DBRS Confirms Ratings on Auto ABS UK Loans plc

DBRS Ratings Limited (DBRS) took the following rating actions on the Notes issued by Auto ABS UK Loans plc (the Issuer):

-- Class A1 Notes due 30 April 2026 confirmed at AAA (sf)
-- Class A3 Notes due 30 April 2026 confirmed at AAA (sf) -- Class A4 Notes due 30 April 2026 confirmed at AAA (sf)
The ratings on the Class A1 Notes, the Class A3 Notes and Class A4 Notes (together, the Class A Notes) address the timely payment of interest and ultimate payment of principal on or before the legal final maturity date.

The rating actions follow an annual review of the transaction and are based on the following analytical considerations:

-- Portfolio performance, in terms of delinquencies, defaults and losses.
-- Probability of default (PD), loss given default (LGD) and residual value (RV) haircut assumptions on the remaining receivables.
-- Current available credit enhancement to the Notes to cover the expected losses at the AAA rating level.
-- No revolving termination events have occurred.

The transaction is backed by a portfolio of auto loan contracts granted by PSA Finance UK Limited (PSA Finance, Originator or Seller) to borrowers in England, Wales, Scotland and Northern Ireland. The transaction was restructured in May 2017 with the revolving period extended by two years to May 2019, the balances on the Class A3 and Class A4 Notes increased, the Class A2 and Class B Notes redeemed, and the new Funding Agents on the newly issued Class A1 Notes.

PORTFOLIO PERFORMANCE AND ASSUMPTIONS
As of 30 April 2018, loans more than 90 days in arrears represented 0.05% of the outstanding portfolio balance. The cumulative default ratio was 0.3% with the recovery rate at 72.6%. The portfolio’s performance is within DBRS’s expectations.

DBRS has updated the recovery rate assumption at a AAA (sf) rating scenario for this transaction to 45.0%, down from 46.2%, which translates into a LGD of 55.0%, in line with the assumptions for the other DBRS-rated Auto ABS UK Loan transactions. DBRS notes that the proportion of receivables with four years or more payment terms has gradually increased, but remains low overall. In relation to personal contract purchase (PCP) contracts, the transaction’s loan covenant limits contract terms to a maximum of 48 months. For more details on PCP terms, please refer to DBRS commentary “U.K. Autos: Elongated PCP Terms Increase the Risk of Voluntary Terminations”.

CREDIT ENHANCEMENT
As of the May 2018 payment date, credit enhancement to the Class A Notes was 19.3%. The credit enhancement is provided through the Subordinated Notes in the transaction. The PD and the RV haircut assumptions remained at 3.4% and 46.7%, respectively.

The transaction benefits from a General Reserve Fund of GBP 13.9 million, funded by PSA Finance at the restructuring of the transaction in May 2017. This reserve fund provides mainly liquidity support to the Class A Notes.

BNP Paribas Securities Services SCA/London acts as the account bank for the transaction. The DBRS private rating of BNP Paribas Securities Services SCA/London is consistent 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.

Abbey National Treasury Services plc acts as the Class A1 Notes and Class A3 Notes swap counterparty, while Wells Fargo Securities International Limited acts as the Class A3 Notes and Class A4 Notes swap counterparty for the transaction. DBRS’s private ratings of both counterparties are above the First Rating Threshold as described in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in British pound sterling unless otherwise noted.

The principal methodology applicable to the ratings is the “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. 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 “Appendix C: The Impact of Sovereign Ratings on Other DBRS Credit Ratings” of the “Rating Sovereign Governments” methodology at: http://dbrs.com/research/319564/rating-sovereign-governments.pdf.

The source of data and information used for these ratings include investor reports provided by BNP Paribas Securities Services S.C.A., London Branch.

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 these ratings 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 30 May 2017, when DBRS confirmed the ratings of the Class A3 Notes and the Class A4 Notes and assigned a AAA (sf) rating to the Class A1 Notes.

The lead analyst responsibilities for this transaction have been transferred to Kevin Ma.

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

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

-- DBRS expected a lifetime base case PD and LGD for the pool 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, LGD at AAA (sf) rating level, and RV haircut at AAA (sf) rating level of the current pool of loans for the Issuer are 3.4%, 55.0% and 46.7%, respectively.
-- The Risk Sensitivity overview below illustrates the ratings expected if the PD, LGD and RV haircut increase by a certain percentage over the base case assumption. For example, if the PD and LGD increase by 50%, the rating of the Class A Notes would be expected to fall to AA (sf), assuming no change in the RV haircut. If the RV haircut increases by 50%, the rating of the Class A Notes would be expected to fall to AA (sf), assuming no change in the PD and LGD. Furthermore, if the PD, LGD, and RV haircut increase by 50%, the rating of the Class A Notes would be expected to fall to BBB (high) (sf).

Class A Notes Risk Sensitivity:
-- 25% increase in PD and LGD, expected rating of AA (high) (sf)
-- 50% increase in PD and LGD, expected rating of AA (sf)
-- 25% increase in RV Loss, expected rating of AA (high) (sf)
-- 50% increase in RV Loss, expected rating of AA (sf)
-- 25% increase in PD and LGD, and 25% increase in RV Loss, expected rating of AA (sf)
-- 50% increase in PD and LGD, and 25% increase in RV Loss, expected rating of A (sf)
-- 50% increase in RV Loss, and 25% increase in PD and LGD, expected rating of A (sf)
-- 50% increase in RV Loss, and 50% increase in PD and LGD, expected rating of BBB (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 and U.S. regulations only.

Lead Analyst: Kevin Ma, Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 29 April 2016

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

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

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.