Bavarian Sky S.A., Compartment German Auto Leases 4

Transcription

1 Presale: Bavarian Sky S.A., Compartment German Auto Leases 4 Primary Credit Analyst: David Tuchenhagen, Frankfurt ; david.tuchenhagen@standardandpoors.com Secondary Contact: Marc-Orell Stadthaus, Frankfurt; marc-orell.stadthaus@standardandpoors.com Table Of Contents 800 Million Asset-Backed Floating- And Fixed-Rate Notes Transaction Summary Notable Features Rating Rationale Strengths, Concerns, And Mitigating Factors Transaction Structure Collateral Description Credit And Cash Flow Analysis Scenario Analysis Monitoring And Surveillance Related Criteria And Research NOVEMBER 18,

2 Presale: Bavarian Sky S.A., Compartment German Auto Leases Million Asset-Backed Floating- And Fixed-Rate Notes This presale report is based on information as of Nov. 18, 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. Class Prelim. rating* Prelim. amount (mil. ) Available credit support (%) Interest (%) Legal final maturity A AAA (sf) One-month EURIBOR plus a margin Dec. 20, 2022 B NR Fixed margin per year Dec. 20, 2022 *The rating on each class of securities is preliminary as of Nov. 18, 2015, and subject to change at any time. We expect to assign final credit ratings on the closing date, subject to a satisfactory review of the transaction documents and legal opinion, and completion of a corporate overview. Standard & Poor's ratings address timely payment of interest and ultimate payment of principal. Standard & Poor's ratings address timely payment of interest and ultimate principal. Includes subordination and a cash reserve (see "Transaction Key Features" below for details). NR--Not rated. EURIBOR Euro interbank offered rate. Transaction Participants Originator, arranger, seller, and servicer Joint lead managers Trustee Data trustee Corporate administrator and back-up servicer facilitator Issuer bank account provider and paying agent Interest-rate swap counterparty BMW Bank GmbH Commerzbank AG and Société Générale U.S. Bank Trustees Ltd. SFM Trustees Ltd. Structured Finance Management (Luxembourg) S.A. Elavon Financial Services Ltd., U.K. Branch DZ BANK AG Deutsche Zentral-Genossenschaftsbank Supporting Ratings Institution/role Elavon Financial Services Ltd., U.K. Branch as issuer bank account provider DZ BANK AG Deutsche Zentral-Genossenschaftsbank as interest-rate swap counterparty Rating AA-/Stable/A-1+* AA-/Stable/A-1+ *Based on the rating on the parent company, Elavon Financial Services Ltd. Transaction Key Features Closing date Dec. 16, 2015 Collateral Principal outstanding (discounted lease balance; mil. ) Country of origination Transaction structure Auto lease receivables; residual values are not securitized 800 Germany Static true sale Replenishment period (years) 0 NOVEMBER 18,

3 Transaction Key Features Redemption profile (cont.) Credit enhancement for the class A notes (% of asset volume) Cash reserve Commingling reserve Fully sequential, using all principal and excess interest collections to pay down the notes Overcollateralization: 6.8; Cash reserve: 1.0; Excess spread (initial % per annum): million available to cover liquidity shortfalls during the life of the transaction and redeem notes at the end of the transaction; non-amortizing Sized dynamically to cover either one or two months of collections, based on account sweeping frequency; available to cover commingled collections in the event of servicer insolvency *As of the pool cut-off date on Oct. 31, Transaction Summary Standard & Poor's Ratings Services has assigned preliminary credit rating to Bavarian Sky S.A., Compartment German Auto Leases 4's (BavSky Leases 4) class A notes. At closing, the issuer will also issue unrated class B notes. A portfolio of auto lease receivables backs BavSky Leases 4's (Bavarian Sky S.A., acting for and on behalf of its Compartment German Auto Leases 4) notes, which BMW Bank GmbH originated to its German, mostly small commercial customer base in the ordinary course of its business. The transaction does not have a replenishment period, and the notes amortize sequentially from the first payment date, using all principal and excess interest collections to pay down the notes. The rated notes will be credit enhanced through a combination of overcollateralization, a cash reserve, and excess spread. A fixed-to-floating interest rate swap agreement with DZ BANK AG Deutsche Zentral-Genossenschaftsbank will mitigate the risk of potential interest rate mismatches between the fixed rate assets and floating-rate liabilities. A commingling reserve will almost fully mitigate commingling risk. Notable Features This will be BMW Bank's fourth public German auto-lease transaction. Compared with its predecessor, Bavarian Sky S.A., Compartment 3 (BavSky Lease 3), this transaction provides 1.5% less credit enhancement for the class A notes. Unlike previous Bavarian Sky Lease term transactions, certain seller-related risks (German trade tax risks, VAT risk, and deposit set-off risks) are not mitigated by an indemnity reserve. We have stressed these risks in our cash flow analysis as an additional loss. Rating Rationale Economic outlook In our base-case scenario, we forecast that Germany will record GDP growth of 1.7% in 2015, 2.0% in 2016, and 1.8% in 2017, compared with 1.6% in At the same time, we expect unemployment rates to stabilize at historically low NOVEMBER 18,

