The rating action is as follows:

Class A1 notes, EUR 250.0m (EUR 125m drawn): assigned final rating of AAA_SF

Class A2 notes, EUR 250.0m (EUR 125m drawn): assigned final rating of AAA_SF

*The analysis considers the portfolio as of 31.05.2018.

Rating rationale

The rating reflects the legal and financial structure of the transaction; the credit quality of the collateral in the context of the macroeconomic conditions and long-term performance of auto ABS in Germany; the ability of the originator and servicer, FCE Bank Plc (not rated) and Ford Bank GmbH (not rated); and the counterparty exposure Elavon Financial Services DAC, U.K. Branch (not rated) as account bank and principal paying agent, and Lloyds Bank Corporate Markets Plc (A/Stable Outlook) as the interest rate swap. Ford Bank GmbH obtained its banking license in 2018 and is a wholly-owned German subsidiary of FCE Bank Plc. Ford Bank GmbH continues the operations of FCE Bank Plc’s previous legal German subsidiary, Ford Bank Niederlassung der FCE Bank Plc.

The Class A1 and A2 notes, collectively referred to as the Class A notes, are protected against potential losses from the receivables portfolio by 12.2% of credit enhancement from subordination and a fully funded cash reserve. The notes benefit from sequential amortisation following the end of a 16-month revolving period. In addition, 1.28% of excess spread is available at closing to cover periodic payment shortfalls. An interest rate swap with Lloyds Bank safeguards the excess spread against erosion from the fixed-floating mismatch of assets and liabilities.

The transaction benefits from the consistent and sustainable business model of Ford Bank GmbH as the German financial services arm of Ford Motor Company. Ford Bank GmbH is highly experienced in originating auto loans to support Ford Motor Company sales, and the flexible origination criteria are matched with well-structured loans and effective monitoring and recovery processes, which is suitable for a creditor-friendly jurisdiction like Germany.

The performance of the assets will benefit from the strong and stable German economy. The robust labour market, favourable financing conditions and rising productivity signify a benign macroeconomic environment. Furthermore, Germany has high-quality public institutions which explain the long history of economic stability behind its good credit performance. Scope expects low net losses i.e. 63 bps from the loan portfolio, assuming that normal long-term economic conditions persist. The agency assumed portfolio defaults, taking long-term performance conditions into consideration, by assuming: a ‘90-days-past-due’ default rate mean of 3.0% and a coefficient of variation of 51.4%. In addition, Scope has assumed a recovery rate of 47.4% after incorporating a AAA rating-conditional recovery stress.

The transaction is well protected from portfolio underperformance and portfolio migration during the revolving period. Ford Bank GmbH would have to provide significant protection to prevent early amortisation if the portfolio composition migrated during the revolving period or if the portfolio underperformed. Scope’s analysis did not consider this additional protection for the analysis under AAA rating-conditional stresses. Consequently, Scope’s analysis does not rely on Ford Bank GmbH as the protection provider. However, this mechanism represents a positive feature which will support the Class A notes.

The rating reflects the counterparty credit risk in the transaction and its mitigants. Ford Bank GmbH has to fund a commingling reserve, equal to two-thirds of the sum of: i) the highest monthly collection, plus ii) 1.7% of the entire balloon exposure. The interest rate swap counterparty has to be replaced upon the loss of a BBB rating by Scope. Scope analysed the counterparty risk related to the account bank and the paying agent based on publicly available ratings. The latter counterparties are subject to a replacement mechanism based on external ratings.

Key rating drivers

Credit enhancement (positive). The Class A notes benefit from 12.2% of credit enhancement, including a minimum 1.15% liquidity reserve which also provides loss coverage in a liquidation scenario.

Excess spread (positive). The transaction benefits from 1.28% p.a. excess spread at closing, which covers for payment shortfalls and partially hedges the transaction against a default of the interest rate swap counterparty.

Experienced originator (positive). Ford has been in the German car financing business since 1929, providing it the necessary expertise to structure loans based on vehicle value, which supports Ford Motor Company’s vehicle sales.

Historical performance (positive). Ford Bank GmbH’s loan book has shown solid historic performance, even through the financial crisis. Static loan-loss vintage data for a period from 2007 to 2017 show loss rates below 1% with moderate volatility.

Robust structure (positive). The mechanisms implemented effectively address the risks associated with replenishments and a fixed-floating asset liability mismatch. The simple, sequentially-amortising structure builds up additional protection for the Class A notes as the portfolio amortises.

German economic environment (positive). The healthy economic environment in Germany stabilises the performance of consumer loans, with low unemployment and solid economic growth, which is reflected in rising private household income.

Heterogenous obligor quality (negative). Obligor credit quality is highly heterogenous, due Ford Bank GmbH’s origination strategy and loan products in Germany, which are not very discriminating. This may result in volatile performance in a distressed environment. However, Ford Bank GmbH has a solid loss track record. This reflects its proactive credit mitigation features such as down payments, guarantees and conservatively-sized balloon payments based on vehicle residual value. Additionally, dynamic credit enhancement reflects the exposure to product types that are more attractive to riskier obligors.

Balloon exposure (negative). The transaction is exposed to a large proportion of balloon payments which may result in increasing defaults towards the loans’ maturities. This risk is partially mitigated by the adequate sizing of the balloon payments, as well as the buy-back guarantee from the dealer for the Trade Cycle Management (TCM) loans which make up the largest share of the portfolio.

