Press Release

DBRS Morningstar Confirms Credit Rating on Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2021-2

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September 25, 2023

DBRS Ratings Limited (DBRS Morningstar) confirmed its AAA (sf) credit rating on the Class A Notes issued by Silver Arrow S.A., acting in respect of its Compartment Silver Arrow UK 2021-2 (the Issuer).

The credit rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal on or before the legal final maturity date in October 2027.

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 August 2023 payment date;
-- Probability of default (PD), loss given default (LGD), residual value (RV) haircut, and expected loss assumptions on the remaining receivables; and
-- Current available credit enhancement to the Class A Notes to cover the expected losses at the AAA (sf) credit rating level.

The transaction is a securitisation of auto loan contracts granted mainly to individuals and, to a lesser degree, to companies in England, Wales, Scotland, and Northern Ireland by Mercedes-Benz Financial Services UK Limited (MBFS), which is wholly owned by Mercedes-Benz Group AG (formerly Daimler AG) and which also acts as the servicer. The pool consist mainly of personal contract purchase (PCP) loans and a small portion of hire purchase (HP) loans, and the loans are backed by new and used vehicles.

The transaction did not have a revolving period and closed in October 2021. The transaction is subject to RV risk through the presence of PCP loans. The receivables do not include the financing of ancillary products, such as insurance components. The legal final maturity date are at the payment dates in October 2027.

PORTFOLIO PERFORMANCE
As of August 2023 payment date, two- to three-month arrears represented 0.2% of the outstanding portfolio balance and the 90+ day delinquency ratio was 0.3%. As of August 2023, the gross cumulative default ratio was 0.3%, as a proportion of the initial portfolio balance.

PORTFOLIO ASSUMPTIONS AND KEY DRIVERS
DBRS Morningstar conducted an analysis of the pool of receivables and updated its expected PD to 6.2%, up from 6.1% at the time of previous annual review. DBRS Morningstar maintained its LGD and RV haircut at 51.5% and 43.6%, respectively, at the AAA (sf) credit rating level.

The transaction is subject to voluntary termination (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 August 2023 payment date, 93.2% of the portfolio consisted of PCP receivables with original terms equal to or longer than four years, which poses increased VT risk as per DBRS Morningstar’s “UK Autos: Elongated PCP Terms Increase the Risk of Voluntary Termination” commentary at https://www.dbrsmorningstar.com/research/326850/uk-autos-elongated-pcp-terms-increase-the-risk-of-voluntary-termination. DBRS Morningstar continues to factor this risk into its base case PD and LGD assumptions.

CREDIT ENHANCEMENT
As of the August 2023 payment date, credit enhancement to the Class A Notes was 68.1%, up from 38.4% at the time of the last annual review one year ago. Credit enhancement is expressed as portfolio overcollateralisation and does not include the reserve fund.

The transaction benefits from a non-amortising 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 reducing to zero. As of the August 2023 payment date, the reserve was funded at its target amount of GBP 2.0 million.

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

Skandinaviska Enskilda Banken AB acts as the swap counterparty for the transaction. DBRS Morningstar’s Long Term Critical Obligations Rating of AA on Skandinaviska Enskilda Banken AB is above the first rating threshold as described in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

DBRS Morningstar’s credit rating on the notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the credit rating is the “Master European Structured Finance Surveillance Methodology” (7 February 2023): https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit 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/401817/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 credit rating include investor reports provided by MBFS, and loan-level data 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 credit 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 purpose of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the credit rating process.

The last credit rating action on this transaction took place on 18 October 2022, when DBRS Morningstar confirmed the credit rating of the Class A Notes at AAA (sf).

The lead analyst responsibilities have been transferred to Petter Wettestad.

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

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit rating, DBRS Morningstar considered the following stress scenarios as compared with the parameters used to determine the credit 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 at the B (sf) credit rating level are 6.2% and 20.0%, respectively. The RV haircut at the AAA (sf) credit rating level is 43.6%.
-- The risk sensitivity overview below illustrates the credit ratings expected if the PD, LGD, and RV haircut increase by a certain percentage over the base case assumption. For example, if the RV haircut increases by 50%, the credit rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in both the PD and LGD. If both the PD and LGD increase by 50%, the credit rating on the Class A Notes would be expected to remain at AAA (sf), assuming no change in the RV haircut. Furthermore, if the PD, LGD, and the RV haircut all increase by 50%, the credit rating on the Class A Notes would be expected to remain at AAA (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in RV haircut, expected credit rating of AAA (sf)
-- 50% increase in RV haircut, expected credit rating of AAA (sf)
-- 25% increase in both PD and LGD, expected credit rating of AAA (sf)
-- 50% increase in both PD and LGD, expected credit rating of AAA (sf)
-- 25% increase in both PD and LGD and 25% increase in RV haircut, expected credit rating of AAA (sf)
-- 25% increase in both PD and LGD and 50% increase in RV haircut, expected credit rating of AAA (sf)
-- 50% increase in both PD and LGD and 25% increase in RV haircut, expected credit rating of AAA (sf)
-- 50% increase in both PD and LGD and 50% increase in RV haircut, expected credit 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: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

Lead Analyst: Petter Wettestad, Assistant Vice President
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Date: 7 October 2021

DBRS Ratings Limited
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London EC1Y 1HQ United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960.

The credit rating methodologies used in the analysis of this transaction can be found at: https://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 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.

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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