4 levels. We forecast unemployment to be 4.8% in 2015, 4.6% in 2016, and 4.6% in 2017, compared with 5.0% in 2014 (see "Eurozone Economic Outlook: Steady For Now, Despite Slower World Trade," published on Sept. 30, 2015). In our view, changes in GDP growth and the unemployment rate largely determine portfolio 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 BMW Bank has underwritten auto leasing and loan contracts in Germany since Our preliminary rating on the class A notes reflects our assessment of the company's origination policies, as well as our evaluation of BMW Bank's ability to fulfill its role as servicer under the transaction documents. Our structured finance operational risk criteria do not impose any cap on the maximum achievable rating in this transaction due to operational risks (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published on Oct. 9, 2014). Credit risk We have used performance data from BMW Bank's leasing portfolio and from previous transactions to analyze credit risk. We expect to see about 2.45% of gross losses in the securitized pool. In comparison to BavSky Lease 3, we reduced our baseline expectations to reflect our assumption of a continued low unemployment rate in Germany and stable GDP growth of the German economy, as well as our view of BMW Bank's strong underwriting and servicing procedures. Furthermore, we sized stressed recoveries of 39% for all rating levels based on recovery data provided for previous Bavarian Sky lease transactions and a peer comparison with other German auto leasing transactions. We have analyzed credit risk by applying our European auto asset-backed securities (ABS) criteria (see "Methodology And Assumptions For European Auto ABS," published on Oct. 15, 2015). Sequential payment structure Our preliminary rating on the class A notes reflects our assessment of the transaction's payment structure set out in the transaction documents. The credit enhancement would build up quickly in our baseline scenario due to the sequential payment structure, the utilization of all excess cash to pay down the notes, and the nonamortizing cash reserve. Our analysis indicates that the available credit enhancement for the class A notes is sufficient to withstand the credit and cash flow stresses that we apply at a 'AAA' rating level. Counterparty risk Our preliminary rating on the class A notes also considers that the replacement mechanisms implemented in the transaction documents adequately mitigate the counterparty risks that the transaction is exposed to. The transaction is exposed to Elavon Financial Services Ltd., U.K. Branch as bank account provider, and to DZ BANK AG Deutsche Zentral-Genossenschaftsbank as swap counterparty. We have analyzed these 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 transaction documents and swap agreements will likely be in line with our current counterparty criteria. Legal risk In our opinion, the transaction may be exposed to deposit set-off risks, German trade tax risks, VAT risk, and commingling risk. A commingling reserve, which BMW Bank will fund if it is no longer deemed eligible under our current counterparty criteria, almost fully mitigates commingling risk. We have sized the unmitigated exposure as an NOVEMBER 18,

