Silver Arrow S.A., Compartment 7

Transcription

1 Presale: Silver Arrow S.A., Compartment 7 Primary Credit Analyst: Ignacio T Estruga, Madrid (34) ; ignacio.estruga@spglobal.com Secondary Contact: Vedant Thakur, London (44) ; vedant.thakur@spglobal.com Table Of Contents 1.1 Billion Asset-Backed Floating- And Fixed-Rate Notes Transaction Summary Notable Features Rating Rationale Strengths, Concerns, And Mitigating Factors Transaction Structure Collateral Description Credit Analysis Cash Flow Analysis Scenario Analysis Monitoring And Surveillance Related Criteria And Research JUNE 20,

2 Presale: Silver Arrow S.A., Compartment Billion Asset-Backed Floating- And Fixed-Rate Notes This presale report is based on information as of June 20, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Rating As Of June 20, 2016 Class Preliminary rating* Preliminary amount (mil. ) Available credit enhancement (%) Interest A AAA (sf) 1, One-month EURIBOR plus a margin Legal final maturity July 15, 2024 B NR N/A July 15, 2024 *The rating on each class of securities is preliminary as of June 20, 2016, and subject to change at any time. Final credit ratings are expected to be assigned on the closing date subject to a satisfactory review of the transaction documents and legal opinion. Our ratings address timely payment of interest and payment of principal not later than the legal final maturity. Including a liquidity reserve in an amount equal to 0.5% of the initial notes amount that is ultimately available to mitigate potential principal shortfalls. EURIBOR--Euro Interbank Offered Rate. NR--Not rated. N/A--Not applicable. Transaction Participants Issuer Silver Arrow S.A., Compartment 7 Originator Mercedes-Benz Bank AG Arranger Societe Generale Seller Mercedes-Benz Bank AG Servicer Mercedes-Benz Bank AG Subordinated lender Mercedes-Benz Bank AG Security trustee Wilmington Trust SP Services (Frankfurt) GmbH Corporate service provider Elian Fiduciary Services (Luxembourg) SARL Swap provider DZ Bank AG Deutsche Zentral-Genossenschaftsbank Bank account provider Elavon Financial Services Ltd., U.K. Branch Paying agent Elavon Financial Services Ltd., U.K. Branch Custodian Elavon Financial Services Ltd., U.K. Branch Managers DZ Bank AG Deutsche Zentral-Genossenschaftsbank, BNP Paribas, and Landesbank Baden-Wuerttemberg Joint lead managers Societe Generale and UniCredit Bank AG Supporting Ratings Institution/role Elavon Financial Services Ltd., U.K. Branch as bank account provider* DZ BANK AG Deutsche Zentral-Genossenschaftsbank as swap counterparty Ratings AA-/Stable/A-1+ AA-/Stable/A-1+ *Based on our rating on the parent company, Elavon Financial Services Ltd., in line with our bank-branch criteria (see "Related criteria"). JUNE 20,

3 Transaction Key Features Closing date July 13, 2016 Collateral Total receivables at closing Country of origin Deal structure Replenishment period Redemption profile Credit enhancement for the class A notes as a percentage of asset volume Liquidity reserve Commingling reserve Mercedes-Benz Bank AG's German auto loan receivables 1,100 million Germany Static pool, true sale None Fully sequential Subordination: 7.50%; cash reserve: 0.50%; and excess spread (initial, per year): approximately 2.00% The 5.5 million (equal to 0.5% of the initial notes' amount) reserve can be drawn to cover liquidity shortfalls during the transaction's life, and note redemption once the portfolio has amortized. The reserve is non-amortizing. The seller will fund a commingling reserve at closing with million. The reserve is dynamically calculated thereafter. Transaction Summary S&P Global Ratings has assigned its preliminary 'AAA (sf)' credit rating to Silver Arrow S.A., Compartment 7's class A notes. At closing, Silver Arrow, Compartment 7 will also issue unrated class B notes. The underlying collateral comprises German loan receivables for cars, vans, trucks, and buses. Mercedes-Benz Bank AG originated and granted the loans to its private and commercial retail customers. This will be Mercedes-Benz Bank's seventh German publicly-rated asset-backed securities (ABS) transaction, and the third that we have rated. Similar to its rated predecessors, the transaction is structured as a static true sale transaction, with a liquidity reserve. The assets pay a monthly fixed interest rate and the class A notes pay one-month Euro Interbank Offered Rate (EURIBOR) plus a margin. The transaction repays interest and principal strictly sequentially. Notable Features In comparison with Silver Arrow S.A., Compartment 5's, the level of credit enhancement that the liquidity reserve provides to the notes in this transaction has been reduced by 0.5% (to 0.5% from 1.0%). Rating Rationale Economic outlook Our base-case scenario for Germany forecasts that GDP growth will increase to 1.6% in 2016 and to 1.7% in 2017, from 1.5% in We forecast that unemployment rates will decrease to 4.5% in 2016 and 2017, from 4.6% in 2015 (see "Europe Is Still Holding On, Amid Negative Rates And Brexit Risk," published on April 6, 2016, and "European Economic Snapshots--May 2016: Signs Point To Sustained Recovery Despite External Headwinds," published on May 31, 2016). In our view, changes in GDP growth and in the unemployment rate are key determinants of portfolio JUNE 20,

