Morningstar DBRS Confirms Credit Rating on Silver Arrow S.A., acting in respect of its Compartment 16

DBRS Ratings GmbH (Morningstar DBRS) confirmed its AAA (sf) credit rating on the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment 16 (the Issuer).

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the August 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 Class A Notes to cover the expected losses at the AAA (sf) credit rating level.

The transaction is a securitisation of auto loans originated by Mercedes-Benz Bank AG (MBB), to private individual and commercial borrowers in the Federal Republic of Germany. The underlying motor vehicles consist of both new and used vehicles. MBB also services the receivables.

The transaction is static and is not exposed to residual value risk but the presence of a mandatory or an optional balloon payment due at the end of the loan agreement exposes the Issuer to balloon risk. The legal final maturity date is on the payment date in September 2030.

PORTFOLIO PERFORMANCE
As of the August 2024 payment date, loans two to three months in arrears and loans more than three months in arrears remained limited at 0.1% of the outstanding portfolio balance. Cumulative defaults amounted to 0.3% of the closing portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
Morningstar DBRS conducted an analysis of the current pool of receivables and increased its base case PD at the B (low) (sf) credit rating level to 3.1% from 2.9% at closing and maintained its base case LGD assumption at the B (low) (sf) credit rating level at 30.0%. The increase in the base case PD assumption reflects the increased balloon risk, which rises naturally as the portfolio amortises and the balloon component increases as a proportion of the outstanding portfolio balance. As of the August 2024 payment date, the balloon component represented 59.7% of the outstanding portfolio balance, up from 53.6% at closing.

CREDIT ENHANCEMENT
As of the August 2024 payment date, credit enhancement to the Class A Notes increased to 8.4% from 6.1% at closing. Credit enhancement consists of the subordination of the junior notes.

The transaction benefits from a general reserve, which is available to cover senior expenses, interest and swap payments on the Class A Notes and principal balance on the payment date of the Class A Notes redemption. The general reserve is nonamortising and was at its target balance of EUR 7.0 million at the August 2024 payment date.

Elavon Financial Services DAC (Elavon) acts as the account bank for the transaction. Based on Morningstar DBRS' private credit rating on Elavon, 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 rating assigned to the Class A 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 (high) on SEB 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 applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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

Following a judgement of the European Court of Justice (Case C-100/21), the German Federal Court of Justice ruled in the second quarter of 2023 that vehicle purchasers of certain diesel vehicles are entitled to claim damages against the manufacturer if it has intentionally or negligently equipped vehicles with inadmissible emissions defeat devices. The decision may increase the number of lawsuits for damages, that if successful could pose additional risks associated with these vehicles, including bans and recalls. These risks may lead to changes in expected vehicle valuations and borrowers' behaviour that could subsequently influence future default, recovery, and prepayment activity. Morningstar DBRS considers the comparatively higher exposure to diesel vehicles in this transaction to be a credit negative, relevant environmental factor within its analysis, namely the environmental factor "Carbon and Greenhouse Gas (GHG) Costs". At closing, approximately 49% of the receivables related to vehicles equipped with a diesel engine.

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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781.

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: "Master European Structured Finance Surveillance Methodology" (6 August 2024), https://dbrs.morningstar.com/research/437540.

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 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 Credit Ratings on Other Morningstar DBRS Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/436000.

The sources of data and information used for this credit rating include investor reports provided by MBB and loan-level data provided by European DataWarehouse.

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

At the time of the initial credit rating, Morningstar DBRS was supplied with 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 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.

The last credit rating action on this transaction took place on 17 November 2023, when Morningstar DBRS finalised its AAA (sf) credit rating on the Class A Notes.

The lead analyst responsibilities for this transaction have been transferred to Shalva Beshia.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://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):

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):

-- 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 at the B (low) (sf) rating level are 3.1% and 30.0%, respectively.

Class A Notes Risk Sensitivity:
-- 25% increase in LGD, expected credit rating of AAA (sf)
-- 50% increase in LGD, expected credit rating of AA (high) (sf)
-- 25% increase in PD, expected credit rating of AA (high) (sf)
-- 50% increase in PD, expected credit rating of AA (high) (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 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: Shalva Beshia, Assistant Vice President
Rating Committee Chair: Mark Wilder, Senior Vice President
Initial Rating Date: 2 November 2023

DBRS Ratings GmbH
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Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
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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.

--Master European Structured Finance Surveillance Methodology (6 August 2024),
https://dbrs.morningstar.com/research/437540
--Rating European Consumer and Commercial Asset-Backed Securitisations (22 August 2024),
https://dbrs.morningstar.com/research/438224
--Rating European Structured Finance Transactions Methodology (25 June 2024),
https://dbrs.morningstar.com/research/434970
--Interest Rate Stresses for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435278
-- Derivative Criteria for European Structured Finance Transactions (6 September 2024)
https://dbrs.morningstar.com/research/439043
--Legal Criteria for European Structured Finance Transactions (28 June 2024),
https://dbrs.morningstar.com/research/435165
--Operational Risk Assessment for European Structured Finance Servicers (6 August 2024),
https://dbrs.morningstar.com/research/437543
--Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024),
https://dbrs.morningstar.com/research/437781

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.