5 additional loss in our analysis. We have sized for set-off risk stemming from customers having deposits with BMW Bank, and tax risks as the transaction will not have a reserve to cover these risks. We consider the issuer to be a bankruptcy-remote entity, in line with our European legal criteria (see "Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance," published on Sept. 13, 2013). We anticipate that the legal opinion at closing will likely provide comfort that the sale of the assets would survive the insolvency of the seller. Rating stability In our review, we have analyzed the effect of a moderate stress on the credit variables and their ultimate effect on the ratings on the notes (see "Scenario Analysis: Gross Default Rates And Excess Spread Hold The Answer To Future European Auto ABS Performance," published on May 12, 2009). We have run two scenarios and the results are in line with our credit stability criteria (see "Methodology: Credit Stability Criteria," published on May 3, 2010). Strengths, Concerns, And Mitigating Factors Strengths We consider that defaults under transactions backed by leases to commercial retail customers are sensitive to the economy. The German economy is performing relatively well and our baseline forecast of unemployment levels is at 4.6% in both 2016 and Furthermore, we expect the German economy to record positive GDP growth of 2.0% in 2016 and 1.8% in In our view, BMW Bank has a good market position as one of the larger captive car financing companies in the German market, with more than 40 years' business experience. The preliminary pool is granular and diversified, comprising approximately 72,644 lessees with more than 83,000 lease contracts. The largest single lessee concentration is 0.04%. The top 20 lessees comprise just over 0.50% of the pool. The preliminary pool does not contain any contracts that were overdue or defaulted as of the cut-off date. The portfolio does not revolve, so a shift in pool quality due to substitution cannot occur. The notes will amortize in strictly sequential order from the first payment date, using all principal and excess interest collections to pay down the notes. This will lead to a quick build-up of credit enhancement for the class A notes. The structure benefits from a non-amortizing cash reserve, which will be fully funded at closing. The reserve will serve primarily as liquidity support to mitigate any cash strains. Ultimately, it is available to repay the notes at the end of the transaction. Concerns and mitigating factors The transaction is exposed to commingling risk, deposit set-off risk, German trade tax risk, and VAT risk. The seller will fund an additional reserve to almost fully mitigate commingling risk once it is no longer deemed eligible under our current counterparty criteria. Different to its predecessor, the transaction will not have an indemnity reserve to mitigate tax risks and deposit set-off risks. We have sized any unmitigated exposure as an additional loss. A hot backup servicer will not be in place at closing. The combination of a lessee notification process, a reserve fund, a commingling reserve (which BMW Bank will fund if a commingling reserve trigger event occurs), and the general availability of substitute servicers, mitigates servicer disruption risk. NOVEMBER 18,

6 Transaction Structure At closing, the issuer will issue the class A and B notes to finance the purchase price for a pool of auto lease receivables (but not the residual value receivables) it purchases from the seller. To calculate the purchase price of 800 million, the seller applied a fixed discount rate to be determined to the nominal value. At the same time, the issuer will use the proceeds from a subordinated loan it receives from the seller to fund the cash reserve. The issuer will also enter into a fixed-to-floating balance guaranteed swap to hedge the risk between the fixed discount rate that the assets pay and the floating rate payable on the notes (see chart 1). The class A notes pay interest in arrears on the 20th day of each month, at a rate of Euro Interbank Offered Rate (EURIBOR) of one month plus a margin. The class B notes pay interest in arrears at a fixed annual rate. The first interest payment date (IPD) is on Jan. 20, 2016; the legal final maturity of the notes will be in December NOVEMBER 18,

7 Originator profile BMW Bank was originally founded in 1971 under the name BMW Kredit GmbH and renamed as BMW Bank GmbH in BMW AG (A+/Stable/A-1) has 100% ownership of the company, which is located in Munich, Germany. BMW Bank is a licensed bank in Germany and is therefore regulated by the German regulatory authority (BaFin). The primary business of the bank is to provide financial products to customers and German BMW dealers. BMW Bank has advised that the sole channel for originating leasing contracts is BMW's dealer network. As of Q2 2015, BMW Bank has a volume of approximately 12 billion of leasing and loan receivables related to German customers on its books, it services about 600,000 customers, and employs about 800 full-time employees. In 2011, BMW Bank merged its former subsidiary, BMW Leasing GmbH, into the bank to incorporate the leasing business in its operations. We understand that this is an organizational, not substantial, change and that it did not change the operating processes. Underwriting policy Almost all lease applications are received from the dealership through the online interface linking dealers to the originator. After an initial round of plausibility checks, all remaining applications are scored in an internal scoring system, which calculates the risk cost (Expected loss exposure) for the contract. The present underwriting system has been in place since 2005 and BaFin has validated it as an internal ratings-based approach (IRBA) tool for retail financing. In 2010 the scorecards for loan and leasing applications for all customer groups were newly developed and are in use since then. The scoring engine uses four different scorecards (employed, self-employed, company with individual ownership, company without individual ownership) that the bank validates and amends regularly. The scorecards all take into account customer and contract data, credit bureau data, and any payment history that the originator may already have with the customer. The originator also conducts a household affordability analysis. The approval competency tableau is arranged by the risk cost of a potential contract. The system can automatically approve a certain amount of risk cost and applications; if risk costs increase, they require increasing levels of competence. As a result, about 50% of the applications are auto accepted, and the rest require manual intervention (such as asking for additional down-payment to reduce the expected loss). Ultimately, BMW Bank accepts around 95% of the applications. Servicing BMW Bank employs about 45 full-time employees and collaborates with several external service providers to service the assets. It overhauled the process for the servicing of distressed contracts in The new process groups delinquent customers into one of three different client segments (from 'premium' to 'high risk') on the basis of the expected loss of the contract, as well as the client's payment behavior. Clients in different segments will be assigned to different servicing workflows, which differ in terms of contact frequency, contact tonality, contact channel, and escalation speed. Termination of the leasing contract can be done once two installments are overdue, subject to legal limitations (for private lessees, up to 10% of the contract must be overdue). On average, termination takes place once three or four NOVEMBER 18,

