Rating action

The rating actions are as follows:

Class A notes, EUR 649.5m: affirmed at AAA_SF

Class B notes, EUR 40.0m: upgraded to AA_SF from AA-_SF

Class C notes, EUR 15.0m: affirmed at BBB+_SF

Class D notes, EUR 10.0m: affirmed at BB+_SF

Scope’s review was based on transaction data up to the October 2020 reporting date.

Transaction overview

Red & Black Auto Germany 6 UG is a static cash securitisation of German auto loans with no residual value risk, originated and serviced by Bank Deutsches Kraftfahrzeuggewerbe GmbH (BDK). The current portfolio (EUR 719.5m versus EUR 1,000.0m at closing) is comprised of private (88.8%) and commercial (11.2%) clients based in Germany, who used the loans to acquire new and used vehicles. The transaction closed on 21 November 2019 and has a final legal maturity of 15 October 2028.

Rating rationale

The rating actions are supported by structural deleveraging, robust structural protections and very good asset performance. Scope acknowledges potential uncertainty going forward due to Covid-19. However, the rating agency believes this is partially mitigated by a combination of: i) strong transaction elements; ii) Germany’s fiscal and monetary stimulus coupled with unprecedented EU support measures made available in the wake of the outbreak; and iii) the country’s large and diversified economic base with limited exposure to the hard-hit travel and tourism sector.

Credit enhancement from subordination has increased since closing as follows: Class A (9.7% from 7.0%), Class B (4.2% from 3.0%), Class C (2.1% from 1.5%), and Class D (0.7% from 0.5%). The transaction continues to benefit from a fully funded liquidity reserve, along with significant excess spread (1.6%). The EUR 3.7m amortising reserve fund provides liquidity and covers senior fees, senior notes’ interest and can be used to cover losses at transaction termination.

Asset performance is better than Scope’s expectation at closing. The observed cumulative default ratio is 0.2%, compared to Scope’s original expectation of 0.7% up to October 2020. The share of loans which are 90+ days past due are 0.2% of the outstanding portfolio. The share of borrower types has not materially changed since closing.

Transaction counterparties continue to support the ratings: i) BDK, the originator and servicer; ii) Elavon Financial Services DAC, the account bank and paying agent; and iii) Royal Bank of Canada, as the interest rate swap counterparty. Structural protections include a guarantee by Société Générale S.A. to fund a commingling reserve upon the loss of its investment grade rating or BDK’s insolvency.

Key rating drivers

CREDIT-POSITIVE (+)

Increased credit enhancement: Classes A to D are protected against potential losses via increased credit enhancement from subordination of 9.7%, 4.2%, 2.1% and 0.7%, respectively¹.

Excess spread: The current portfolio yield is 3.5%¹. Scope expects net excess spread² will remain high, even after accounting for potential yield compression and stressed servicing fees.

Improved structural resilience: Compared to closing, the Class B notes in particular are much less sensitive to backloaded default scenarios. Backloaded defaults remain a risk given the transaction’s pro-rata amortisation feature, but deleveraging partially offsets this risk.

Germany’s Covid-19 relief measures: Employment support and salary compensation measures implemented by the German government provide a strong backstop for private clients’ performance, which forms 88.8%¹ of the asset portfolio.

Non-captive originator: BDK’s non-captive status allows it to be selective regarding its customers, while providing flexible financial solutions.

No interest rate risk: The interest rate swap feature mitigates any fixed-floating asset-liability mismatch.

CREDIT-NEGATIVE (-)

Pro-rata amortisation: The pro-rata priority of payment mechanism could expose the rated notes to backloaded default scenarios. Pro-rata amortisation begins once Class A credit enhancement reaches 11.0%³, but can revert back to sequential amortisation if performance deteriorates.

Limited cash reserve: The cash reserve is 0.5% of the rated notes’ balance^1,3. It is amortising, subject to a floor, and mainly available to cover liquidity shortfalls. The reserve remainder at transaction maturity could be used to repay the outstanding notes’ principal.

High prepayments: The average annualised prepayment rate since closing is 11.4%¹. Moving into the pro-rata amortisation phase, high prepayments can reduce available excess spread otherwise used to cover potential loan defaults, with the benefit of increased credit enhancement from subordination on a relative basis. This could exacerbate downside risk when combined with backloaded defaults.

