Press Release

DBRS Morningstar Confirms Rating on Silver Arrow UK 2020-2

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November 19, 2021

DBRS Ratings Limited (DBRS Morningstar) confirmed its AAA (sf) rating on the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2020-2 (Silver Arrow UK 2020-2).

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date.

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- Portfolio performance, in terms of delinquencies, defaults, and losses, as of the October 2021 payment date;
-- Probability of default (PD), loss given default (LGD), and residual value (RV) haircut assumptions on the remaining receivables;
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) rating level; and
-- Current economic environment and an assessment of sustainable performance, as a result of the Coronavirus Disease (COVID-19) pandemic.

The transaction is a securitisation of auto loan contracts granted to individuals and companies in England, Wales, Scotland, and Northern Ireland by Mercedes-Benz Financial Services UK Limited (MBFS), which is wholly owned by Daimler AG and which also acts as servicer. The pool consists of personal contract purchase (PCP) loans and hire purchase (HP) loans granted for the purchase of new and used vehicles. The transaction closed in November 2020, has static collateral, and is subject to RV risk because of the PCP loans. The receivables do not include the financing of ancillary products, such as insurance components. The legal final maturity is on the payment date in December 2026.

PORTFOLIO PERFORMANCE
Delinquencies are low since closing, with loans that are two to three months in arrears and more than three months in arrears representing 0.1% and 0.0% (0.04%) of the outstanding portfolio balance, respectively. According to the transaction documents, defaulted loans are based on a more-than-six-instalments-in-arrears basis. As of the October 2021 payment date, the cumulative default ratio was 0.5% and cumulative voluntary terminations (VT) ratio was 1.0%. Cumulative recoveries related to defaults and VT represented 56.2% of the cumulative defaulted balance and 89.4% of the cumulative VT balance, respectively. The performance of the portfolio remains within DBRS Morningstar’s expectations.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar reviewed the remaining receivables and maintained its base case PD assumption at 7.0%, its base case LGD assumption at 20.0%, and its RV haircut at the AAA (sf) rating levelat 44.8%. The transaction is subject to VT risk as, under the UK Consumer Credit Act, the borrower has the right to terminate a consumer loan agreement after having paid at least half of the total amount payable, provided that the vehicle returns to the finance provider in good condition. As of the October 2021 payment date, 92.4% of the portfolio consisted of PCP receivables with original terms equal to or longer than four years, which poses an increased VT risk as per DBRS Morningstar’s “UK Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination” commentary. DBRS Morningstar factored this risk into its base case PD and LGD assumptions.

CREDIT ENHANCEMENT
Credit enhancement to the Class A Notes consists of the subordination of the Class B Notes and has increased to 43.1% from 26.0% since closing.

The transaction benefits from a nonamortising reserve that provides liquidity support to the Class A Notes through the life of the transaction and can be used toward repayment of the Class A Notes upon the outstanding portfolio balance being reduced to zero. As of the October 2021 payment date, the reserve was funded at its target amount of GBP 5.4 million. DBRS Morningstar deems the commingling and set-off risks to be limited in this transaction.

Elavon Financial Services DAC (Elavon) acts as the account bank for the transaction. Based on DBRS Morningstar’s private rating on 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 rating assigned to the Class A Notes, as described in DBRS Morningstar's "Legal Criteria for European Structured Finance Transactions" methodology.

DZ BANK AG Deutsche Zentral-Genossenschaftsbank (DZ Bank) acts as the swap counterparty for the transaction. DBRS Morningstar's Long Term Critical Obligations Rating of AA on DZ Bank is above the First Rating Threshold as described in DBRS Morningstar's "Derivative Criteria for European Structured Finance Transactions" methodology.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

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 borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many ABS transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread 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.

On 2 November 2021, DBRS Morningstar updated its 8 May 2020 commentary outlining the impact of the coronavirus crisis on the performance of DBRS Morningstar-rated auto ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/387320/european-auto-abs-recovery-performance-update and https://www.dbrsmorningstar.com/research/360734/european-abs-transactions-risk-exposure-to-coronavirus-covid-19-effect.

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 British pound sterling unless otherwise noted.

The principal methodology applicable to the rating is “Master European Structured Finance Surveillance Methodology” (8 February 2021).

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.

A review of the transaction legal documents was not conducted as the legal documents have remained unchanged since the most recent rating action.

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 this rating include loan-level data provided by EuroABS Limited and investor reports provided by MBFS.

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

At the time of the initial rating, 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 is the first rating action since the Initial Rating Date.

The lead analyst responsibilities for this transaction have been transferred to Natalia Coman.

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):
-- 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 assumptions, and the RV haircut assumption at the AAA (sf) rating level are: PD of 7.0%, LGD of 20.0%, and RV haircut at AAA (sf) of 44.8%.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD, LGD, and RV haircut increase by a certain percentage over the base case assumption.

For example, if both the PD and LGD increase by 50%, the rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in the RV haircut. If the RV haircut increases by 50%, the rating of the Class A Notes would also be expected to remain at AAA (sf), assuming no change in either the PD or LGD. Furthermore, if both the PD and LGD as well as the RV haircut increase by 50%, the rating on the Class A Notes would be expected to fall to AA (high) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in PD and LGD, expected rating of AAA (sf)
-- 50% increase in PD and LGD, expected rating of AAA (sf)
-- 25% increase in PD and LGD, and 25% increase in RV haircut, expected rating of AAA (sf)
-- 25% increase in PD and LGD, and 50% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in PD and LGD, and 25% increase in RV haircut, expected rating of AAA (sf)
-- 50% increase in PD and LGD, and 50% increase in RV haircut, expected rating of AA (high) (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.

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Natalia Coman, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 20 November 2020

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
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.

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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