8 installments are overdue. BMW Bank will reinstate terminated contracts, if all overdue amounts are repaid, and it receives two installments as deposit. Priority of payments The transaction has a combined waterfall. On each monthly payment date, the issuer will apply to the following combined waterfall (see table 1): All asset collections received during the month, including recovery proceeds and deemed collections paid by the seller; All net swap receipts; All amounts in the cash reserve; and Amounts in the commingling reserve (if there is a servicing disruption). Table 1 Priority Of Payments (Simplified) 1 Taxes and payments to the trustee 2 Senior fees, including payments to the servicer, corporate administrator, and bank account provider 3 Payments to the swap counterparty (except termination payments if the swap counterparty is the defaulting party) 4 Interest on the class A notes 5 Interest on the class B notes 6 Top-up cash reserve 7 Fully repay the class A notes 8 Fully repay the class B notes 9 Termination cost of the swap if the counterparty is defaulting or affected 10 Interest on the subordinated loan 11 Principal due and payable on the subordinated loan 12 Pay any excess back to the seller Cash reserve At closing, the issuer will use the proceeds from the subordinated loan it receives from the seller to fund the cash reserve up to its required amount of 8 million. The entire cash reserve is applied to the waterfall each month, where it is available to pay senior fees and the interest on the class A and B notes. The cash reserve will not amortize, and all amounts standing on the cash reserve once the portfolio has paid down to zero will be available to redeem outstanding notes. Commingling risk and reserve Commingling risk may arise if the servicer becomes insolvent and if collections in the servicer's collection accounts at the time (plus collections received directly afterward) become commingled with the insolvent estate's funds. Lessees pay their monthly installments into accounts held in the servicer's name. The servicer transfers these collections onto the special purpose entity's (SPE) accounts monthly, as long as no commingling reserve trigger event has occurred. The transaction benefits from a commingling reserve, which BMW Bank will fund if a commingling reserve trigger event occurs. During the transaction's life, the servicer can choose between two different target sizes for the NOVEMBER 18,