4 performance. We set our credit assumptions to reflect our economic outlook. Our near- to medium-term view is that the German economy will remain resilient and record positive growth. Operational risk We conducted an overview of Mercedes Benz Bank's origination, underwriting, collections, and risk management practices. We consider these to be in line with general market practice and our criteria for assessing operational risk (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published on Oct. 9, 2014 and "Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment," published on May 28, 2009). We believe that the severity risk and portability risk following a disruption to the servicer are both low. Consequently, our operational risk criteria don't constrain the maximum potential rating assignable to the transaction. Credit risk We analyzed the portfolio's credit risk based on the previous performance of quarterly gross loss cohorts in the originator's loan book and the historical performance of previous Silver Arrow compartments that we rate. Based on this data, we expect to see 2.6% of gross losses as our base case in the securitized pool and the applicable multiple at the 'AAA' rating category has been sized at 4.7x. We have also sized our cash flow modelling assumptions for the recovery rate at 42.0%, after applying a discount over historical recovery rates based on our assessment of the volatility of past performance and portfolio features. We set our assumptions to reflect our expectations for the German economy, as well as our view of Mercedes Benz Bank's origination and servicing processes over the past few years, based on available information. Furthermore, we sized for higher borrower default risk, as some of the loan contracts contain balloon payments, which have a large installment at maturity. We have analyzed credit risk by applying our European auto ABS methodology (see "Methodology And Assumptions For European Auto ABS," published on Oct. 15, 2015). Payment structure We assessed the transaction's documented payment structure. The notes amortize sequentially. The liquidity reserve provides liquidity support and is available to cure losses. In our view, the transaction structure does not mitigate the exposure to negative interest rates below a certain threshold, we have therefore further stressed our assumptions considering a negative interest rate of -0.75%. Our analysis indicates that the class A notes' available credit enhancement is sufficient to withstand our credit and cash flow stresses at a preliminary 'AAA' rating level. Counterparty risk We consider that the transaction's documented replacement mechanisms adequately mitigate its counterparty risk exposure. The transaction is exposed to Elavon Financial Services Ltd., U.K. Branch as bank account provider and DZ Bank AG Deutsche Zentral-Genossenschaftsbank as swap counterparty. We analyzed counterparty risks by applying our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). We anticipate that the final swap agreements will be in line with our current counterparty criteria. Legal risks At closing, the seller will fully fund a reserve, which will partially mitigate the transaction's commingling risk exposure. A second reserve will also partially mitigate deposit setoff risk. We accounted for the open exposure in our cash flow model. The issuer is a bankruptcy remote Luxembourg special-purpose entity, in line with our legal criteria (see "Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept. 13, 2013, and JUNE 20,

