Press Release

DBRS Morningstar Assigns Provisional Ratings to Red & Black Auto Lease France 1

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October 05, 2021

DBRS Ratings GmbH (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Red & Black Auto Lease France 1 (the Issuer), a French Fonds Commun de Titrisation:

-- Class A Notes at AAA (sf)
-- Class B Notes at BBB (low) (sf)

DBRS Morningstar did not assign provisional ratings to the Class C Notes to be issued in this transaction.

The ratings on the Class A Notes and the Class B Notes (together, the Rated Notes) address the timely payment of scheduled interest and the ultimate repayment of principal by the final maturity date, in accordance with the terms of the notes.

The provisional ratings are based on information provided to DBRS Morningstar by the Issuer and its agents as of the date of this press release. These ratings will be finalised upon review of the final version of the transaction documents and of the relevant opinions.

This transaction represents the issuance of notes backed by a portfolio of receivables related to vehicle lease agreements, excluding the residual value (RV) component of the leases, granted by Temsys SA (ALD Automotive) to commercial lessees residing or incorporated in the Republic of France.

The seller granted a pledge without dispossession (gage sans dépossession) over the leased cars in favour of the Issuer to guarantee any and all present and future payment obligations of the seller under the master receivables transfer agreement and the servicing agreement. The transaction is managed by Eurotitrisation SA and the receivables are serviced by ALD Automotive. ALD Automotive is a majority-owned subsidiary of Société Générale, SA. (Société Générale).

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;
-- Relevant credit enhancement in the form of subordination, excess spread, and the availability of the general reserve;
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected cumulative net losses under various stressed cash flow assumptions for the Rated Notes;
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested;
-- ALD Automotive´s financial strength and its capabilities with regard to originations, underwriting, and servicing;
-- 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 Republic of France, currently at AA (high) with a Stable trend; and
-- The expected 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 are expected to address the true sale of the assets to the Issuer.

The rating is also based on the following analytical considerations:
-- DBRS Morningstar determined the probability of default (PD) for the portfolio using the historical performance information supplied. DBRS Morningstar assumed an annualised PD of 1.8% for vehicles leases. DBRS Morningstar applied additional adjustments in the context of the current Coronavirus Disease (COVID-19) pandemic.
--The assumed weighted-average life (WAL) of the portfolio was 1.4 years.
-- The PDs and WAL were used in the DBRS Morningstar Diversity Model to generate the hurdle rate for the assigned ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker, considering the default rates at which the Rated Notes did not return all specified cash flows.

TRANSACTION STRUCTURE
The transaction is subject to a revolving period of 12 months, during which time the seller may offer additional lease receivables. The Issuer can purchase these receivables so long as the eligibility criteria, global portfolio limits, performance triggers, and other conditions set out in the transaction documents are met. The repayment of principal of the Class A Notes will be fully sequential with no payment of principal on the Class B Notes until the Class A Notes are redeemed in full.

The Rated Notes are supported by a general reserve, which covers senior fees, net swap payments, and interest payment shortfalls on the Rated Notes throughout the life of the transaction. The general reserve is funded at closing with EUR [●] million and it amortises subject to a target required amount of 0.5% of the outstanding balance of the Notes.

All lease receivables are sold using a fixed discount rate while the Class A Notes are indexed to one-month Euribor. Interest rate risk for the Class A Notes is mitigated through an interest rate swap provided by the Royal Bank of Canada (RBC).

COUNTERPARTIES
The Issuer bank account is held at Société Générale. The DBRS Morningstar public Long-Term Issuer Rating on Société Générale is A (high) with a Stable trend and the Long Term Critical Obligations Rating is AA with a Stable trend. The transaction is expected to contain downgrade provisions relating to the account bank consistent with DBRS Morningstar’s criteria.

RBC is the swap counterparty for the transaction. The DBRS Morningstar public Long-Term Issuer Rating on RBC is AA (high) with a Stable trend. The hedging documents are expected to contain downgrade provisions consistent with DBRS Morningstar’s criteria.

CORONAVIRUS CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many lessees. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many ABS transactions and portfolios, including SMEs. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus. For this transaction, DBRS Morningstar increased the expected default rate for obligors in certain industries based on their perceived exposure to the adverse disruptions of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings

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

For more information on DBRS Morningstar considerations for European Structured Credit transactions and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar commentary: https://www.dbrsmorningstar.com/research/361098.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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).

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.

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 considers potential portfolio migration based on replenishment criteria set forth in the transaction legal documents.

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/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The sources of data and information used for these ratings include ALD Automotive.

DBRS Morningstar received the following data and information:
-- Dynamic delinquency, prepayment, and origination data from Q1 2014 to Q2 2021;
-- Static gross loss default and recovery data from Q1 2014 to Q2 2021;
-- Portfolio loan-by-loan data and summarised stratification tables of the provisional pool as at 30 June 2021; and
-- A theoretical amortisation of the provisional pool.

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 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 expected-to-be-issued new financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

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 (the base case):

-- Probability of default (PD) used: Expected PD of 26.0% for the AAA (sf) scenario, 12.7% for the BBB (low) (sf) scenario, and a 25% and 50% increase on the applicable PD at each rating level.
-- Recovery rate used: Expected recovery rate of 46.2% for the AAA (sf) scenario, 54.3% for the BBB (low) (sf) scenario
-- Loss given default (LGD) used: Expected LGD of 53.8% for the AAA (sf) scenario, 45.7% for the BBB (low) (sf) scenario, and a 25% and 50% increase on the applicable LGD at each rating level.

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

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios will be:

-- Class A Notes: AA (high) (sf), A (sf), AA (high) (sf), A (sf), BBB (high) (sf), A (sf), A (low) (sf), and BBB (high) (sf);
-- Class B Notes: BB (high) (sf), BB (low) (sf), BB (high) (sf), BB (low) (sf), B (sf), BB (sf), B (sf), and below B (low) (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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Stephan Rompf, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 5 October 2021

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.

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.

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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