Morningstar DBRS Confirms Credit Ratings on VCL Master Sweden S.A., acting for and on behalf of its Compartment 1

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings on the notes issued by VCL Master Sweden S.A., acting for and on behalf of its Compartment 1 (the Issuer) as follows:

-- Class A1 Notes at AAA (sf)
-- Class A2 Notes at AAA (sf)
-- Class A3 Notes at AAA (sf)
-- Class A4 Notes at AAA (sf)
-- Class A5 Notes at AAA (sf)
-- Class B1 Notes at AA (low) (sf)
-- Class B2 Notes at AA (low) (sf)
-- Class B4 Notes at AA (low) (sf)

Morningstar DBRS does not rate the outstanding Class A6 Notes and Class B3 Notes of the Issuer.

The credit ratings address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date of the notes in September 2033.

The confirmations follow a review of the transaction upon the execution of an amendment agreement that includes, among others:
-- Updated margins on all series of notes;
-- Updated target overcollateralisation levels for both classes of notes;
-- The inclusion of an additional reserve fund, the Collections Reserve Ledger;
-- A 12-month extension of the revolving period for the notes through to March 2025; and
-- A 12-month extension of the legal maturity date for all series of notes through to September 2033.

The transaction is a master securitisation of financial and operational lease contracts comprising instalments and residual values (RVs) originated and serviced by Volkswagen Finans Sverige AB (VFS) in Sweden, with a maximum notes issuance amount of SEK 15.0 billion. As of the March 2024 payment date, the receivables portfolio had an outstanding balance of SEK 8.9 billion.

The credit ratings are based on Morningstar DBRS’ review of the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and net losses;
-- The programme’s capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, a reserve fund, and overcollateralization (OC);
-- Credit enhancement levels that are sufficient to support Morningstar DBRS’ projected cumulative net losses and RV losses under various stressed cash flow assumptions for the notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested;
-- VFS’ capabilities with regard to origination, underwriting, servicing, and its 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;
-- Morningstar DBRS’ sovereign credit rating on the Kingdom of Sweden, currently rated AAA with a Stable trend; and
-- The consistency of the transaction’s legal structure with Morningstar DBRS’ “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the isolation of the assets and the enforceability the Issuer's rights.

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 non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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

Environmental (E) Factors

The transaction has a relatively large exposure to electric and hybrid vehicles at 41% of the current portfolio balance compared with 32% at issuance. Morningstar DBRS received RV performance data over a limited time horizon and aggregated by fuel and product type. Morningstar DBRS notes that RV performance related to hybrid and electric vehicles underperformed vehicles equipped with internal combustion engines in recent years and considered such exposure in deriving its RV loss assumption. Morningstar DBRS considers that the increased exposure to electric vehicles, combined with a potential further increase in that exposure during the revolving period, is a relevant Environmental factor within its analysis, namely the factor “Carbon and Greenhouse Gas (GHG) Costs”. This E factor is new and was not present in the prior credit rating disclosure.

There were no Social or 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 Swedish krona unless otherwise noted.

The principal methodology applicable to the credit ratings is Master European Structured Finance Surveillance Methodology (7 March 2024), https://dbrs.morningstar.com/research/429051.

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 continues to consider 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 these credit ratings include historical performance data relating to receivables provided by VFS directly or through its agent, Skandinavska Enskilda Banken AB; monthly investor reports provided by VFS; and legal documentation provided by the Issuer’s legal counsel.

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

Morningstar DBRS was supplied with third-party assessments. However, this did not impact the 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 rating process.

The last credit rating action on this transaction took place on 26 June 2023, when Morningstar DBRS withdrew its AAA (sf) rating on the Class A6 Notes at the Issuer’s request.

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

-- Probability of default (PD) rate used: base case PD of 2.9%, a 25% and 50% increase on the base case PD was tested.
-- Losses given default (LGD) rates used: LGD of 54.5% at the AAA (sf) stress level and 49.6% at the AA (low) (sf) stress level, a 25% and 50% decrease in the base case LGD was tested.
-- Residual Value (RV) Loss rate: 34.6% at the AAA (sf) stress level and 26.4% at the AA (low) (sf) stress level. In both scenarios, a 25% and 50% increase in RV Loss was tested.

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

Class B Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of A (sf)
-- 50% increase in PD and LGD, expected rating of A (low) (sf)
-- 25% increase in RV Loss, expected rating of A (sf)
-- 50% increase in RV Loss, expected rating of A (low) (sf)
-- 25% increase in PD and LGD and 25% increase in RV Loss, expected rating of A (low) (sf)
-- 25% increase in PD and LGD and 50% increase in RV Loss, expected rating of BBB (high) (sf)
-- 50% increase in PD and LGD and 25% increase in RV Loss, expected rating of BBB (high) (sf)
-- 50% increase in PD and LGD and 50% increase in RV Loss, expected rating of BBB (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 Rating Date: 27 March 2023

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Tel. +49 (69) 8088 3500
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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.

-- Master European Structured Finance Surveillance Methodology (7 March 2024),
https://dbrs.morningstar.com/research/429051.
-- Rating European Structured Finance Transactions Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425149.
-- Rating European Consumer and Commercial Asset-Backed Securitisations (8 January 2024),
https://dbrs.morningstar.com/research/426219.
-- 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.
-- 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].