DBRS Morningstar Confirms Ratings of Silver Arrow S.A., acting in respect of its Compartments 8 and 9

DBRS Ratings GmbH (DBRS Morningstar) confirmed its ratings of two series of Class A Notes (the Notes) issued by Silver Arrow S.A., acting in respect of its Compartment 8 and Compartment 9 (SA-8 and SA-9, respectively), at AAA (sf).

The ratings of the Notes address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The confirmations follow an annual review of the transactions and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults, and losses as of the May 2020 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 the AAA (sf) rating level;
-- Current economic environment and sustainable performance assessment, as a result of the Coronavirus Disease (COVID-19) pandemic.

SA-8 and SA-9 are securitisations of auto loan receivables originated and serviced by Mercedes-Benz Bank AG (MBB) to private and commercial borrowers in Germany to finance the purchase of new and used vehicles. Silver Arrow is a public limited company incorporated under the law of Luxembourg. SA-8 and SA-9 pay monthly, have static collateral pools, and follow the same structure. The transactions are not exposed to residual value risk.

PORTFOLIO PERFORMANCE
Delinquencies have been trending upward but remain low, with loans that were three months in arrears representing 0.4% and 0.2% of the outstanding portfolio balance, and the 90+ delinquency ratio of 0.4% and 0.1% as of the May 2020 payment date, for SA-8 and SA-9, respectively. Under the servicer definition, loans are classified as defaulted once they exceed six months of arrears. Under this definition, defaults remained low, reaching a cumulative amount of 1.1% and 0.7% of the initial portfolio balance for SA-8 and SA-9, respectively. Recoveries stood at 69.3%, 51.9% of the defaulted balance for SA-8 and SA-9, respectively.

PORTFOLIO ASSUMPTIONS
DBRS Morningstar has updated its base case PD and LGD assumptions to 2.0% and 55%, from 1.7% and 56%, respectively, for SA-8, and to 1.9% and 55%, from 1.7% and 58%, respectively, for SA-9. The default and recovery assumptions were based on quarterly historical vintage data from MBB and are broken down into subsets reflecting the composition of the portfolio according to vehicle condition, the loan payment type, and the borrower type. The adjustments in the PD and LGD are driven by updated vintage data received by MBB and the current portfolio composition.

CREDIT ENHANCEMENT
As of the May 2020 payment date, credit enhancement to the Class A Notes was 40.6% and 16.8% for SA-8 and SA-9, respectively, both up from 18.7% and 10.6% one year ago at the time of the last rating action. The credit enhancement comes from the subordination of the Class B Notes and the presence of a General Reserve Ledger. The General Reserve Ledger was funded through a Subordinated Loan at closing and is nonamortising at EUR 6.0 million and EUR 4.0 million for SA-8 and SA-9, respectively. The General Reserve Ledger provides liquidity support to the Class A Notes while the portfolio is outstanding and credit support to the Class A Notes and Class B Notes, upon full amortisation of the portfolio.

Each of the transactions benefits from a Commingling Reserve Ledger. The Commingling Reserve Ledger is funded and available for SA-8 and SA-9 upon occurrence of a downgrade of the Servicer’s parent company, Daimler AG, below BBB (low). DBRS Morningstar`s current Issuer Rating of Daimler AG is ‘A’, Under Review with Negative Implications.

Each of the transactions is subject to set-off risk partially mitigated by a Set-Off Reserve Ledger, funded and available upon the amount of the set-off exposure exceeding 0.5% of the initial portfolio balance.

Each of the transactions is subject to interest rate risk mitigated by the presence of a fixed-for-floating swap.

Elavon Financial Services DAC, UK Branch (Elavon) acts as the account bank for the transaction for both transactions, holding the issuer account, the swap account, and the various reserves. Based on the DBRS Morningstar private rating of Elavon, the downgrade provisions outlined in the transaction documents, and other mitigating factors inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to the account bank to be consistent with the ratings assigned to the Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank) is the swap counterparty for both transactions. DBRS Morningstar’s Critical Obligations Rating of DZ Bank at AA is above the First Rating Threshold as described in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology, given the ratings assigned to the Notes.

DBRS Morningstar analysed the transaction structures in Intex DealMaker.

The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many ABS transactions, some meaningfully. The ratings are based on additional analysis and adjustments to expected performance as a result of the global efforts to contain the spread of the coronavirus. For these transactions DBRS Morningstar applied an additional haircut to its base case recovery rate.

On 16 April 2020, the DBRS Morningstar Sovereign group published its outlook on the impact to key economic indicators for the 2020-22 time frame. These scenarios were updated on 1 June 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/361867/global-macroeconomic-scenarios-june-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings.

On 8 May 2020, DBRS Morningstar published a commentary outlining how the coronavirus crisis is likely to affect the DBRS Morningstar-rated ABS transactions in Europe. For more details please see https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect and https://www.dbrsmorningstar.com/research/362712/european-structured-finance-covid-19-credit-risk-exposure-roadmap.

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.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (22 April 2020).

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions 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 rating action.

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: https://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 these ratings include investor reports provided by MBB, and loan-level data provided by the European DataWarehouse GmbH.

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

At the time of the initial ratings, 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 these ratings 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.

The last rating action on this transaction took place on 26 June 2019, when DBRS Morningstar confirmed its ratings of the Class A Notes at AAA (sf) for both SA-8 and SA-9.

The lead analyst responsibilities for these transactions have been transferred to Alfonso Candelas.

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

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

-- DBRS Morningstar 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 are 2.0% and 55%, respectively for SA-8, and 1.9% and 55%, respectively for SA-9.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD and LGD increase by a certain percentage over the base case assumption. For example, if the LGD increases by 50%, the rating of the SA-8 Class A Notes would be expected to remain at AAA (sf), assuming no change in the PD. If the PD increases by 50%, the rating of the SA-8 Class A Notes would be expected to remain at AAA (sf), assuming no change in the PD. Furthermore, if both the PD and LGD increase by 50%, the rating of the SA-8 Class A Notes would be expected to remain at AAA (sf).

SA-8 Class A Notes Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

SA-9 Class A Notes Sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (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 GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Alfonso Candelas, Senior Vice President
Rating Committee Chair: David Lautier, Senior Vice President
Initial Rating Date SA-8: 27 June 2017
Initial Rating Date SA-9: 26 July 2018

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

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

-- Legal Criteria for European Structured Finance Transactions (11 September 2019)
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (22 April 2020)
https://www.dbrsmorningstar.com/research/359884/master-european-structured-finance-surveillance-methodology.
-- 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.
-- 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.
-- 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.
-- Rating European Structured Finance Transactions Methodology (28 February 2020).
https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology.
-- Derivative Criteria for European Structured Finance Transactions (26 September 2019), https://www.dbrsmorningstar.com/research/350907/derivative-criteria-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 https://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.