Morningstar DBRS Confirms Credit Ratings on Red & Black Auto Lease France 2

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on the notes issued by Red & Black Auto Lease France 2 (the Issuer) as follows:

-- Class A Notes at AAA (sf)
-- Class B Notes at BBB (high) (sf)

The credit rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal on or before the legal final maturity date in June 2035. The credit rating on the Class B Notes addresses the ultimate payment of interest and principal by the legal final maturity date and the timely payment of interest once it becomes the most senior outstanding class of notes in the transaction.

CREDIT RATING RATIONALE
The confirmations 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 May 2024 payment date;
-- Probability of default (PD), loss given default (LGD), and expected loss assumptions on the remaining receivables;
-- Current available credit enhancement to the notes to cover the expected losses at their respective credit rating levels; and
-- No purchase termination events or breach of transfer limits to date.

The transaction is a securitisation collateralised by lease receivable instalments and the residual value (RV) component of the lease agreements. The auto lease agreements are characterised as full-service leasing contracts (location long durée (LLD)) and have been granted by Temsys S.A., whose commercial name is ALD Automotive (ALD France or the Seller) to commercial lessees operating in France. The transaction closed in June 2023 and there is a revolving period of 12 months, which will end after the June 2024 payment date.

PORTFOLIO PERFORMANCE
As of the May 2024 payment date, loans that were 30 days to 60 days delinquent and 60 days to 90 days delinquent represented 0.3% and 0.2% of the portfolio balance, respectively. The cumulative gross default ratio was 1.2% of the aggregate cumulative portfolio.

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, LGD, and RV assumptions to 8.0%, 50.1%, and 8.4%, respectively.

CREDIT ENHANCEMENT
Subordination of the junior notes provides credit enhancement. As of the May 2024 payment date, the credit enhancement to the Class A, and Class B Notes were 27.5%, and 13.9%, respectively, unchanged from closing.

The transaction benefits from a general reserve that is fully funded on the issue date. The general reserve covers senior expenses, net swap payments, and interest shortfalls on the rated notes during both the revolving and normal amortisation periods and it is made available in full to the priority of payments on the legal maturity date. The general reserve is set at 1.5% of the outstanding balance of the notes. It has been at its required balance since closing, and currently stands at EUR 10.3 million.

Société Générale, S.A. acts as the account bank for the transaction. Based on the account bank reference rating of AA (low) on Société Générale, S.A. (which is one notch below its Morningstar DBRS Long Term Critical Obligations Rating of AA), 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 's "Legal Criteria for European Structured Finance Transactions" methodology.

All lease receivables are sold using a fixed discount rate while the Class A Notes are indexed to one-month Euribor. Interest rate risk for the Class A Notes is mitigated through an interest rate swap provided by the Royal Bank of Canada (RBC). Morningstar DBRS' Long-Term Issuer Rating of AA (high) on RBC is above the first rating threshold as described in Morningstar DBRS' "Derivative Criteria for European Structured Finance Transactions" methodology.

Morningstar DBRS' credit ratings on the 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 transaction documents 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
Environmental (E) Factors
The transaction has a relatively large exposure to electric and plug-in hybrid vehicles at 53.6% as of the latest payment date. The line-by-line sale proceeds data, which was used to derive the RV loss assumption at closing, included a high number of observations related to older diesel engine vehicles, which did not reflect the securitised pool composition. At closing Morningstar DBRS considered the relatively higher exposure to plug-in hybrid, electric, and hybrid which showed favourable past RV performance as a result of prudent RV setting policies in deriving its RV loss assumption. Morningstar DBRS considers that this exposure, is a significant Environmental factor within its analysis, namely the factor "Carbon and Greenhouse Gas (GHG) Costs". At closing, without considering that, the rating of the Class B Notes would have been one notch lower.

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 euros unless otherwise noted.

The principal methodology applicable to the credit ratings is the "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 the replenishment criteria set forth in the transaction legal documents.

A review of the transaction 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 transaction reports provided by France Titrisation and loan-level data provided by the European DataWarehouse GmbH.

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 27 June 2023, when Morningstar DBRS finalised its credit ratings on the Class A and Class B Notes at AAA (sf) and BBB (high) (sf), respectively.

The lead analyst responsibilities for this transaction have been transferred to Baran Cetin.

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 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.
-- Probability of default (PD) rate used: base case PD of 23.7% at the AAA (sf) stress level and 12.9% at the BBB (high) (sf) stress level, a 25% and 50% increase on the base case PD was tested.
-- Losses given default (LGD) rates used: LGD of 50.1% at the AAA (sf) stress level and 42.1% at the BBB (high) (sf) stress level, a 25% and 50% decrease in the base case recovery rate was tested.
-- Residual Value (RV) Loss rate: 31.0% at the AAA (sf) stress level and 19.0% at the BBB (high) (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 credit rating of AA (high) (sf)
-- 50% increase in PD and LGD, expected credit rating of A (high) (sf)
-- 25% increase in RV Loss, expected credit rating of AAA (sf)
-- 50% increase in RV Loss, expected credit rating of AA (sf)
-- 25% increase in PD and LGD and 25% increase in RV Loss, expected credit rating of AA (sf)
-- 25% increase in PD and LGD and 50% increase in RV Loss, expected credit rating of A (high) (sf)
-- 50% increase in PD and LGD and 25% increase in RV Loss, expected credit rating of A (sf)
-- 50% increase in PD and LGD and 50% increase in RV Loss, expected credit rating of A (low) (sf)

Class B Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected credit rating of BBB (low) (sf)
-- 50% increase in PD and LGD, expected credit rating of BB (high) (sf)
-- 25% increase in RV Loss, expected credit rating of BBB (low) (sf)
-- 50% increase in RV Loss, expected credit rating of BB (high) (sf)
-- 25% increase in PD and LGD and 25% increase in RV Loss, expected credit rating of BB (high) (sf)
-- 25% increase in PD and LGD and 50% increase in RV Loss, expected credit rating of BB (sf)
-- 50% increase in PD and LGD and 25% increase in RV Loss, expected credit rating of BB (sf)
-- 50% increase in PD and LGD and 50% increase in RV Loss, expected credit rating of BB (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: Baran Cetin, Senior Analyst
Rating Committee Chair: Mark Wilder, Senior Vice President
Initial Rating Date: 27 June 2023

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.

-- Master European Structured Finance Surveillance Methodology (7 March 2024),
https://dbrs.morningstar.com/research/429051
-- 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
--Rating CLOs backed by Loans to European SMEs (20 June 2024) and SME Diversity Model v.2.6.1.4,
https://dbrs.morningstar.com/research/434775
-- 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
-- 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].