DBRS Confirms Rating on the Senior Note Issued by Startline Auto Receivables Limited

DBRS Ratings Limited (DBRS) has today confirmed its A (high) (sf) rating on the Senior Note issued by Startline Auto Receivables Limited (the Issuer).

The confirmation follows an annual review of the transaction and is based on the following analytical considerations:
-- The portfolio performance, in terms of level of delinquencies and defaults, as of June 2017;
-- No Early Amortisation Events have occurred;
-- The current available credit enhancement (CE) to the Senior Note to cover expected losses assumed in line with the A (high) (sf) rating level.
-- Startline Motor Finance Limited’s limited trading history, which has led to limited historic data availability to derive portfolio base-case assumptions.

The rating on the Senior Note addresses the timely payment of interest and ultimate payment of principal payable on or before the Final Repayment Date, due five years after the end of the revolving period.

The Issuer is a securitisation collateralised by a portfolio of auto loan receivables granted by Startline Motor Finance Limited (SMF) to retail customers in Great Britain. The transaction represents SMF’s first issuance in the United Kingdom through an existing programme that commenced in February 2015. The securitised portfolio is composed exclusively of hire-purchase finance agreements secured by predominantly used vehicles. The receivables are serviced by Link Financial Outsourcing Limited, which is a separate entity from SMF.

The transaction envisages a revolving period scheduled to end in November 2017, unless an Early Amortisation Event has occurred. Following the end of the revolving period, the Senior Note will be repaid on a fully sequential basis.

PORTFOLIO PERFORMANCE
As of the June 2017 payment date, loans in arrears between 31 days and 60 days represented 1.1% of the principal outstanding balance of the portfolio while 61- to 90-day delinquencies were represented 0.4%. Gross cumulative defaults, as a percentage of the original portfolio and cumulative transferred receivables, stood at 2.2% with cumulative recoveries of 35.3%.

CREDIT ENHANCEMENT
The structure includes a Senior Note and a Junior Note. The Senior Note has a maximum facility size of GBP 200 million and benefits from credit enhancement in the form of subordination from the Junior Note and overcollateralisation.

The transaction structure includes a dynamic General Reserve Ledger, funded through the proceeds from the Junior Note issuance and from the Issuer’s available funds, according to the priority of payments. This reserve is available to cover senior expenses and missed interest payments on the Senior Note. Up to the June 2017 payment date, the General Reserve Ledger has always been at its target level of 1.6 % of the aggregate principal outstanding balance of all Eligible Receivables in the portfolio.

HSBC Bank plc acts as Account Bank for the transaction. DBRS’s private rating on HSBC Bank plc complies with the Minimum Institution Rating, given the rating assigned to the Senior Note as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

There is an interest rate mismatch between the securitised portfolio, composed exclusively of fixed interest-rate receivables, and the Senior Note, indexed to one-month GBP LIBOR. This risk is partially mitigated through the introduction of a hedge provider and cap only when one-month GBP LIBOR exceeds 3.5% or upon the amortisation date, whichever is earlier. DBRS has given no credit to this arrangement and has modelled the transaction’s cash flows as unhedged; however, excess spread is available to the transaction.

DBRS amended this press release on 16 October 2017 as the previous version mistakenly identified a material methodology deviation.

Notes:
All figures are in GBP 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.

An asset and a cashflow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis continues to be based on the worst-case replenishment criteria set forth in the transaction legal documents.

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 SMF.

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 dated from 2015. 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.

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, 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 10.4% and 40.0%, respectively.

-- The Risk Sensitivity below illustrates the ratings expected for the Senior Note 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 Senior Note would be expected to remain at A (high) (sf), all else being equal. If the PD increases by 50%, the rating of the Senior Note would be expected to remain at A (high) (sf), all else being equal. Furthermore, if both the PD and LGD increase by 50%, the rating of the Senior Note would be expected to be downgraded to BBB (sf), all else being equal.

Senior Note risk sensitivity:
-- 25% increase in LGD, expected rating of A (high) (sf)
-- 50% increase in LGD, expected rating of A (high) (sf)
-- 25% increase in PD, expected rating of A (high) (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of A (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of A (low) (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 BBB (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: Vito Natale, Senior Vice President
Initial Rating Date: 6 July 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 Originators
-- 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