DBRS Upgrades Rating on SC Germany Consumer 2014-1 UG (haftungsbeschränkt)

DBRS Ratings Limited (DBRS) has today upgraded its rating on the EUR 650,368,986.50 Class A notes issued by SC Germany Consumer 2014-1 UG (haftungsbeschränkt) (the Issuer) to AA (sf) from A (sf).

The rating action follows an annual review of the transaction and is based on the following analytical considerations, as described more fully below:

-- The overall portfolio performance as of the March 2017 payment date, in particular with regard to low levels of cumulative net loss 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.
-- Updated base case default and recovery assumptions, considering the updated quarterly vintage performance data received by DBRS.
-- The increased levels of credit enhancement available to the Notes to cover expected losses assumed in line with the AA (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 payable on or before the Final Legal Maturity Date in February 2028.

SC Germany Consumer 2014-1 UG (haftungsbeschränkt) is a securitisation of German consumer loans originated by Santander Consumer Bank AG (SCB), a subsidiary of Santander Consumer Finance SA (SCF). The EUR 795.4 million portfolio, as of the March 2017 payment date, consists of both secured (25.4%) and unsecured (74.6%) loans.

The transaction envisaged an initial 36-month revolving period, which was due to mature in March 2017. However, the Seller exercised a Replenishment Termination Option as outlined in the transaction documents, and the revolving period terminated in May 2016.

PORTFOLIO PERFORMANCE
As of the March 2017 payment date, 30-day to 60-day delinquencies were 0.7% of the outstanding principal balance and 60-day to 90-day delinquencies were 0.4%, while delinquencies greater than 90 days were 0.3%. The gross cumulative defaults as a ratio of the original portfolio plus all additional receivables are 2.9%, of which 8.0% have been recovered.

BASE CASE ASSUMPTIONS
DBRS has received updated vintage performance data. With the updated data, DBRS recalibrated its base case assumptions of gross default and recovery. At the last review, the Probability of Default (PD) assumption was 7.6% and the Recovery Rate assumption was 17.1%. These assumptions have been updated to 6.6% and 17.5%, respectively.

CREDIT ENHANCEMENT
Credit Enhancement (CE) is provided by the subordination of the Class B notes and the Reserve Fund. CE for the Class A notes increased to 19.9% in March 2017, from 11.7% at closing. A non-amortising Reserve Fund of EUR 13.5 million was funded at closing and provides liquidity support to the Class A and Class B notes. Additionally, these funds are available to pay the principal balance on the Class A and Class B notes in the event of an Issuer default or at the final maturity of the transaction. The reserve fund is currently at the initial and target level of EUR 13.5 million.

The deal is exposed to potential commingling and set-off risks (as debtors may open accounts with the Originator). As a mitigant, the Servicer undertakes to fund a Commingling Reserve, as well as a Set-Off Reserve, if the DBRS rating of SCB’s parent company (SCF) falls below specific thresholds as defined in the legal documentation. To date, these reserves continue to be unfunded, as none of the rating triggers have been breached.

The Bank of New York Mellon, Frankfurt Branch acts as the Account Bank for the transaction. DBRS’s private rating of The Bank of New York Mellon, Frankfurt Branch complies with the minimum institution rating given the ratings assigned to the Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the rating 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 surveillance section of the principal methodology.

A review of the transaction legal documents was not conducted as the legal 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.

These 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 DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

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

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

At the time of the initial rating DBRS was not supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS considers the data and information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating action on this transaction took place on 18 March 2016, when DBRS confirmed the rating of the Class A notes at A (sf).

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

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

To assess the impact of changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to 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 the credit ratings.

-- The Base Case of PD and LGD of the current pool of assets of receivables are 6.6% and 82.5%, respectively.

-- The risk sensitivity overview below illustrates the ratings expected for the 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 for the Class A notes would be expected to remain at AA (sf), ceteris paribus. If the PD increases by 50%, the rating for the Class A notes would be expected to decrease to A (high) (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the ratings for the Class A notes would be expected to decrease to A (low) (sf), ceteris paribus.

Class A notes risk sensitivity:
-- 25% increase in LGD, expected rating of AA (sf)
-- 50% increase in LGD, expected rating of AA (sf)
-- 25% increase in PD, expected rating of AA (low) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in PD, expected rating of A (high) (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of A (low) (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of A (low) (sf)
For further information on DBRS historical 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.

Lead Analyst: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 20 March 2014

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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

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.