9 commingling reserve, depending on the then applied sweeping mechanism for transferring collections: If the servicer elects to transfer collections monthly, the transaction documents require the seller to credit the reserve with an amount equal to the last two months' collections; or If the servicer elects to transfer collections every two weeks, the transaction documents require the seller to credit the reserve with an amount equal to the past months' collections. In our opinion, this mechanism does not fully mitigate the commingling risk in the early months of the transaction's life as the collections exceed the initial commingling reserve amount if the servicer elects to transfer collections monthly. In our cash flow modeling, we accounted for the portion of residual risk that the commingling reserve does not mitigate. Set-off risk, German trade tax risk, and VAT risk BMW Bank accepts deposits from its customers. As a result, if the seller becomes insolvent, the lessees that have deposits with BMW Bank may exercise their right to set-off amounts they owe under the lease contract against amounts they deposited with the insolvent seller. Under the transaction's eligibility criteria, lessees that have a deposit with BMW Bank at closing are excluded from the securitized pool. However, the set-off exposure may build up as lessees deposit funds with BMW Bank over time. The transaction will not benefit from a reserve to mitigate this risk. In our opinion, the potential deposit-related set-off risk is limited, based on the transaction's short weighted-average life and the historical data we have received from predecessor transactions and the seller. We have sized an additional loss of 1.6 million in our cash flow model. There is also a residual risk that the issuer may become liable to pay German trade tax and/or VAT risk. The transaction will not benefit from a reserve to mitigate this risk. We have sized an additional loss of 10 million in our cash flow model to address potential tax risks. Swap The issuer will enter into a swap agreement with DZ BANK AG Deutsche Zentral-Genossenschaftsbank, under which it will pay a fixed swap rate in exchange for a floating-rate based on one-month EURIBOR. The notional of the swap will be the sum of the balance of the class A notes at the beginning of the period. The swap documentation contains replacement language that is fully in line with our current counterparty criteria. Back-up servicing BMW Bank will act as servicer for the transaction assets. No back-up servicer will be appointed at closing. We believe that the operational risk associated with servicer insolvency and the transition to a new substitute servicer is limited because of the following factors: The assets are amortizing lease receivables based on contracts in line with market practice. Given the size of the leasing market in Germany and the availability of third-party servicing in this area, we believe the issuer will be able to contract a substitute servicer with adequate servicing capabilities in a relatively short time period. Structured Finance Management (Luxembourg) S.A. has agreed that it will facilitate the appointment of a suitable entity to act NOVEMBER 18,

10 as back-up servicer to the transaction. A lessee notification process is in place, by which lessees would be instructed to redirect their payments to the accounts of the SPV/the substitute servicer immediately after servicer insolvency. According to the transaction documents, responsibility for this process lies primarily with the servicer. However, the issuer has the obligation to start notification if the servicer fails to do so within five days after a notification event. The trustee would obtain access to the relevant address information stored with the data trustee. The transaction is equipped with a cash reserve that is sufficient to cover about nine months of senior fees and interest on the class A and B notes. Furthermore, a separate commingling reserve held in the issuer's accounts will partially mitigate potential credit losses due to amounts being commingled in the insolvent servicer's accounts. Collateral Description The preliminary collateral pool consists of auto lease receivables that are based on leasing contracts that BMW Bank entered into with its German private and commercial leasing customers. Lessees in the pool finance either new or used vehicles. All contracts in the pool are based on similar terms with respect to maximum term, repayment profile, or termination rights. Typically, lease contracts comprise two elements: The regular lease installments, which cover the depreciation in value of the vehicle over the life of the contract, and the residual value of the vehicle when the lease contract expires. In this transaction, only the lease installments are securitized, but no residual values. In addition, value-added tax (VAT) payments and payments relating to the provision of services will be excluded from the securitized balance. According to the lease agreements, there is no unilateral cancellation or prepayment right for the lessee. However, the seller and the lessees can agree to prepayments or cancellations. Upon lease prepayment, BMW Bank will pay the outstanding net present value of the future lease payments due to BavSky Leases 4 discounted at a rate to be determined at which the issuer initially purchased the receivables. Portfolio stratification and eligibility criteria Table 2 shows the breakdown of the preliminary portfolio. Table 2 Breakdown Of The Preliminary Pool* Pool characteristics Discounted lease balance (mil. ) 800 Number of lease contracts 83,104 Number of lessees 72,644 Average discounted lease balance Weighted-average yield/discount rate (%) 4.61 Weighted-average original term (months) 36.9 Weighted-average remaining term (months) 26.9 Weighted-average seasoning (months) 10.0 Pool concentrations Top 20 Customers (% of balance) NOVEMBER 18,

