Morningstar DBRS Finalises Provisional Credit Ratings on VCL Multi-Compartment S.A., acting for and on behalf of its Compartment VCL 42

DBRS Ratings GmbH (Morningstar DBRS) finalised its provisional credit ratings on the following classes of notes issued by VCL Multi-Compartment S.A., acting for and on behalf of its Compartment VCL 42 (the Issuer):

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)

The credit ratings on both the Class A Notes and Class B Notes (together, the Notes) address 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 the Notes backed by a portfolio of approximately EUR 1.0 billion of receivables related to auto leases granted by Volkswagen Leasing GmbH (VWL; the Seller and the Originator), a wholly owned, indirect subsidiary of Volkswagen AG, to lessees who reside or are incorporated in the Federal Republic of Germany. The underlying motor vehicles related to the auto leases consist of both new and used passenger and light-commercial vehicles. VWL also services the receivables (the Servicer).

Morningstar DBRS' credit ratings are 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 Notes have been issued.
-- The credit quality of VWL's portfolio, the characteristics of the collateral, its historical performance, and Morningstar DBRS-projected behaviour under various stress scenarios.
-- VWL's capabilities with respect to originations, underwriting, servicing, and its position in the market and financial strength.
-- The operational risk review of VWL, 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 incorporates a single waterfall that governs the allocation of the available distribution amount consisting of, inter alia, collections representing interest, principal, and recoveries. The transaction documents foresee a mixed sequential/pro rata amortisation structure. Initially, principal payments on the Notes will be allocated to the Class A Notes. Once the Class A overcollateralization (OC) percentage reaches 12.25%, the Class B Notes will begin to amortise. Once the Class B OC percentage reaches 7.5%, principal payments on the Notes will be allocated on a pro rata basis, unless prespecified performance triggers on the cumulative net loss (CNL) ratio are breached, as outlined in the transaction documents.

The transaction benefits from liquidity support provided by a cash reserve, with an initial balance of EUR 12.0 million (equal to 1.2% of the initial outstanding discounted receivables balance). The target balance of the reserve on subsequent payment dates is the higher of 1.2% of the aggregate discounted receivables balance and the lower of (1) EUR 10 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. The reserve also provides credit enhancement to the Notes and is available to repay principal on the Notes when the portfolio's aggregate discounted receivables balance reaches zero.

COUNTERPARTIES
Deutsche Bank AG (DB) has been appointed to act as the account bank for the transaction. Morningstar DBRS has a Long-Term Issuer Rating of A and a Critical Obligations Rating of AA (low) on DB, which meets its criteria to act in such capacity. The transaction documents contain downgrade provisions relating to the account bank consistent with Morningstar DBRS's criteria.

DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank) has been appointed to act as the swap counterparty for the transaction. Morningstar DBRS has a Long-Term Issuer Rating of AA (low) and a Critical Obligations Rating of AA on DZ Bank, which meets its criteria to act in such capacity. The hedging documents contain downgrade provisions relating to the swap counterparty consistent with Morningstar DBRS's criteria.

Morningstar DBRS' credit ratings on the Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. For the Notes listed in the table, the associated financial obligations are the Notes' interest due and the Notes' principal balance.

Morningstar DBRS' credit ratings do 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: 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: 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.

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 the Originator and its agents:
-- Static CNL data going back to January 2014 and up to December 2023 provided on a total portfolio basis;
-- Total portfolio level delinquency data from January 2010 to December 2023;
-- Summarised stratification tables for the portfolio as at 31 May 2024; and
-- A theoretical amortisation of the selected portfolio.

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

Morningstar DBRS was not supplied with one or more third-party assessments. However, this did not affect 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.

These credit ratings concern newly issued new financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

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

-- Expected probability of default (PD) rate: 1.1%
-- Expected recovery rate: 62.0%
-- Loss given default (LGD): 60.3% for the AAA (sf) scenario and 55.9% for the AA (low) (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

Morningstar DBRS 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), AA (sf), AA (sf), and A (high) (sf)
-- Class B Notes: AA (low) (sf), A (high) (sf), AA (low) (sf), A (high) (sf), A (sf), A (sf), A (sf), and A (low) (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: Xiaoxi Sun, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 13 May 2024

DBRS Ratings GmbH
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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].