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Rating Action: Moody's assigns definitive Aaa (sf) to Notes issued by Silver Arrow S.A., Compartment 12, a securitization of German auto loans
Global Credit Research - 26 Nov 2020
Paris, November 26, 2020 -- Moody's Investors Service ("Moody's") has assigned the following definitive rating to Notes issued by Silver Arrow S.A., Compartment 12:
....EUR 688.0M Class A Asset-Backed Floating Rate Notes due September 2027, Definitive Rating Assigned Aaa (sf)
Moody's does not rate the EUR 61.9M Class B Asset-Backed Fixed Rate Notes due September 2027.
Today's rating assignment reflects the transaction's structure as a static cash securitisation of loan agreements entered into for the purpose of financing vehicles to private and commercial obligors in Germany by Mercedes-Benz Bank AG (NR) ('Mercedes-Benz Bank'), which is ultimately owned by Daimler AG (A3/P-2). This is the twelfth public auto loan securitisation transaction in Germany launched by Mercedes-Benz Bank. The originator will also act as the servicer of the portfolio during the life of the transaction.
The portfolio of underlying assets consists of auto loans distributed through captive and independent auto dealers in Germany.
As of 31 October 2020, the portfolio size was around EUR 750 million and showed 32,716 non-delinquent contracts with a weighted average seasoning of around 15 months. The loans in the portfolio finance new cars (52.86%) and used cars (47.14%) to private (51.16%) and commercial customers (48.84%). Vehicles in the financed portfolio are predominantly Mercedes-Benz brand vehicles.
According to Moody's, the transaction benefits from credit strengths such as a granular portfolio; a short portfolio weighted average life of 2.1 years; a simple transaction structure, with no revolving period, and a single waterfall to repay the Class A and Class B Notes sequentially. Furthermore, the Notes benefit from a non-amortising cash reserve of 0.5% of the initial pool balance. This reserve is fully funded at closing and will provide liquidity during the life of the transaction to pay senior expenses and coupons on Class A Notes in the event of a cash flow disruption. In addition, the contractual documents will include the obligation of the calculation agent to estimate amounts due in the event that a servicer report is not available. This reduces the risk of any technical non-payment of interest on the Notes.
However, Moody's notes that the transaction features some credit weaknesses such as (i) commingling risk, (ii) set-off risk (from deposits and linked insurance contracts financed via the loans), and (iii) the relatively high proportion of balloon loans. Various mitigants have been put in place in the transaction structure. Commingling risk is mitigated by (i) the automatic termination of collection rights in case of servicer insolvency, and (ii) a rating trigger to fund a commingling reserve at loss of Baa2/P-2 by Mercedes-Benz Bank's parent, Daimler AG. Set-off risk is mitigated by (i) the requirement for the Seller, if the set-off exposure exceeds 0.5% of the outstanding portfolio balance, to post a set-off reserve equal to the difference between the actual amount of deposits and 0.5% of the outstanding portfolio balance, (ii) the high rating of the servicer's parent and (iii) the short weighted average life of the static portfolio. Moody's notes that the exposure to deposit and insurance set-off risk has been immaterial in previous transactions issued by Mercedes-Benz Bank.
The portfolio consists of approximately 78.73% "balloon" loans, which have equal instalments during the life of the loan and a larger balloon payment at loan maturity.
Moody's analysis focused, among other factors, on (i) an evaluation of the underlying portfolio of financing agreements; (ii) the macroeconomic environment; (iii) historical performance information; (iv) the credit enhancement provided by 8.25% subordination, a 0.5% reserve fund and excess spread; (v) the liquidity support available in the transaction, by way of principal available to pay interest and the reserve fund; and (vi) the legal and structural integrity of the transaction.
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of Auto Loans from the current weak German economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantialimplications for public health and safety.
MAIN MODEL ASSUMPTIONS
Moody's determined the portfolio lifetime expected defaults of 2.75%, expected recoveries of 50% and Aaa portfolio credit enhancement ("PCE") of 8.00% related to borrower receivables. The expected defaults and recoveries capture our expectations of performance considering the current economic outlook, while the PCE captures the loss we expect the portfolio to suffer in the event of a severe recession scenario. Expected defaults and PCE are parameters used by Moody's to calibrate its lognormal portfolio loss distribution curve and to associate a probability with each potential future loss scenario in the ABSROM cash flow model to rate Auto ABS.
Portfolio expected defaults of 2.75% are in line with the EMEA Auto Loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account (i) historic performance of the loan book of the originator, as well as the historical performance of the originator's previous securitisation transactions, (ii) benchmark transactions, and (iii) other qualitative considerations, such as the high balloon loan component of the portfolio.
Portfolio expected recoveries of 50% are slightly higher than the EMEA Auto Loan ABS average and are based on Moody's assessment of the lifetime expectation for the pool taking into account (i) historic performance of the loan book of the originator, (ii) benchmark transactions, and (iii) other qualitative considerations.
PCE of 8.00% is in line with the EMEA Auto Loan ABS average and is based on Moody's assessment of the pool which is also driven by the exposure to balloon loans despite considering the strength of the originator and the relative ranking to originator peers in the German auto loan market. The PCE level of 8.00% results in an implied coefficient of variation ("CoV") of 52.54%.
The principal methodology used in this rating was "Moody's Global Approach to Rating Auto Loan- and Lease- Backed ABS", published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1236186. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
FACTORS THAT WOULD LEAD TO A DOWNGRADE OF THE RATING:
Factors that may cause a downgrade of the Class A Notes rating include a decline in the overall performance of the pool or a significant deterioration of the credit profile of the originator's parent, Daimler AG.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Vincent Verdier Asst Vice President - Analyst Structured Finance Group Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Anthony Parry Senior Vice President/Manager Structured Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's France SAS 96 Boulevard Haussmann Paris 75008 France JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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