuer until the Target OC Amount is met, which is expected by month four based on scheduled payments (assuming no losses, delinquencies or prepayments). In addition, 4.28% (annualized) of excess spread, net of indicative cost of funds and monthly servicing fees, will be available to offset any collection shortfalls on a monthly basis.

(2) NONAMORTIZING 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 at its highest at the maturities of the lease contracts. Nonamortizing credit enhancement ensures that an increasing level of protection is available to offset potential vehicle disposition losses.

(3) STRONG OBLIGOR PROFILE AND PERFORMANCE
The obligors of the underlying lease contracts represent high-credit-quality customers, as the weighted-average FICO score is 794. 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. Performance has been stable with consistently low credit losses and delinquencies.

(4) CONSERVATIVE ADVANCE RATE ON RESIDUAL VALUES
The Base Residual Value is determined using the lowest of contract residual value, ALG value at lease inception, and updated ALG value as of January 2024. The reference to the ALG values in setting the Base Residual Value eliminates funding of potential embedded losses (negative equity in relation to residual values) on the Expected Closing Date, effectively reducing residual value risk in the Portfolio of Assets. The ALG value at origination and the updated ALG value are available for all the vehicles in the Portfolio of Assets. As ALG projects its residual values primarily based on auction proceeds, ALG values represent an independent and conservative estimate of the expected wholesale value of the vehicles in the portfolio at maturity.

(5) OPERATIONAL AND BRAND STRENGTH OF SELLER
Mercedes-Benz Group AG (MBG AG) and its related Canadian entities were upgraded to “A” with a Stable trend by Morningstar DBRS on November 16, 2023. The credit rating upgrade reflects MBG AG's persistent, solid, and resilient earnings performance, notwithstanding various meaningful headwinds. As a wholly owned subsidiary of MBG AG, Mercedes-Benz Financial Services Canada benefits from its parent’s strong financial standing and global presence as discussed in Morningstar DBRS’ Mercedes-Benz Group AG rating report (available here: https://dbrs.morningstar.com/research/424332), allowing it to leverage the experience and expertise of MBG AG's other financial services companies worldwide to ensure sound and consistent underwriting standards and efficient servicing operations.

(6) EFFICIENT REMARKETING STRATEGY
MBFSC has an established vehicle remarketing strategy to maximize the disposition proceeds and minimize the time to remarket the vehicles should they be returned upon or prior to maturity. The commitment from the dealers to purchase off-lease vehicles (at least 65% since 2013) reduces MBFSC’s reliance on remarketing the vehicles through the auction channel, which historically results in additional costs and lower liquidation proceeds. In addition, the use of Pull-Ahead Programs sponsored by the Seller’s parent are expected to be employed to manage the supply of used vehicles by shifting the maturity schedule of leases into months where the used-car market is expected to be stronger. By including a manufacturer’s warranty at the cost of the Seller’s parent, the certified pre-owned programs also enhance disposition proceeds, as potential customers can expect a high level of quality in the condition of the vehicles.

Morningstar DBRS’ 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.

Morningstar DBRS’ credit rating on the Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS’ 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.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030/.

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

The principal methodology applicable to the credit ratings is Rating Canadian Auto Retail Loan and Lease Securitizations (September 29, 2023), https://dbrs.morningstar.com/research/421298/

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

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 info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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

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

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

-- Operational Risk Assessments for Canadian Structured Finance (April 4, 2023),
https://dbrs.morningstar.com/research/412270/
-- Legal Criteria for Canadian Structured Finance (June 20, 2023),
https://dbrs.morningstar.com/research/416101/

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.