DBRS Morningstar Confirms Provisional Ratings on Auto ABS Spanish Loans 2020-1 FT

DBRS Ratings GmbH (DBRS Morningstar) confirmed the following provisional ratings on the series of notes to be issued by Auto ABS Spanish Loans 2020-1 FT (the Issuer):

-- Series A Notes at AA (high) (sf)
-- Series B Notes at A (high) (sf)
-- Series C Notes at A (low) (sf)
-- Series D Notes at BB (sf)
-- Series E Notes at B (high) (sf)

DBRS Morningstar does not rate the Series F notes expected to be issued in this transaction. DBRS Morningstar will update and republish the presale report for the transaction to reflect the updated analysis.

The rating on the Series A Notes addresses the timely payment of interest and the ultimate repayment of principal by the legal final maturity date in December 2035. The ratings on the Series B Notes, Series C Notes, Series D Notes, and Series E Notes address the ultimate payment of interest and the ultimate repayment of principal by the legal final maturity date.

DBRS Morningstar confirms the provisional ratings assigned to the notes issued, following the analysis of the existence of residual value (RV) risk in connection with certain loan products included in the portfolio backing the notes. DBRS Morningstar analysed the transaction including RV stresses and concluded that its provisional ratings previously assigned do not change as a result.

The RV risk arises from the balloon loans, which have equal payment instalments before maturity and a final large balloon instalment on the last payment date. For balloon loans, the borrower has the option to return the vehicle instead of paying the final balloon instalment. The borrower must comply with certain requirements to fulfil its obligations (including but not limited to giving consent to the sale of the vehicle and to the application of the proceeds of sale of the vehicle towards repayment of the loan up to its full repayment), the vehicle must be returned in adequate conditions and meet certain requirement in terms maintenance and mileage. If the proceeds of sale were not sufficient to repay the loan in full, the borrower would still be free from any further repayment obligation, hence exposing the issuer to RV risk. At the time DBRS Morningstar assigned provisional ratings to the notes, it had assumed that the borrower would be liable to pay the difference between vehicle sales proceeds and loan balance.

In this transaction, the RV risk is mitigated by the undertaking of Peugeot S.A. Group (the manufacturer) to repurchase the vehicle at a price equal to the balloon amount. DBRS Morningstar believes that the undertaking mitigates but does not remove the Issuer’s RV risk and benefits are limited to the manufacturer’s credit standing and financial strength. The manufacturer’s undertaking is believed to be validly transferred to the Issuer as explained by the transaction counsel in a memorandum DBRS Morningstar reviewed.

DBRS Morningstar based its ratings on a review of the following analytical considerations:
-- The transaction’s capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels are sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios, including RV haircuts.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the notes.
-- The seller’s, originator’s, servicer’s, and manufacturer’s financial strength and their capabilities with respect to originations, underwriting and servicing.
-- The other parties’ financial strength with regard to their respective roles.
-- DBRS Morningstar’s operational risk review of PSA Financial Services Spain, E.F.C., S.A., which it deemed to be an acceptable servicer.
-- The credit quality, diversification of the collateral, and historical and projected performance of the portfolio.
-- DBRS Morningstar’s current sovereign rating of the Kingdom of Spain at “A” with a Stable trend.
-- 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.

The transaction represents the issuance of Series A Notes, Series B Notes, Series C Notes, Series D Notes, and Series E Notes backed by a portfolio of approximately EUR 600 million of fixed-rate receivables related to standard and balloon auto loans granted by PSA Financial Services, (the originator) to private individuals residing in Spain for the acquisition of new or used vehicles. The originator will also service the portfolio. The Series F Notes will be issued to fund the cash reserve.

The transaction includes an 13-month revolving period scheduled to end in December 2021. During the revolving period, the originator may offer additional receivables that the Issuer will purchase provided that eligibility criteria and concentration limits set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur, such as the breach of performance triggers, insolvency of the originator, or replacement of the servicer.

The transaction allocates payments on a combined interest and principal priority of payments basis and benefits from an amortising EUR 5.1 million cash reserve funded through the subscription proceeds of the Series F Notes. The cash reserve can be used to cover senior costs and interest on the Series A Notes, Series B Notes, Series C Notes, Series D Notes, and Series E Notes. The cash reserve will be part of the available funds.

The repayment of the Series A to Series E Notes will start after the end of the revolving period on the first principal payment date in January 2022 on a pro rata basis unless certain events such as breach of performance triggers, insolvency of the servicer, or termination of the servicer occur (Subordination Events). Under these circumstances, the principal repayment of the notes will become fully sequential, and the switch is not reversible. Series F Notes will be repaid with available funds up to the its target amortisation amount as from the first payment date in December 2020.

Interest and principal payments on the notes will be made monthly on the 28th of every month. The Series A Notes, Series B Notes, and Series C Notes pay interest indexed to one-month Euribor whereas the total portfolio pays a fixed-interest rate. The interest rate risk arising from the mismatch between the Issuer’s liabilities and the portfolio is hedged through a cap collateral agreement with an eligible counterparty.

