DBRS Morningstar Assigns AAA (sf) Rating to Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-1

DBRS Ratings Limited (DBRS Morningstar) assigned a AAA (sf) rating to the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-1 (the Issuer). DBRS Morningstar has not assigned a rating to the Class B Notes issued in this transaction.

The 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, in accordance with terms of the notes.

The Class A Notes and Class B Notes are backed by a static portfolio selected from a pool of approximately GBP 678 million receivables related to personal contract purchase (PCP) and hire purchase (HP) auto loan contracts granted by Mercedes-Benz Financial Services UK Limited (MBFS or the Seller), a wholly owned indirect subsidiary of Daimler AG, to borrowers in England, Wales, Scotland, and Northern Ireland. The underlying motor vehicles related to the finance contracts consist of both new and used passenger and light-commercial vehicles. MBFS services the receivables.

The underlying receivables consist of both HP agreements and PCP agreements with guaranteed future values (GFV). The GFV affords the borrower an option to hand back the underlying vehicle at contract maturity as an alternative to repaying or refinancing the final balloon payment; this feature directly exposes the Issuer to residual value (RV) risk.

DBRS Morningstar based its rating on a review of the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement;
-- Relevant credit enhancement in the form of subordination, excess spread, and the availability of the general reserve. Credit enhancement levels are sufficient to support DBRS Morningstar-projected expected cumulative net losses and RV losses under various stress scenarios;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- MBFS’ capabilities with regard to originations, underwriting, servicing, and its financial strength. DBRS Morningstar conducted an operational risk review of MBFS’ premises in Milton Keynes and deems it to be an acceptable servicer;
-- 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;
-- The sovereign rating of the United Kingdom, currently at AAA with a Stable trend; and
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction benefits from a single waterfall that outlines the allocation of the available distribution amount including collections representing interest, principal, and recoveries. The notes amortise sequentially subject to a note-specific target principal redemption amount that permits available excess spread to be used.

A nonamortising general reserve account equal to 0.8% of the portfolio balance at the cutoff date is available to the structure. The general reserve provides liquidity to the Class A Notes while also ultimately providing credit enhancement to the notes. It is available to repay principal on the notes when the outstanding principal balance of the portfolio reaches zero.

All underlying contracts are fixed rate while floating-rate notes have been issued. The Class A Notes are indexed to one-month GBP Libor prior to and excluding the October 2020 payment date, thereafter the Class A Notes are indexed to daily compounded Sterling Overnight Index Average. Interest rate risk for the Class A Notes is mitigated through an interest rate swap provided by DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank AG).

DBRS Morningstar analysed the transaction cash flow structure in Intex DealMaker.

COUNTERPARTIES
Elavon Financial Services DAC (Elavon) has been appointed to act as account bank for the transaction. Based on DBRS Morningstar’s private rating of Elavon and the downgrade provisions outlined in the transaction documents, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DZ Bank AG has been appointed as a swap counterparty. The transaction documents contain downgrade provisions relating to the swap counterparty that are consistent with DBRS Morningstar’s "Derivative Criteria for European Structured Finance Transactions" methodology.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the rating is “Rating European Consumer and Commercial Asset-Backed Securitisations” (13 January 2020).

DBRS Morningstar 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.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/350410/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for this rating include the Seller and the arranger, Commerzbank Aktiengesellschaft.

DBRS Morningstar received the following data and information:
--Static quarterly cumulative gross loss and recovery data from Q1 2013 and up to Q4 2019, split by new/used vehicles and by product type for credit defaults and voluntary terminations;
--Dynamic monthly delinquency and prepayment data at a portfolio level from January 2015 to December 2019;
--Loan-level characteristics and stratification data as at 29 February 2020; and
--Aggregated annual PCP RV realisation data from 2013 to 2019 outlining volumes and sales results.

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

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

DBRS Morningstar considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating.

-- Expected default (credit defaults and voluntary terminations): 7.0%
-- Expected recovery rate: 80%
-- Loss given default (LGD): 51.5% for the AAA (sf) scenario.
-- RV loss at maturity: 44.8%. for the AAA (sf) scenario.

Scenario 1: A 25% increase in the expected default and LGD.
Scenario 2: A 50% increase in the expected default and LGD
Scenario 3: A 25% increase in the RV loss.
Scenario 4: A 25% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 5: A 50% increase in the expected default and LGD and a 25% increase in the RV loss.
Scenario 6: A 50% increase in the expected RV loss.
Scenario 7: A 25% increase in the expected default and LGD and a 50% increase in the RV loss.
Scenario 8: A 50% increase in the expected default and LGD and a 50% increase in the RV loss.

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

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Alex Garrod, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 9 April 2020

DBRS Ratings Limited
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Registered and incorporated under the laws of England and Wales: Company No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrsmorningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset-Backed Securitisations (13 January 2020),
https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations
-- Rating European Structured Finance Transactions (28 February 2020),
https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology
-- Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019),
https://www.dbrsmorningstar.com/research/350907/derivative-criteria-for-european-structured-finance-transactions
-- Operational Risk Assessment for European Structured Finance Originators (28 February 2020),
https://www.dbrsmorningstar.com/research/357430/operational-risk-assessment-for-european-structured-finance-originators
-- Operational Risk Assessment for European Structured Finance Servicers (28 February 2020),
https://www.dbrsmorningstar.com/research/357429/operational-risk-assessment-for-european-structured-finance-servicers
-- Interest Rate Stresses for European Structured Finance Transactions (10 October 2019),
https://www.dbrsmorningstar.com/research/351557/interest-rate-stresses-for-european-structured-finance-transactions

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.