5 "Multiple-Use Special-Purpose Entity Criteria--Structured Finance," published on May 7, 2013). We anticipate that the legal opinion at closing will likely confirm that the sale of the assets would survive the seller's insolvency. Rating stability In line with our approach to scenario analysis, we ran two scenarios to test the preliminary rating's stability (see "Scenario Analysis: Gross Default Rates And Excess Spread Hold The Answer To Future European Auto ABS Performance," published on May 12, 2009). The results show that, under our scenario for moderate stress conditions (scenario 1), the preliminary rating would not suffer more than the maximum projected deterioration that we would associate with each rating level in a one-year horizon, as outlined in our credit stability criteria (see "Methodology: Credit Stability Criteria," published on May 3, 2010). Country risk The application of our criteria for rating single-jurisdiction securitizations above the sovereign foreign currency rating does not cap the rating in this transaction (see "Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance," published on May, 29, 2015). Strengths, Concerns, And Mitigating Factors Strengths In our view, Mercedes-Benz Bank is an experienced and established originator and servicer in global and, especially, European securitization markets. This is the bank's seventh German publicly-rated ABS transaction, but the third that we have rated. The previous transactions have performed well. The portfolio is highly granular and well-diversified across Germany's federal states. As of the pool cut-off date, it comprised 54,120 obligors, the largest single obligor represented about 0.03%, and the top 15 obligors comprised 0.38% of the portfolio. As of the cut-off date, the portfolio did not contain any delinquent or defaulted contracts. The notes amortize sequentially. If the transaction incurs defaults, it uses excess spread and ultimately the liquidity reserve to amortize the notes. Given the difference between the assets' interest and the senior expenses, interest on the notes, and swap costs, the transaction benefits from excess spread to cure defaults. There is no replenishment period, therefore the notes amortize after closing. In our baseline scenario, this causes credit enhancement to build up quickly. Additionally, the portfolio's quality will not deteriorate through adverse replenishment. Concerns and mitigating factors Mercedes-Benz Bank services the securitized assets and the transaction will not have a back-up servicer at closing. We rely on the general availability of servicing in the German market to mitigate the risk of servicing disruption. Furthermore, the liquidity and commingling reserves will provide additional liquidity and will mitigate servicer disruption risk. About 67.39% of loans in the pool are balloon loans that have a final installment payment that is significantly higher than previous installments. These final instalments represent 39.48% of the closing pool balance. In a stressed environment, the balloon payment could result in the obligor experiencing a payment shock, if the vehicle's value declines and the originator does not provide follow-up financing. We have accounted for the additional losses resulting from payment shock after a market value decline of the underlying vehicles under our ratings scenario. JUNE 20,

6 The transaction is exposed to commingling and deposit setoff risk in case the originator becomes insolvent. A specific commingling risk reserve will mitigate commingling risk. A setoff risk reserve will mitigate deposit setoff risk. This reserve will be funded after the exposure exceeds 0.5% of the portfolio's initial outstanding amount. However, we consider that they only partially mitigate the risks. In our cash flow assumptions, we have stressed for the open exposure. An interest rate swap counterparty will mitigate the interest rate risk between the fixed-rate assets and the floating rate of interest payable on the class A notes. Nevertheless, such a hedge is not perfect and the issuer would be exposed to additional costs if the absolute negative value of one-month EURIBOR is greater than the absolute note margin. In our cash flow assumptions, we have additionally stressed for interest rates going down to -0.75%. Transaction Structure In this transaction, Mercedes-Benz Bank sells auto loan receivables to Silver Arrow, Compartment 7, which issues notes to fund such purchase. The receivables comprise the loan installments from the underlying obligors. At closing, Silver Arrow, Compartment 7 will receive a subordinated loan (totaling 5.5 million) from Mercedes-Benz Bank to fund the nonamortizing liquidity reserve. This liquidity reserve will be available to pay interest shortfalls and ultimately credit losses. The subordinated loan's repayment is subordinated to that of the class A and B notes. An interest rate swap counterparty will mitigate the interest rate risk between the fixed-rate assets and the floating rate of interest payable on the class A notes. JUNE 20,

7 Originator Mercedes-Benz Bank is a German captive car financing provider for the country's second largest car manufacturer, Daimler AG. The bank was first established in 1967 and is now a wholly owned subsidiary of Daimler Financial Services AG, Daimler's car financing arm. Mercedes-Benz Bank employs about 1,900 employees and its outstanding contract volume was 19.8 billion at the end of Mercedes-Benz Bank originates the loans included in this asset pool through its dealer network. Most new vehicles benefit from an interest subsidy provided by the manufacturer. Mercedes-Benz Bank receives applications through the dealership via an online interface. Credit decisions are performed centrally and Mercedes-Benz Bank scores all JUNE 20,

