DBRS Confirms Rating of Bavarian Sky S.A. acting in respect of its Compartment German Auto Loans 3

DBRS Ratings Limited (DBRS) has today confirmed its AAA (sf) rating on the EUR 469.3 million Class A Notes issued by Bavarian Sky S.A. acting in respect of its Compartment German Auto Loans 3 (the Issuer).

The rating action reflects an annual review of the transaction, based upon the following analytical considerations:
-- The overall portfolio performance as of the July 2016 payment date, in particular with regard to low levels of cumulative net defaults and delinquencies.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms and conditions of the Notes.
-- The available credit enhancement to the Notes to cover expected losses assumed in line with the AAA (sf) rating level for the Class A Notes.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Legal Final Maturity Date in August 2022.

The Issuer is a securitisation collateralised by a pool of auto loans granted by BMW Bank GmbH (BMW Bank) to German retail and commercial customers (representing 70.99% and 29.01% of the current outstanding balance, respectively). The portfolio includes balloon loans, which currently represent 99.01% of the principal outstanding balance.

The portfolio is performing in line with DBRS’s expectations. As of the July 2016 payment date, 31- to 60-day delinquencies and 61- to 90-day delinquencies were 0.17% and 0.04% of the portfolio principal balance, respectively, while delinquencies greater than 90 days were 0.08%. The cumulative gross default ratio was 0.17% of the original balance, with cumulative recoveries of 65.36%.

Credit enhancement for the Class A Notes is provided by overcollateralisation, the subordination of the Class B Notes and the Cash Reserve Leger. Current credit enhancement of the Class A Notes is equal to 15.89%, up from 8.00% at closing.

The transaction structure includes a non-amortising Cash Reserve, funded at closing with the proceeds of the Subordinated Loan provided by BMW Bank. This reserve is available to cover senior expenses and missed interest payments on the Notes and can be used to pay principal on the Notes at the Legal Final Maturity Date. The reserve fund is currently at its target level of EUR 8.00 million, equivalent to 1.00% of the original Notes balance and 1.52% of the current Notes balance.

A swap structure is in place to mitigate the interest rate mismatch between the Class A Notes, indexed to 1-month Euribor, and the fixed interest rate payments for the securitised portfolio. Royal Bank of Canada is the swap counterparty; the DBRS rating of Royal Bank of Canada at AA complies with the First Rating Threshold defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions”.

Elavon Financial Services DAC, U.K. Branch (Elavon Financial Services) acts as Account Bank on this transaction. The DBRS private rating of Elavon Financial Services complies with the Minimum Institution Rating given the rating assigned to the Class A Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions”.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

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

Other methodologies referenced in this transaction are listed at the end of this press release. This may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to the DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” found at http://www.dbrs.com/industries/bucket/id/10036/name/commentaries.

The sources of information used for this rating include monthly investor reports provided by BMW Bank and loan level data from the European DataWarehouse GmbH.

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

DBRS was supplied with third-party assessments at the Initial Rating Date. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing these ratings was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This is the first rating action since the Initial Rating Date.

The lead responsibilities for this transaction have been transferred to Joana Seara da Costa.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of changing transaction parameters on the rating, at closing DBRS considered the following stress scenarios compared with the parameters used to determine the rating (the Base Case):

-- DBRS expected a base case probability of default (PD) and loss given default (LGD) for the portfolio based on a review of the current assets. Adverse changes to asset performance may cause stresses to base case assumptions and, therefore, have a negative effect on credit ratings.

-- The base case PD and LGD of the current pool of receivables are 2.48% and 40.00%, respectively.

-- The Risk Sensitivity below illustrates the ratings expected for the Class A Notes if the PD and LGD increase by a certain percentage over the base case assumptions. For example, if the LGD increases by 50%, the rating of Class A Notes would be maintained at AAA (sf), all else being equal. If the PD increases by 50%, the rating of Class A Notes would be maintained at AAA (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of Class A Notes would be maintained at AAA (sf), all else being equal.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)

For further information on DBRS historic default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Initial Lead Analyst: Eric Levassor
Initial Rating Date: 23 July 2015
Initial Rating Committee Chair: Chuck Weilamann

Lead Surveillance Analyst: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Senior Vice President

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The rating methodologies used in the analysis of this transaction can be found at
http://www.dbrs.com/about/methodologies.

-- Master European Structured Finance Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Unified Interest Rate Model for European Securitisations
-- Derivative Criteria for European Structured Finance Transactions

A description of how DBRS analysis structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375