Morningstar DBRS Finalises Provisional Credit Rating on Bavarian Sky S.A., acting in respect of its Compartment German Auto Loans 13

DBRS Ratings GmbH (Morningstar DBRS) finalised its provisional credit rating of AAA (sf) on the Class A Notes issued by Bavarian Sky S.A., acting in respect of its Compartment German Auto Loans 13 (the Issuer).

Morningstar DBRS did not assign a credit rating to the Class B Notes (together with the Class A Notes, the Notes) 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.

CREDIT RATING RATIONALE
The transaction represents the issuance of Notes backed by a pool of approximately EUR 750 million of receivables related to amortising and balloon loans granted by BMW Bank GmbH (BMW Bank or the Originator) to private individual and commercial borrowers resident or incorporated in the Federal Republic of Germany. The underlying receivables relate to the financing of new and used passenger vehicles and motorbikes. BMW Bank also acts as the Servicer for the transaction.

Morningstar DBRS’ 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 have been issued.
-- The credit quality of BMW Bank’s portfolio, the characteristics of the collateral, its historical performance, and Morningstar DBRS projected behaviour under various stress scenarios.
-- BMW Bank's capabilities with respect to originations, underwriting, servicing, and its position in the market and financial strength.
-- The operational risk review of BMW Bank, which Morningstar DBRS deems to be an acceptable servicer.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The consistency of the transaction’s legal structure with Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology.
-- The consistency of the transaction’s hedging structure with Morningstar DBRS’ “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 Morningstar DBRS.

TRANSACTION STRUCTURE
The transaction has a 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 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 cash reserve fully credited to the cash reserve account within two business days from the issue 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 cash reserve is set at 1.1% of the current aggregate outstanding principal balance (i.e., approximately EUR 8.3 million).

COUNTERPARTIES
The Bank of New York Mellon, Frankfurt Branch (BONY-FB) has been appointed to act as the account bank for the transaction. Morningstar DBRS privately rates BONY-FB and concluded that the bank meets the criteria to act in this capacity. The Issuer account incorporates subaccounts and ledgers that include the operating account, the cash reserve account, the commingling reserve account, the servicing reserve account, and the replenishment ledger. The transaction documents contain downgrade provisions consistent with Morningstar DBRS’ criteria.

The transaction is exposed to interest rate risk because of 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. ING Bank N.V. has been appointed as the swap counterparty for the transaction. Morningstar DBRS has a Long-Term Issuer Rating of AA (low) with a Stable trend and a Long Term Critical Obligations Rating of AA (high) with a Stable trend on ING Bank N.V. The hedging documents contain downgrade provisions consistent with Morningstar DBRS' criteria.

Morningstar DBRS’ 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 notes’ principal.

Morningstar DBRS’ credit rating does not address nonpayment 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, 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 rating is: Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024), https://dbrs.morningstar.com/research/426219.

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.

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

The sources of data and information used for this credit rating include the Originator and its agents. Morningstar DBRS received the following data:
-- Quarterly static default and net loss data from January 2015 to September 2023, split into total, amortising and balloon loans, and commercial and private subsets;
-- Monthly dynamic delinquency data, prepayment data, originations, and outstanding balances from January 2015 to September 2023; and
-- Portfolio stratification tables as at 29 February 2024 and its related theoretical amortisation schedule.

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

Morningstar DBRS was supplied with one or more 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 this credit rating 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.

This credit rating concerns a newly issued financial instrument. This is the first Morningstar DBRS credit rating on this financial instrument.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit rating (the base case):

-- Expected default rate: 1.6%
-- Expected recovery rate: 65.0%
-- Loss given default (LGD): 57.8% for the AAA (sf) scenario

Scenario 1: 25% increase in LGD
Scenario 2: 50% increase in LGD
Scenario 3: 25% increase in probability of default (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

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

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

Lead Analyst: Xiaoxi Sun, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 19 February 2024

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 Consumer and Commercial Asset-Backed Securitisations (8 January 2024),
https://dbrs.morningstar.com/research/426219
-- 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
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024),
https://dbrs.morningstar.com/research/429054
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602
-- 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].