8 applications using internal (contract data, payment history, and customer information) and external (credit bureaus and bank enquiries) data. In the Daimler group, Mercedes-Benz Bank acts independently and is accountable for its own profits and losses. Cash flow mechanics The transaction has a combined interest and principal waterfall. Interest on the notes is payable monthly in arrears in accordance with the interest waterfall. Cash flows redeem strictly sequentially, in accordance with the priority of payments. Payment waterfall On any monthly interest payment date, the issuer allocates the available distribution amount comprising all interest and principal collections, recoveries, net swap receipts, and the liquidity reserve in the order shown in table 1. Table 1 Simplified Payment Waterfall 1 Senior and trustee fees 2 Servicing fees 3 Swap payments 4 The class A notes' interest 5 Liquidity reserve up to its required amount 6 The class A notes' principal redemption amount 7 The class B notes' interest 8 The class B notes' principal redemption amount 9 Interest on the subordinated loan 10 Principal on the subordinated loan 11 Remaining cash flows for the seller Through the payment waterfall, the transaction redeems the class A notes' principal up to an amount equaling the difference between the class A and B notes' balance, and the assets' outstanding performing balance. This means that the transaction uses excess spread to cure defaults, as defaulted receivables reduce the performing asset balance. The liquidity reserve is refilled each payment date through the priority of payments up to its required amount under the transaction documents (0.5% equal to 5.5 million of the notes' closing balance) before the payment of the class A notes' principal. Once the asset balance is zero, the issuer can use the liquidity reserve to cure losses for the class A notes, and for further junior items in the waterfall. Interest rate hedging The issuer, acting in respect of its Compartment 7, and the swap counterparty will enter into an interest rate swap agreement that is in line with our current counterparty criteria. The swap hedges the issuer's exposure to interest rate risk resulting from the fixed interest of the receivables and the floating-rate obligations under the class A notes. Under this swap agreement, the issuer will pay a fixed rate of [TBD] on the outstanding principal balance of the class A notes. In exchange, the swap counterparty will pay to the issuer a floating interest rate based on one-month EURIBOR (i.e., the same index that the notes pay). JUNE 20,

9 We consider that such a hedge is not perfect. In the environment of negative interest rates, if the absolute negative value of one-month EURIBOR rate is greater than the note margin, the issuer would be exposed to additional costs. In our cash flow assumption, we have additionally stressed for interest rates going down to -0.75%. Credit enhancement The excess spread, the class B notes, and the liquidity reserve will provide credit enhancement for the class A notes. Additional reserves will mitigate commingling and deposit setoff risks. According to the transaction documents, these reserves cannot be used for any other purpose. Excess spread results from the difference between: The interest income received from the assets; and The interest on the rated notes plus any senior fees, servicing fees, and swap expenses. At closing, this difference will amount to above 2.00%. In our analysis, we sized for yield compression risk by modeling a gradual decline of the portfolio yield to 2.98% from 3.33%. At closing, the seller will provide a subordinated loan provided to fund the liquidity reserve. This issuer will establish this reserve in its transaction account. Under the transaction documents, the reserve's required amount is 5.5 million, equaling 0.5% of the assets' closing balance. Commingling reserve If the servicer becomes insolvent, any collections in its collection accounts plus collections that it receives directly afterward may become commingled with the funds of the insolvent estate. We accounted for commingling risk, considering the transaction's monthly cash-sweeping mechanism and the obligor-notification process, which is triggered by servicer insolvency. We consider that the commingling reserve only partially mitigates this risk. We have incorporated any such amounts not covered by the commingling reserve in our cash flow analysis. The commingling reserve will be funded by cash deposited in the issuer account, eligible securities deposited in the issuer account, or eligible securities deposited in a servicer account pledged to the issuer. We have applied our market value securities criteria to determine the securities' valuation percentages (see "Methodology And Assumptions For Market Value Securities," published on Sept. 17, 2013). In our view a potential liquidity risk remains, which we have sized for in our analysis. Setoff risk In general, if the servicer becomes insolvent, setoff risk may arise. This is because obligors can set off their loan installments against: Their salary (employee setoff); Insurance obligations (if the insurance provider becomes insolvent); Loan administration fees; or Their deposits (deposit setoff). The transaction's eligibility criteria for the pool exclude loans granted to Mercedes-Benz Bank's employees, thereby mitigating employee setoff risk. Mercedes-Benz Bank is a deposit-taking institution. It will fund a reserve at closing, partly mitigating deposit setoff risk. This is if the exposure exceeds 0.5% of the initial outstanding assets. The servicer JUNE 20,

