DBRS Morningstar Assigns Provisional Ratings to BMW Canada Auto Trust, Series 2021-1

DBRS Limited (DBRS Morningstar) assigned the following provisional ratings to the Class A-1, Class A-2, and Class A-3 Notes, Series 2021-1 (collectively, the Notes) to be issued by BMW Canada Auto Trust:

-- Class A-1 Notes, Series 2021-1 (the Class A-1 Notes) at AAA (sf)
-- Class A-2 Notes, Series 2021-1 (the Class A-2 Notes) at AAA (sf)
-- Class A-3 Notes, Series 2021-1 (the Class A-3 Notes) at AAA (sf)

DBRS Morningstar considered additional analyses and, where appropriate, additional adjustments to expected performance as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020. The scenarios were updated on January 28, 2021, and reflect the updated scenarios in our rating analysis. For details see https://www.dbrsmorningstar.com/research/372842. DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced commentary.

The Notes will be supported by a portfolio of retail closed-end lease contracts of new passenger cars and sport-activity vehicles (the Portfolio of Assets). The lease contracts were originated by authorized BMW dealers in Canada.

Repayment of the Notes will be made from collections from the Portfolio of Assets, which includes scheduled monthly lease payments (including residual value payments in the case of customer-retained vehicles) as well as proceeds from vehicle sales either at the end of the lease term or earlier, in the case of prepayments and defaults. Proceeds from excess mileage and wear-and-tear charges, if any, also form part of the collections used to repay the Notes.

The pass-through structure repays the Notes as monthly principal payments are collected from the Portfolio of Assets. The Notes will be repaid in sequential order, with the Class A-1 Notes being repaid first, followed by repayment of the Class A-2 Notes and then the Class A-3 Notes. The ratings assigned are based on the full repayment of the Notes by their respective Maturity Dates.

The ratings incorporate the following considerations:

HIGH LEVEL OF CREDIT ENHANCEMENT
On the Expected Closing Date, 15.50% of credit enhancement will be available (0.25% of cash and 15.25% of overcollateralization (OC)). Excess collections will be applied monthly to repay outstanding principal of the Notes until the OC reaches the Target OC of 17.25%, which is expected by month five based on scheduled payments. In addition, an estimated 4.21% (annualized) of excess spread, net of the indicative cost of funds and the Replacement Servicer Fee provision, will be available to offset any collection shortfalls on a monthly basis.

NON-AMORTIZING CREDIT ENHANCEMENT
The requirement to maintain the cash account and the OC amounts at their target levels provides a deleveraging structure as the principal on the Notes is repaid. Residual values represent the largest risk in closed-end auto lease securitizations, and the exposure to such risk is highest at contract maturity. Non-amortizing credit enhancement ensures that an increasing level of protection is available to offset potential vehicle disposition losses as these contracts mature.

CONSERVATIVE ADVANCE RATE ON RESIDUAL VALUES
The Base Residual Value is determined by using the lower of the contract residual values and the Automotive Lease Guide’s (ALG) estimated values as of January/February 2021. The reference to the ALG values in setting the advance rate on the Notes ensures that expected embedded losses (negative equity in relation to residual values) are not funded on the closing date, effectively reducing residual value risk in the Portfolio of Assets. ALG projects its residual values primarily based on auction proceeds and forecasts of economic factors, such as used vehicle supply. Overall, the ALG values represent an independent estimate of the expected wholesale value of the vehicles in the portfolio at maturity.

STRONG OBLIGOR PROFILE
The obligors of the underlying lease contracts represent high-credit-quality customers, as the weighted-average (WA) FICO score is 811. Approximately 61% of the pool has a FICO score of 800 or greater. The strong credit profile is also supported by low credit losses and delinquency levels of the Seller’s owned and managed portfolio in the last five years. DBRS Morningstar also notes that the majority of the underlying lease contracts were originated during the coronavirus pandemic. Given the ability of these obligors to obtain financing amid the pandemic, DBRS Morningstar expects these obligors to be more resilient to the ongoing economic impacts.

ESTABLISHED REMARKETING STRATEGY
BMW Canada Inc. (BMW Canada or the Seller) has an established vehicle remarketing strategy to maximize the disposition proceeds and minimize the time to remarket the vehicles should they be returned at or prior to maturity. Historical trends demonstrate BMW Canada’s ability to leverage its dealer network and other dealer groups across Canada to purchase off-lease vehicles. Certified pre-owned and pull-ahead programs offered by BMW Canada improve the management and value of off-lease inventory, and the strategy of selling directly to the dealers reduces the reliance on remarketing vehicles through physical auctions, which generally yield lower proceeds. In 2016, BMW Canada implemented a business strategy that focuses on dealership preference to purchase vehicles through the online auction channel, resulting in an increase in online auction sales and a decrease in physical auction sales compared with previous years. The enhancement levels support a turn-in rate above 95% and disposition through third-party auctions applying a 30% haircut to the base residual values, assuming the more attractive channels are unavailable.

OPERATIONAL AND BRAND STRENGTH OF SELLER
The Seller and its parent, BMW AG (BMW or the Company), were confirmed at A (high) with Negative trends by DBRS Morningstar on September 29, 2020. The confirmations recognized the Company’s solid business risk assessment as a global manufacturer while the Negative trends reflected the significant headwinds facing the automotive industry at large with respect to the effect of the coronavirus pandemic on sales. Consistent with other automotive manufacturers, the Company's global operations were materially affected by the pandemic, resulting in decreases in revenue, earnings, and free cash flow. However, the Company's balance sheet has remained resilient, with intragroup funding from its financial services segment bolstering free cash flow and a sufficiently strong liquidity position. BMW continues to invest in vehicle electrification and autonomous driving. As a subsidiary of the Company, BMW Canada benefits from its parent’s strong financial standing, global presence, and brand value, allowing it to leverage the experience and expertise of BMW’s other financial services companies worldwide to ensure sound and consistent underwriting standards and efficient servicing operations. As of December 2020, BMW Canada’s market share decreased slightly to 1.7% from 1.9% as of December 2019, with sales down 30.5% from the prior year compared with the total market decline of 19.7%.

The DBRS Morningstar cash flow analysis includes a conservative base-case cumulative net loss estimate. Available credit enhancement is able to withstand the stresses at levels commensurate with the assigned ratings.

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 Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Auto Retail Loan and Lease Securitizations (October 26, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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

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