11 Table 2 Breakdown Of The Preliminary Pool* (cont.) Top vehicle class (BMW 5; % of balance) Top region (by main postcode; % of balance) Distribution by product Share of used vehicles (% of balance) 5.85 Share of commercial customers (% of balance) Share of non-bmw or non-mini vehicles (% of balance) 1.09 *As of the pool cutoff date on Oct. 31, The transaction documents set out certain eligibility criteria for receivables in the pool as follows: Lease agreements must be legally valid and assignable; Lease agreements have been originated in the ordinary course of the seller's business; Lease receivables must have monthly installment payments; Leased vehicles under the lease agreements must be existing; Lease receivables must be free from rights of third parties; Lease receivables may be segregated and identified at any time for purposes of ownership; None of the lessees is an employee or affiliate of BMW AG and BMW Bank; None of the lessees hold deposits on accounts of BMW Bank; All lease receivables must be governed by German law; Where applicable, contracts comply with the requirements of the German Civil Code (Bürgerliches Gesetzbuch) on consumer financing; On the relevant cut-off date, at least two lease installments must have been paid in respect of each of the lease agreements; Lease receivables must be denominated in an amount payable in euros; Lease agreements must have been entered into with lessees whose registered office (corporate entities) or place of residence (individuals) is in Germany; Lease agreements may not contain the right to cancel the relevant lease agreement or to prepay the lease installments; Lease receivables may not be overdue for more than 30 calendar days or in default on the relevant cut-off date; Purchased lease receivables must not allow for any third party/lessees' rights to make set-off claims; Warranty claims or any other rights (including set-off) of the lessee may not impair the status and enforceability of the purchased lease receivables; The remaining term of the contract as of the relevant cut-off date may not be more than 60 months; Lease receivables have been originated on or after April 1, 2012; and Consumer Lease receivables must comply with all applicable form requirements and notifications. Credit And Cash Flow Analysis Our rating analysis includes an assessment of the credit risk inherent in the transaction. We analyze various stress scenarios and their effects on the cash flow under the notes by applying our European auto ABS criteria. We have received quarterly static gross and net loss data showing cumulative gross and net losses (i.e., defaults and losses after recoveries) as a percentage of the origination volume in BMW Bank's lease book. The data range to Q2 NOVEMBER 18,

12 2015 from Q and provide for a split between private and commercial customers. The originator has not provided us with separate recovery data. To arrive at a proxy for recoveries, we used the difference between gross losses and net losses, assuming a recovery time lag of one quarter. In our analysis, we considered both private and commercial customers and sized separate gross loss base-case and stressed recovery rate and aggregated them into weighted-average base cases. Charts 2 and 3 below show cumulative gross losses in the originators' books for private and commercial lessees. The performance for both subpools has improved significantly since 2007 and BMW Bank has informed us that it revised its scorecards in 2009 and overhauled the process for the servicing of distressed contracts in In our view, in tandem with the benign economic environment in Germany, this led to an overall improvement in performance since then. Our analysis of the private and commercial customers' performance data shows that the private customers, which only comprise about 30% of the securitized preliminary portfolio, perform substantially better than the commercial customers. Chart 2 NOVEMBER 18,

13 Chart 3 We also analyzed performance data from existing and matured transactions of the same originator. Similar to the loss data from the originators' books, the performance of the outstanding transactions show a positive trend, but lower absolute loss levels. In our view, the positive selection bias introduced through the eligibility criteria as per the transaction documents is behind this difference in absolute levels between the performance of the originators' books and the transactions. Based on the stable performance of the receivables and the performance of outstanding Bavarian Sky Lease transactions, we have sized an average gross loss base case of 2.45% for the whole pool. We set our stress multiples in the low-to-mid range to reflect the quantity and quality of BMW Bank's data and BMW Bank's extensive business experience. Tables 3 and 4 summarize our credit assumptions. Table 3 Base Cases Gross loss (%) Private customers 1.75 Commercial customers 2.75 Total preliminary pool NOVEMBER 18,

14 Table 4 Stress Assumptions Rating Gross loss (%) Recovery (%) Prepayment (%) AAA to 20.0 Cash flow analysis In our cash flow modeling of this transaction, we applied stressed losses equally for a period of 13 months. We stressed the prepayment rates, and ran interest rate scenarios at current levels, down to 0%, and up to 12%. We further assume a stressed annual servicing fee of 1% plus 100,000 so that in our modeling the excess spread available to the transaction is reduced to approximately 2.5% per annum as of closing. We have not sized any prepayment losses or coupon compression because BMW Bank agrees to reimburse the issuer for prepayment losses and, under a seller-insolvency scenario, we assume that a back-up servicer would only consent to a prepayment if the issuer did not incur any loss as a result. The model incorporates the payment structure including the 'turbo' amortization and the non-amortizing features of the cash reserve. We have sized for uncovered commingling exposure and potential deposit set-off risk and tax risks. Our analysis indicates that the credit enhancement available to the class A notes is sufficient to withstand the credit and cash flow stresses that we apply at a 'AAA' rating level. The high prepayment and low interest scenario has proven to be more stressful, mostly because it reduces the amount of available excess spread. The ratings address not only the availability of funds for full payment of interest and principal, but also the timeliness of these payments in accordance with the terms of the rated securities. 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. 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 NOVEMBER 18,