10 notifies the obligors if the reserve is not fully funded. Additionally, obligors may exercise their right to set off loan payments because some of the contracts have been sold with insurance products. Their right to reduce their installments by an amount equal to the insurance premium cannot be excluded. If the insurer becomes insolvent, Mercedes-Benz Bank mitigates the related shortfalls. The risk cannot be excluded if Mercedes-Benz Bank and the insurer simultaneously become insolvent. We consider this risk to be remote in our analysis. Servicing As servicer, Mercedes-Benz Bank services the purchased receivables and the related collateral. There are no back-up servicing agreements in place. In our view, the following mechanisms mitigate the risk of a servicing disruption: The assets are of a common type (auto loans) and third-party servicers are available in Germany to take on this additional business. The transaction has sufficient liquidity to pay interest of more than four months during a servicer disruption period. The obligor-notification process limits the time period during which collections can be routed through the insolvent servicer. A commingling reserve can mitigate the commingling loss that would follow a servicer disruption. Collateral Description As of the cut-off date, the collateral pool backing the notes comprised 57,711 loans, with a total current principal balance of 1,100 million. The entire portfolio comprises auto loan contracts. The products include: The Plus3 contracts (balloon contracts that include a vehicle put option to the dealer); Standard fully amortizing contracts; and Amortizing contracts, with a final balloon payment, which Mercedes-Benz Bank distributed to commercial and private individuals in Germany. The transaction documents set out the following eligibility criteria for collateral (receivables) in the securitized pool (abbreviated list): It was originated in the originator's ordinary course of business; It incorporates monthly installments; It is governed by German law; It provides for an original term of not more than 72 months; It is euro-denominated; It is not a defaulted receivable nor delinquent; It is paid by direct debit; It constitutes legally valid, binding, and enforceable obligations of the obligor; The obligor has paid at least one installment; The obligor is resident in Germany; and The obligor is not employed by the originator. JUNE 20,

11 Table 2 Pool Distribution Cut-off date May 31, 2016 Portfolio amount (mil. ) 1, Number of loans 57,711 Number of obligors 54,120 Top 15 obligors (%) 0.38 Weighted-average original term (months) Weighted-average remaining term (months) Weighted-average seasoning (months) Weighted-average yield (%) 3.33 Vehicle type (percentage of loans; %) New Used Contract type (percentage of loans; %) Amortizing Balloon Object type (percentage of loans; %) Cars Vans Trucks Buses 0.24 Customer type (percentage of loans; %) Commercial Consumer JUNE 20,

12 Credit Analysis We analyzed the transaction's credit risk under various stress scenarios by applying our European consumer finance criteria. We received quarterly static gross loss and recovery data from Q to Q We have also used the performance information available from the predecessor transactions. We received all data split into subportfolios. Based on the historical stability in origination volumes of the subportfolios, we decided to size our base cases from the total book. Chart 3 shows that the scheduled amortization is rather gradual. JUNE 20,

13 Chart 3 Chart 4 shows yearly averages of quarterly static cumulative gross loss data from 2010 to 2016 for the total portfolio. JUNE 20,

14 Chart 4 Overall, the performance of the portfolio has been very much in line with Germany's economy, where we have seen a strong improvement since 2010, compared with 2008 and Our base-case assumptions reflect our expectation that Germany's economy will continue to stabilize. Chart 5 shows yearly averages of quarterly static recovery data from 2010 to 2016 for the total portfolio. JUNE 20,

15 Chart 5 We expect the transaction's performance to be in line with its peer auto loan originators (mainly private customers) in Germany. The portion of commercial customers (58%) is high compared with private customers. Commercial customers typically perform worse than private customers. However, we consider the performance of Mercedes-Benz Bank's book to be good, compared with similar consumer auto loan transactions. Table 3 shows our base-case assumptions and stressed assumptions for the respective rating scenarios. We have created our base-case assumptions on the historical data shown above, our economic outlook for Germany, our view on portfolio quality, and our analysis of the originator's underwriting and servicing standards. Good data quality, stable origination volumes, and Mercedes-Benz Bank's extensive experience as a servicer have led us to use lower multiples for our 'AAA' stress assumptions. Table 3 Credit Risk Stress Assumptions Cumulative Gross loss (%) Recoveries (%) Base-case 2.60 'AAA' stress assumption JUNE 20,