Banco Santander S.A. (Banco Santander) acts as the account bank for the transaction. Based on the DBRS Morningstar rating of Banco Santander, the downgrade provisions outlined in the transaction documents, and structural mitigants inherent in the transaction structure, DBRS Morningstar considers the risk arising from the exposure to Banco Santander to be consistent with the rating assigned to the Series A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.
DBRS Morningstar analysed the transaction structure in Intex DealMaker, considering the default rates at which the notes did not return all specified cash flows.

The provisional ratings are based on information provided to DBRS Morningstar by the Issuer and by its agents as of the date of this press release. The ratings can be finalised upon review of final information, data, legal opinions, and the executed version of the governing transaction documents. To the extent that the information or the documents provided to DBRS Morningstar as of this date differ from the final information, DBRS Morningstar may assign different final ratings to the notes.

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 this transaction DBRS Morningstar assumed a moderate decline in the expected recovery rate.

On 16 April 2020, the DBRS Morningstar Sovereign group released a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 10 September 2020. For details, see the following commentaries: https://www.dçbrsmorningstar.com/research/366542/global-macroeconomic-scenarios-september-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. The DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

For more information on DBRS Morningstar considerations for European ABS transactions and Coronavirus Disease (COVID-19), please see the following commentary: https://www.dbrsmorningstar.com/research/360734.

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 “Rating European Consumer and Commercial Asset-Backed Securitisations” (3 September 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. Due to the inclusion of a revolving period in the transaction, the analysis is based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments.

The sources of data and information used for these ratings include the Originator, the Issuer, and Titulización de Activos S.G.F.T., S.A.

DBRS Morningstar received static default vintage data (more than 90 days in arrears) static recoveries vintage data from the period Q1 2013 to Q4 2019. The data was split between loans granted for the acquisition of new vehicles and loans granted for the acquisition of used vehicles, in relation to standard amortising loans only. DBRS Morningstar received the same set of information for dynamic delinquency and prepayment data.

Stratification tables and portfolio loan-by-loan data were also provided as at 13 August 2020.

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

DBRS Morningstar was not 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.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

This is the first rating action since the Initial Rating Date.

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 ratings, DBRS Morningstar considered the following stress scenarios, as compared with the parameters used to determine the ratings.

-- PD used: Expected base case PD of 2.2%, and 14.3%, 9.6%, 7.3%, 3.3% and 2.9%, respectively, for AA (high) (sf), A (high) (sf), A (low) (sf), BB (sf), and B (high) (sf) scenarios, on a 25% and 50% increase in the applicable PD.
-- Recovery rate used: Expected recovery rate of 40.0%.
-- Loss given default (LGD) used: Expected LGD of 71.2%, 68.8%, 67.2%, 63.2% and 61.6% respectively, for AA (high) (sf), A (high) (sf), A (low) (sf), BB (sf), and B (high) (sf)) scenarios, on a 25% and 50% increase in the applicable LGD.
-- Residual Value Loss used: 11.98%, 10.12%, 8.97%, 5.72% and 4.25%% respectively, for AA (high) (sf), A (high) (sf), A (low) (sf), BB (sf), and B (high) (sf)) scenarios, on a 25% and 50% increase in the applicable RV loss.

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 a 50% increase in the expected RV loss.
Scenario 8: A 50% increase in the expected default and a 50% increase in the expected RV loss.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are

-- Series A Notes: AA (sf), A (high) (sf), AA (high) (sf), AA (sf), A (high) (sf), AA (high) (sf), AA (sf) and A (sf).
-- Series B Notes: A (Sf), BBB (low) (sf), A (high) (sf), A (low) (sf), BBB (low) (sf), A (high) (sf), BBB (high) (sf) and BB (high) (sf).
-- Series C Notes: BB (low) (sf), BBB (sf) for scenario 3, B (sf) for scenario 4, BB (sf) for scenario 6, B (sf) for scenario 7 and no quantitative rating is obtained for the scenarios. 2, 5 and 8.
-- Series D Notes: no quantitative rating is obtained for any stress scenarios.
-- Series E Notes: no quantitative rating is obtained for any stress scenarios.

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, Sucursal en España are subject to EU and U.S. regulations only.

Lead Analyst: María López, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 17 September 2020

DBRS Ratings GmbH, Sucursal en España
Calle del Pinar, 5
28006 Madrid
Spain
Tel. +34 (91) 903 6500

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 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 (3 September 2020),
https://www.dbrsmorningstar.com/research/355533/rating-european-consumer-and-commercial-asset-backed-securitisations.
--Legal Criteria for European Structured Finance Transactions (11 September 2019),
https://www.dbrsmorningstar.com/research/350234/legal-criteria-for-european-structured-finance-transactions.
--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.
--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.
--Interest Rate Stresses for European Structured Finance Transactions (28 September 2020),
https://www.dbrsmorningstar.com/research/367292/interest-rate-stresses-for-european-structured-finance-transactions.
--Derivative Criteria for European Structured Finance Transactions (24 September 2020),
https://www.dbrsmorningstar.com/research/367092/derivative-criteria-for-european-structured-finance-transactions.
--Rating European Structured Finance Transactions Methodology (21 July 2020),
https://www.dbrsmorningstar.com/research/357428/rating-european-structured-finance-transactions-methodology.

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.

This press release was amended shortly after publishing to replace all references of "RV Haircut" with "RV loss".