15 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 and demand for replacement vehicles falls. For this analysis, we have included two stress scenarios to demonstrate the transition of a rating on a note (see table 5). Table 5 Scenario Stresses Rating variable Scenario 1 (relative stress to base case) Scenario 2 (relative stress to base case) Gross loss rate (%) Recovery rate (%) (30.0) (50.0) Constant prepayment rate (%) (20.0) (33.3) We intend our base-case assumptions for each transaction to be best estimates of future performance for the asset pool. Our approach in determining these base cases would take account of historically observed performance and an expectation of potential changes in these variables during 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 that the stresses that we apply occur at closing, and apply gross losses based on our expectation of a cumulative default curve for the pool. 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 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, we intend the results of this modeling 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. Tables 6 to 8 show the implied base-case stresses and scenario stress results. NOVEMBER 18,

16 Table 6 Scenario Stresses Stress Horizon 12 Months Rating variable Base case Scenario 1 Scenario 2 Gross loss rate (%) Stressed Recovery rate (%) Constant prepayment rate (%) Table 7 Scenario Stress Analysis Rating Transition Results Scenario stress Class Initial rating Scenario stress rating Scenario 1 A AAA (sf) AAA (sf) Scenario 2 A AAA (sf) AA (sf) Table 8 Cash Flow Effect Principal shortfall Cumulative interest shortfall Scenario stress (class A notes) Scenario 1 Scenario 2 N/A Not applicable. Worst-case run High prepayment, falling interest rate High prepayment, falling interest rate Amount (mil. ) Expected loss as a % of the transaction size Month Amount ( ) Starting in month None 0.0 N/A None N/A None N/A Given the transaction's structure, the more stressful scenario for our cash flow analysis is a high collateral prepayment rate in a falling interest rate environment. Given the stresses we applied under scenario 1, the class A notes would most likely retain its rating. Under scenario 2, we would most likely lower our ratings on class A notes to 'AA (sf)'. We list the amounts of principal and interest shortfalls in these scenarios in table 8 above. Where interest or principal shortfalls occur under the most senior notes, the holders of these notes and/or the trustee can call an event of default. This could lead to multiple events, such as the swap terminating (with the issuer needing to make termination payments), and the post-enforcement priority of payments being applied. All of these events would have an effect on the transaction cash flows. For the purposes of the analysis above, we make a simplified assumption that the trustee will not call an event of default. Monitoring And Surveillance As part of our ongoing surveillance of this transaction, we regularly assess: The performance of the underlying pool, including defaults, delinquencies, and prepayments; The supporting ratings in the transaction; and The servicer's operations and its ability to maintain minimum servicing standards. NOVEMBER 18,

17 Related Criteria And Research Related criteria Methodology And Assumptions For European Auto ABS, Oct. 15, 2015 Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance, May 29, 2015 Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015 Global Methodology And Assumptions For Assessing The Credit Quality Of Securitized Consumer Receivables, Oct. 9, 2014 Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014 Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 2013 Assessing Bank Branch Creditworthiness, Oct. 14, 2013 Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Global Derivative Agreement Criteria, June 24, 2013 Multiple-Use Special-Purpose Entity Criteria--Structured Finance, May 7, 2013 Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012 Methodology: Credit Stability Criteria, May 3, 2010 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Related research Europe's Recovery Persists Despite Signs Of Weakness In China And Latin America, Oct. 13, 2015 Eurozone Economic Outlook: Steady For Now, Despite Slower World Trade, Sept. 30, EMEA ABS Scenario And Sensitivity Analysis, Aug. 6, 2015 European Auto ABS Index Report Q3 2014: Index Composition Supports Stable Collateral Performance, Dec. 19, 2014 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 NOVEMBER 18,

18 Copyright 2015 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription) and (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at NOVEMBER 18,