16 Balloon loan risk Balloon contracts may introduce additional obligor default risk to the transaction, if we assume that obligors expect to be able to finance the final balloon payment through the sale of the vehicle at contract maturity. In a stressed economic environment, such obligors may default on the balloon payment because the market value of the vehicle could have declined to below the amount needed to pay the final balloon payment. The balloon loans (other than Plus3 contracts) that Mercedes-Benz Bank originated do not feature a dealer buyback obligation. So, if an obligor defaults on the balloon payment, Silver Arrow, Compartment 7 will incur an additional loss equal to the difference between the balloon installment and the vehicle's sale proceeds. The Plus3 contracts contain a dealer buyback obligation which is a side agreement between the obligor and the dealer. If a dealer becomes insolvent, the buyback obligation may become invalid so that the obligor must pay the final installment. We have set our balloon loan gross loss assumption at a 'AAA' level at 7.5%, based on the significant vehicle type diversification, Mercedes-Benz Bank's origination policy, and the overall size of the balloon payments. In the application of the additional loss rate in our cash flow analysis, the aggregate balloon payments on loans securitized are adjusted to reflect stress scenario defaults and prepayments to establish an adjusted balloon payment amount. The applicable additional balloon loss rate is multiplied by the adjusted balloon payment amount as a percentage of the total pool balance (39.48%) to calculate the incremental balloon gross loss rate. The resulting balloon gross loss equals approximately 0.93% under our high constant prepayment rate (CPR) scenario, and approximately 1.82% under our low CPR scenario. Cash Flow Analysis We have tested the ability of the classes of notes to pay timely interest and ultimate principal under the above stress assumption through a cash flow model. We ran different interest paths (up to 12.00%, down to 0.00%, and flat at 0.12%), further costs to assess the effect of negative interest rates, different prepayment speeds (0.5% and 20.0% constant prepayment rate), and an equally distributed and back-loaded default curve over the weighted-average life of the pool (23 months). We also modeled delayed recovery timing. The rated class A notes achieve timely payment of interest and ultimate payment of principal under the 'AAA' stressed rating scenarios and assumptions discussed above. The high prepayment, low interest, and equally-loaded default scenarios have proved to be more stressful, mostly because they reduce the amount of available excess spread. This was partially offset by the fact that high prepayments also lead to reduced balloon losses. Scenario Analysis This scenario analysis section incorporates: A description of our methodology and scenario stresses; Results of the effects of the stresses on ratings; and Results of the effects of the stresses on our cash flow analysis. JUNE 20,

17 Methodology When rating European auto and consumer ABS transactions, we have developed a scenario analysis and sensitivity-testing model framework. This demonstrates the likely effect of scenario stresses on the ratings in a transaction over a one-year outlook horizon. For this asset class, we consider scenario stresses over a one-year horizon to be appropriate given the relatively short weighted-average life of the assets backing the notes. For these types of securities, there are many factors that could cause the downgrade and default of a rated note, including asset performance and structural features. However, for the purposes of this analysis, we focused on the three fundamental drivers of collateral performance, namely: Gross loss rate; Recovery rate; and Prepayment rate. Given current economic conditions, the proposed stress scenarios reflect negative events for each of these variables. Increases in gross default rates could arise from a number of factors, including rises in unemployment and company insolvencies, together with falls in house prices and a reduction in the availability of credit. In addition, these effects would most likely cause collateral recovery rates to fall as the structural imbalance between supply and demand leads to reductions in asset prices. In this environment, we also expect prepayment rates to fall as fewer refinancing options leave obligors unable to prepay finance agreements. For this analysis, we have included two stress scenarios to demonstrate the rating transition of a note (see table 4). Table 4 Scenario Stresses Rating variable Scenario 1 (relative stress to base-case) Scenario 2 (relative stress to base-case) Gross loss rate (%) Recovery rate (%) (30.00) (50.00) Constant prepayment rate (%) (20.00) (33.30) We note that our base-case assumptions for each transaction are intended to be best estimates of future performance for the asset portfolio. Our approach in determining these base-cases would take account of historically observed performance and an expectation of potential changes in these variables over the life of the transaction. The sensitivity of rated notes in each transaction will differ depending on these factors, in addition to structural features of the transaction, including its reliance on excess spread, payment waterfalls, and levels of credit enhancement at closing. For each proposed scenario stress, we separate the applied methodology into three distinct stages. In the first stage, we stress our expected base-case assumptions over a one-year period to replicate deviations away from our expected performance over the stress horizon. We assume the stresses that we apply occur at closing, with gross losses applied based on our expectation of a cumulative default curve for the portfolio. The second stage applies our usual rating methodology, including revising our base-case assumptions at the one-year horizon to reflect the assumed deviations as a result of the stressed environment. In the final stage of the analysis, we re-rate the transaction at the one-year horizon, after revising our base-case assumptions and applying our standard credit and cash flow stresses at each rating level. The output of the analysis shows the likely rating transition of the JUNE 20,

