DBRS Upgrades Rating on the Class A Notes issued by SC Germany Auto 2014-2 UG (haftungsbeschränkt)

DBRS Ratings Limited (DBRS) has today upgraded its rating on the EUR 2,895 million Class A notes issued by SC Germany Auto 2014-2 UG (haftungsbeschränkt) (the Issuer) to A (high) (sf) from A (sf).

The rating on the Class A notes addresses the timely payment of interest and the ultimate payment of principal payable on or before the Legal Maturity Date in August 2030.

The upgrade on the Class A notes reflects an annual review of the transaction and is based on the following analytical considerations:
-- Updated and more granular rating levels introduced by the “Legal Criteria for European Structured Finance Transactions” methodology for Account Bank institution replacement triggers.
-- Lower exposure to loans in relation to which the Seller used to charge Loan Administration Fees (LAFs).
-- The overall portfolio performance as of the August 2016 payment date, in particular with regards to low levels of cumulative net defaults and delinquencies.
-- An amendment to the Concentration Limits of the transaction signed on 9 August 2016.
-- No Early Amortisation Events have occurred.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms and conditions of the notes.
-- The current available credit enhancement to the Class A notes to cover the expected losses at A (high) (sf) rating level.

The Issuer is a securitisation collateralised by a pool of auto loans granted by Santander Consumer Bank AG (the Seller) to retail clients resident in Germany. The transaction is a limited liability entrepreneurial company (haftungsbeschränkt) incorporated under the law of the Federal Republic of Germany and closed in September 2014.

The deal has a four-year revolving period ending in September 2018. The structure defines portfolio Concentration Limits and Early Amortisation Events to mitigate a potential portfolio composition and performance deterioration during the revolving period. To date, all these tests have been passed.

On 9 August 2016, the following amendment to the Concentration Limits became effective:
-- On the relevant payment date, the weighted-average interest rate of the collateral portfolio (including the receivables to be purchased on such payment date) must be at least equal to 4.25%; prior to this amendment, the minimum weighted-average interest rate was applicable only to the additional loans to be acquired on the relevant payment date.

Receivables originated prior to 2013 include LAFs, which have been declared void by the German Federal Court of Justice; thus, Debtors are entitled to set off their claims towards the Seller by paid LAFs against any payment claims of the Issuer under the relevant purchased receivables. This risk has been decreasing since closing and is expected to be further reduced due to the amortisation of these loans and the addition of more recently originated receivables during the revolving period.

The portfolio is performing in line with DBRS’s expectations. As of the August 2016 payment date, 31- to 60-day delinquencies and 61- to 90-day delinquencies were 0.12% and 0.05% of the portfolio principal balance, respectively, while delinquencies greater than 90 days were 0.05%. The cumulative gross default ratio was 0.16% of the aggregate original balance, with cumulative recoveries of 12.45%.

Credit enhancement for the Class A notes is provided by the subordination of the Class B notes and the Reserve Fund. Credit enhancement of the Class A notes has been stable at 4.50%.

The transaction structure includes a non-amortising Reserve Fund, funded at closing with the proceeds of the Subordinated Loan provided by the Seller. This reserve is available to cover senior expenses and missed interest payments on the notes. The reserve fund is currently at its target level of EUR 30.00 million, equivalent to 1.00% of the outstanding balance of the notes.

BNP Paribas Securities Services, Luxembourg Branch is the Account Bank of the transaction and its DBRS private rating complies with the Minimum Institution Rating given the rating assigned to the notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology. This methodology was updated on 19 February 2016 by incorporating DBRS’s new Critical Obligations Ratings, which were introduced in the “Critical Obligations Rating Criteria” methodology published on 2 February 2016, and by providing more granular rating levels for Account Bank institution replacements and eligible investments.

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.

An asset and a cash flow analysis were both conducted. However, due to the inclusion of a revolving period in the transaction and no change in assumptions, the initial and current analysis were based on worst-case replenishment criteria as set forth in the transaction legal documents.

In August 2016, the Eligibility Criteria for the additional receivables was amended. DBRS conducted a review of the related amended documentation. A review of any other transaction legal documents was not conducted as they 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 the Seller 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 this rating to be 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.

The last rating action on this transaction took place on 7 September 2015, when DBRS confirmed the rating assigned to the Class A notes at A (sf).

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 3.26% and 62.49%, respectively.

-- The Risk Sensitivity below illustrates the ratings expected for 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 expected to decrease to A (low) (sf), all else being equal. If the PD increases by 50%, the rating of Class A notes would be expected to decrease to A (low) (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of Class A notes would be expected to decrease to BB (high) (sf), all else being equal.

Class A notes risk sensitivity:
-- 25% increase in LGD, expected rating of A (sf)
-- 50% increase in LGD, expected rating of A (low) (sf)
-- 25% increase in PD, expected rating of A (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of BBB (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD, expected rating of A (low) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of BBB (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of BB (high) (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: Paolo Conti
Initial Rating Date: 19 September 2014
Initial Rating Committee Chair: Chuck Weilamann

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

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London EC3M 3BY
United Kingdom

Registered in England and Wales: No. 7139960

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 Originators
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations

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