Morningstar DBRS Upgrades and Confirms Credit Ratings on VCL Multi-Compartment S.A., acting for and on behalf of its Compartment VCL 35

DBRS Ratings GmbH (Morningstar DBRS) took the following credit rating actions on the notes issued by VCL Multi-Compartment S.A., acting for and on behalf of its Compartment VCL 35 (the Issuer):

-- Class A Notes confirmed at AAA (sf)
-- Class B Notes upgraded to AA (sf) from AA (low) (sf)

The credit ratings on the Class A and Class B Notes (together, the Notes) address the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date in January 2028.

The credit rating actions follow an annual review of the transaction and are based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the February 2024 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the Notes to cover the expected losses at their respective credit rating levels.

The transaction is a static securitisation of German auto lease receivables originated and serviced by Volkswagen Leasing GmbH (VWL). The transaction closed in March 2022 with an initial EUR 1.0 billion collateral portfolio that consisted of auto lease receivables (excluding residual value claims relating to the final balloon instalment) granted to retail (83.9% of the discounted portfolio balance) and commercial (16.1%) customers.

PORTFOLIO PERFORMANCE
As of the February 2024 payment date, loans that were 30 days to 60 days and 60 days to 90 days delinquent represented 0.6% and 0.3% of the outstanding portfolio balance, respectively, while loans more than 90 days delinquent amounted to 0.9%. Cumulative net losses amounted to only 0.06% of the original portfolio balance to date.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted a loan-by-loan analysis of the remaining pool of receivables and updated its base case PD assumption to 1.3% and maintained its LGD assumption at 40.0%.

CREDIT ENHANCEMENT
Credit enhancement to the Notes is provided by the subordination of the respective junior obligations and overcollateralisation. As of the February 2024 payment date, credit enhancement to the Class A and Class B Notes increased to 12.2% and 7.4% from 10.0% and 6.3%, respectively, at the time of the previous annual review 12 months ago.

The transaction benefits from liquidity support provided by a cash reserve, funded to EUR 12.0 million at closing with a target amount equal to the 1.2% of the outstanding discounted receivables balance, subject to a floor of the lower of (1) EUR 10.0 million or (2) the aggregate outstanding principal amount of the Notes. The reserve is available to cover the payment of senior expenses, swap payments, and interest on the Notes. As of the February 2024 payment date, the reserve was at its floor level of EUR 10.0 million.

The Bank of New York Mellon - Frankfurt Branch (BNYM Frankfurt) acts as the account bank for the transaction. Based on Morningstar DBRS’ private credit rating on BNYM Frankfurt, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, Morningstar DBRS considers the risk arising from the exposure to the account bank to be consistent with the credit ratings assigned to the Notes, as described in Morningstar DBRS’ "Legal Criteria for European Structured Finance Transactions" methodology.

Skandinaviska Enskilda Banken AB (SEB) acts as the swap counterparty for the transaction. Morningstar DBRS’ Long-Term Critical Obligations Rating of AA on SEB is consistent with the first credit rating threshold as described in Morningstar DBRS’ "Derivative Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS’ credit ratings on the rated notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transactions documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of defaults to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the term 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 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” at: https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is the “Master European Structured Finance Surveillance Methodology” (11 December 2023), https://dbrs.morningstar.com/research/425148.

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

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction’s legal documents was not conducted as the legal documents have remained unchanged since the most recent credit rating action.

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://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings include investor reports provided by VWL and loan-level data provided by the European DataWarehouse GmbH. Additionally, in the context of the latest securitisation of the originator, Morningstar DBRS was provided with updated historical performance data from the originator as follows:
-- Monthly static net loss data from January 2013 to June 2023; and
-- Monthly dynamic delinquency data from January 2010 to June 2023.

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

At the time of the initial credit ratings, Morningstar DBRS was supplied with third-party assessments. However, this did not impact the credit rating analysis.

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

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

The last credit rating action on this transaction took place on 23 March 2023, when Morningstar DBRS confirmed its credit ratings of AAA (sf) and AA (low) (sf) on the Class A and Class B Notes, respectively.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available at dbrs.morningstar.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):

-- Morningstar DBRS expected a lifetime base case PD and LGD for the pool based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings.
-- The base case PD and LGD of the current pool of loans for the Issuer are 1.3% and 40.0%, respectively.

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD, expected credit rating of AAA (sf)
-- 50% increase in PD, expected credit rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (high) (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AA (sf)
-- 50% increase in LGD, expected credit rating of AA (sf)
-- 25% increase in PD, expected credit rating of AA (sf)
-- 50% increase in PD, expected credit rating of AA (sf)
-- 25% increase in PD and 25% increase in LGD, expected credit rating of AA (sf)
-- 25% increase in PD and 50% increase in LGD, expected credit rating of AA (sf)
-- 50% increase in PD and 25% increase in LGD, expected credit rating of AA sf)
-- 50% increase in PD and 50% increase in LGD, expected credit rating of AA (sf)

For further information on Morningstar DBRS 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 Morningstar DBRS 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 Limited for use in the United Kingdom.

Lead Analyst: Daniel Rakhamimov, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Credit Rating Date: 16 February 2022

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://dbrs.morningstar.com/about/methodologies.

-- Rating European Structured Finance Transactions Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425149.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023),
https://dbrs.morningstar.com/research/416730.
-- Master European Structured Finance Surveillance Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425148.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023), https://dbrs.morningstar.com/research/420572.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023), https://dbrs.morningstar.com/research/420602.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023), https://dbrs.morningstar.com/research/420754.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030.

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at https://dbrs.morningstar.com/research/278375.

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