18 rated notes given the applied stresses and the value and timing of any forecasted principal and interest shortfalls under the most stressful scenario. Scenario stress and sensitivity analysis When applying scenario stresses in the manner described above, the results of this modeling are intended to be a simulation of what could happen to the ratings on the notes for the given transaction. For the purposes of our analysis for this transaction, we applied the two scenarios described above in our cash flow modeling. Table 5 Scenario Stresses Stress horizon of 12 months Rating variable Base-case Scenario 1 Scenario 2 Weighted-average gross loss rate (%) Recovery rate (%) Constant prepayment rate (%) Table 6 Scenario Stress Analysis: Rating Transition Results Scenario stress Class Preliminary rating Scenario stress rating Scenario 1 A AAA (sf) AAA Scenario 2 A AAA (sf) AA Table 7 Cash Flow Effect: Principal Shortfall Scenario stress Worst-case run Amount (mil. ) Expected loss as a percentage of the transaction's size (%) Class A notes Scenario 1 high prepayment/low interest rate 0 0 Scenario 2 high prepayment/low interest rate N/A--Not applicable. We subject the transaction structure to the additional stresses set out above. As can be seen in table 6, the class A notes would most likely retain their rating in scenario 1. In scenario 2, we would likely lower our rating to 'AA (sf)'. The most stressful scenario is an "interest down, high CPR" scenario. This appears sensible, in our view, because high CPR scenarios are more stressful with respect to the lower excess spread. Monitoring And Surveillance We will regularly assess the following as part of our ongoing surveillance of this transaction: The performance of the underlying portfolio, including defaults, delinquencies, and prepayments; The supporting ratings in the transaction; and The servicer's operations and its ability to maintain minimum servicing standards. JUNE 20,

19 Related Criteria And Research Related criteria Criteria - Structured Finance - ABS: Methodology And Assumptions For European Auto ABS - October 15, 2015 Criteria - Structured Finance - General: Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance - May 29, 2015 Criteria - Structured Finance - General: Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD - March 02, 2015 Criteria - Structured Finance - General: Global Framework For Cash Flow Analysis Of Structured Finance Securities - October 09, 2014 Criteria - Structured Finance - General: Global Framework For Assessing Operational Risk In Structured Finance Transactions - October 09, 2014 General Criteria: Methodology Applied To Bank Branch-Supported Transactions - October 14, 2013 Criteria - Structured Finance - General: Methodology And Assumptions For Market Value Securities - September 17, 2013 Legal Criteria: Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance - September 13, 2013 Criteria - Structured Finance - General: Counterparty Risk Framework Methodology And Assumptions - June 25, 2013 Criteria - Structured Finance - General: Global Derivative Agreement Criteria - June 24, 2013 Legal Criteria: Multiple-Use Special-Purpose Entity Criteria--Structured Finance - May 07, 2013 Criteria - Structured Finance - General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications - July 12, 2012 General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts - May 31, 2012 General Criteria: Methodology: Credit Stability Criteria - May 03, 2010 Criteria - Structured Finance - General: Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment - May 28, 2009 Related research Europe Is Still Holding On, Amid Negative Rates And Brexit Risk, April 6, 2016 European Economic Snapshots--May 2016: Signs Point To Sustained Recovery Despite External Headwinds, May 31, EMEA ABS Scenario And Sensitivity Analysis, Aug. 6, 2015 European Structured Finance Scenario And Sensitivity Analysis 2014: The Effects Of The Top Five Macroeconomic Factors, July 8, 2014 Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 Scenario Analysis: Gross Default Rates And Excess Spread Hold The Answer To Future European Auto ABS Performance, May 12, 2009 Additional Contact: Structured Finance Europe; StructuredFinanceEurope@standardandpoors.com JUNE 20,

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