DBRS Confirms AAA (sf) Rating on Class A Notes Issued by Bavarian Sky S.A. acting in respect of its Compartment German Auto Loans 4

DBRS Ratings Limited (DBRS) has today confirmed its AAA (sf) rating on the EUR 630,153,016.55 Class A Notes issued by Bavarian Sky S.A. acting in respect of its Compartment German Auto Loans 4 (the Issuer) following an annual review of the transaction.

The above-mentioned rating action is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of April 2017;
-- 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 (CE) to the Class A Notes to cover expected losses assumed in line with the AAA (sf) rating level.

The rating on the Class A Notes addresses the timely payment of interest and ultimate payment of principal payable on or before the Legal Final Maturity Date in October 2023.

The Issuer is a German securitisation collateralised by a static portfolio of auto loan receivables granted by BMW Bank GmbH (BMW Bank) to commercial and private customers residing in Germany. As of 20 April 2017, the balance of the Class A Notes was EUR 630.2 million and the balance of the Class B Notes was EUR 70.0 million. The EUR 729.7 million securitised portfolio (excluding defaulted receivables) includes loans for the purpose of acquiring new (49.8%) and used vehicles (50.2%), of which 98.8% include a final balloon payment.

PORTFOLIO PERFORMANCE
Loans in arrears between 31 days and 60 days and 61 days and 90 days represented 0.17% and 0.05% of the principal outstanding balance of the portfolio, respectively, while delinquencies greater than 90 days were 0.07%. Gross cumulative defaults, as a percentage of the original portfolio, stood at 0.19%, with cumulative recoveries of 52.53%.

CREDIT ENHANCEMENT
As of April 2017, the CE to the Class A Notes was 15.1%, up from 7.5% at closing. The CE to the Class A Notes is provided by the subordination of the Class B Notes (9.6%), overcollateralisation (4.1%) and the amounts deposited in the Cash Reserve Ledger.

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. Up to the April 2017 payment date, the Cash Reserve has always been at its target level of EUR 10.7 million.

Elavon Financial Services DAC, U.K. Branch acts as Account Bank for the transaction. The DBRS private rating of Elavon Financial Services DAC, U.K. Branch 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” methodology.

A swap structure is in place to mitigate the interest rate mismatch between the Class A Notes, indexed to one-month Euribor, and the fixed interest rate payments for the securitised portfolio. Royal Bank of Canada is the Swap Counterparty; the DBRS Issuer Rating of AA for Royal Bank of Canada complies with the First Rating Threshold defined in DBRS’s “Derivative 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 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 investor reports provided by BMW Bank 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 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 20 May 2016, when DBRS finalised the AAA (sf) provisional rating assigned to the Class A Notes.

The lead 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 ratings, 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 and the transaction’s replenishment criteria. 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 2.4% and 40.0%, 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 the Class A Notes would be expected to remain at AAA (sf), all else being equal. If the PD increases by 50%, the rating of Class A Notes would be expected to remain at AAA (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to remain 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 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: 18 April 2016

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

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