Revolving period (negative). The 16-month revolving period allows for portfolio migration towards the portfolio segment with the weakest historical performance. The potential for adverse migration is considered in Scope’s portfolio assumptions. Additionally, Ford Bank GmbH would have to increase credit enhancement in the event of credit-negative migration.

Interest rate mismatch (negative). The fixed-floating asset-liability mismatch in this transaction is well mitigated by a fixed-floating swap with Lloyds Bank Corporate Markets Plc (A/Stable Outlook). The swap has collateralisation and replacement mechanisms.

Subjective loss metric (negative). One of the structural mechanisms to increase credit enhancement depends on write-offs that are subjectively determined by the servicer, which can be credit-negative. This is partly mitigated by the importance of the securitisation tool to the originator, and the well-established servicer processes which make loss-recognition dependent on objective factors.

Complex documentation (negative). The transaction documents feature an accurate but complex description of the terms and conditions. This complexity increases risks of misinterpretation of the intended meaning by a court of law upon a liquidation scenario. This relatively remote risk is partially mitigated by the non-petition language against the issuer entered into by all parties.

Positive rating-change driver

Increased credit enhancement resulting from deleveraging, accompanied by good performance, may strengthen the rating of the Class A notes further.

Negative rating-change driver

Worse-than-expected performance of the assets could negatively impact the ratings.

Quantitative assumptions

Scope performed a cash flow analysis of the transaction over the amortisation period, incorporating important structural mechanisms into the analysis. The agency used a large homogenous portfolio approximation approach to analyse the highly granular collateral pool. Scope assumed that portfolio defaults followed an inverse Gaussian distribution to calculate the expected loss of the rated tranches. The analysis also provided the expected weighted average life of each tranche. Scope considered asset and liability amortisation and the evolution of pool composition during the revolving period. Scope’s analysis considered four distinct asset segments: the segments for Standard and TCM loans, each split into new and used vehicle financing.

Scope’s analysis incorporates an adverse migration of the portfolio within the limits of the eligibility criteria and the expected amortisation over the 16-month revolving period. Scope assumed a portfolio that is comprised of 22.0% ‘Standard NEW’ loans, 25.1% ‘Standard USED’ loans, 48.0% ‘TCM NEW’ loans and 4.9% ‘TCM USED’ loans. Scope maintained the expected available credit enhancement at closing for its analysis. Scope did not incorporate the additional credit enhancement that Ford Bank GmbH would have to advance in the event of adverse portfolio migration and/or performance.

Scope’s point-in-time portfolio assumptions include segment-specific estimates for the ‘90-days-past-due’ default rate mean, coefficient of variation and AAA rating-conditional recovery rate: ‘Standard NEW’ (1.7% / 70.0% / 42.0%), ‘Standard USED’ (5.0% / 30.0% / 48.0%), ‘TCM NEW’ (2.5% / 40.0% / 48.0%) and ‘TCM USED’ (3.5% / 50.0% / 51.0%). A long-term coefficient of variation assumption was also applied on a segment-specific basis: ‘Standard NEW’ (90.0%), ‘Standard USED’ (40.0%), ‘TCM NEW’ (50.0%) and ‘TCM USED’ (65.0%). Scope derived the assumptions from Ford Bank GmbH loss vintage data, covering the years 2007-2017, a period which captures the bank’s performance in both a distressed and benign environment in Germany. Scope also factored in segment-specific loss vintage data and dynamic ‘90+ days past due’ delinquency data provided by Ford Bank GmbH, which reflects the bank’s internal servicing and recovery practices.

Scope analysed the transaction under a high (10%) and low (0%) prepayment assumption.

Stress testing
Stress testing was performed by applying rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope analysed the cash flow vectors from the assets and took into account the transaction’s main structural features, such as the notes’ priorities of payments, note size, the coupon on the notes, hedging, senior costs, as well as servicing fees. This analysis produces an expected loss and expected weighted average life for the notes.

Rating sensitivity
The stability of the ratings is supported by: i) strong protective mechanisms in the structure; and ii) Scope’s use of both rating-conditional recovery rate assumptions and a long-term performance reference for the assets.

Scope tested the sensitivity of the analysis to deviations from the main input assumptions: i) the mean default rate; ii) recovery rates; and iii) the mean default coefficient of variation.

For the class A notes, the following shows how the results change when compared to the assigned rating upon:

• A 50% mean default rate increase, zero notches.
• A 50% recovery rate reduction, zero notches.
• A 50% coefficient of variation increase, zero notches.

Interest rate stresses have no impact on the notes because interest rate risk is perfectly hedged.

Methodology
The methodologies applicable for this final rating are the ‘Auto ABS Rating Methodology’, the General Structured Finance Rating Methodology, and the ‘Methodology for Counterparty Risk in Structured Finance’. All files are available on www.scoperatings.com.

Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com. Scope analysts are available to discuss all details of the rating analysis and the risks to which this transaction is exposed.

Solicitation, key sources and quality of information
The rated entity and its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has relied on a third-party asset audit. The external asset audit has no impact on the credit rating.
Prior to the issuance of the rating, the rated entity was given the opportunity to review the rating and the principal grounds on which it is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating is issued by Scope Ratings GmbH.
Lead analyst Thomas Miller-Jones, Associate Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The rating was first released by Scope on 19.11.2018.
The rating concerns a financial instrument, which has been rated by Scope for the first time.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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