Rating-change drivers

POSITIVE (+)

Strong borrower performance: The continuation of strong, consistent borrower performance will benefit the rated notes. The mezzanine tranches benefit the most in reverse order of seniority during the pro-rata amortisation phase.

NEGATIVE (-)

Worse than expected impact of the Covid-19 pandemic on borrower performance: A severe macro-economic dislocation in the coming years due to Covid-19 could exacerbate macroeconomic and sovereign risks, which may negatively impact the ratings.

Quantitative analysis and assumptions

Scope performed a cash flow analysis considering the portfolio’s characteristics and the main structural features. Scope employed its large homogenous portfolio approximation approach to analyse the highly granular collateral pool and project cash flows over its amortisation period. The transaction was modelled based on two distinct sub-segments in the portfolio, consumers and entrepreneurs.

Scope’s cash flow analysis used the probability distribution of the portfolio’s default rate, following an inverse Gaussian distribution, to calculate the expected loss of each rated tranche. The analysis also provided the expected weighted average life for the notes. Scope took into account asset and liability amortisation and the evolution of the portfolio’s composition.

Scope’s analysis used point-in-time portfolio assumptions for the 90-days-past-due mean default rate and coefficient of variation of 1.9% and 33.6%, respectively. Scope also analysed the transaction considering a long-term adjustment for both portfolio metrics. This resulted in a mean default rate assumption of 3.0%, which reflects the long-term default performance of BDK, adjusted for prepayments. The corresponding coefficient of variation of 39.3% also reflects consistent performance, even through the financial crisis. Scope assumed a 15.0% prepayment rate.

The pro-rata amortisation mechanism makes the transaction sensitive to the timing of defaults. Scope tested several front and back-loaded scenarios and reflected the results in the assigned ratings.

Scope considered a base case recovery rate for the portfolio of 51%, applicable for a B category rating. Rating-conditional haircuts of 40% were applied for a AAA rating target, 32% for AA, 24% for A, 16% for BBB and 8% for BB.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations in the main input parameters: the portfolio’s mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

The following shows how the quantitative results for the rated instruments change compared to the assigned rating when the portfolio’s mean default rate increases by 50%, or the portfolio’s expected recovery rate decreases by 50%, respectively:

• Class A: sensitivity to mean default rate + 50%, zero notches; sensitivity to recovery rates – 50%, zero notches;
   
• Class B: sensitivity to mean default rate + 50%, two notches; sensitivity to recovery rates – 50%, zero notches;
   
• Class C: sensitivity to mean default rate + 50%, one notch; sensitivity to recovery rates – 50%, zero notches;
   
• Class D: sensitivity to mean default rate + 50%, zero notches; sensitivity to recovery rates – 50%, zero notches.

Rating driver references
1. Confidential investor reports
2. Scope internal sources
3. Confidential transaction documents

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

Cash flow analysis
Scope performed a cash flow analysis of the transaction using the Scope Cash Flow SF/EL Model Version 1.1. The analysis incorporated recovery rate and timing assumptions. It also took into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The analysis provided an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for this rating were Scope’s ‘Consumer and Auto ABS Rating Methodology’ published on 4 March 2020 and its ‘Methodology for Counterparty Risk in Structured Finance’ published on 8 July 2020. All documents are available on https://www.scoperatings.com/#!methodology/list.
The model/s used for this rating(s) Scope Cash Flow SF/EL Model Version 1.1 is available in Scope’s list of models, published under: https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.

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: the rated entity, public domain, 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 rating 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 received a third-party asset due diligence assessment at closing. The external due diligence assessment was considered when preparing the rating and it has no impact on the credit rating.
Prior to the issuance of the rating action, the rated entity was given the opportunity to review the rating and the principal grounds on which the credit rating is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Sebastian Dietzsch, Director
Person responsible for approval of the rating: Antonio Casado, Executive Director
The final ratings were first released by Scope on 21 November 2019.

Potential conflicts*
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings. A member of the Board of Trustees of Scope Foundation has a significant relationship with Société Generale SA, a related third party to this transaction. The Scope Foundation is a 20% shareholder of Scope Management SE, the general manager of Scope SE & Co KGaA (“Scope Group”). Scope Foundation has no financial or economic interest in Scope SE & Co KGaA and the main function of the foundation is to preserve the European identity of the shareholder structure of Scope Group.

*Editor's note: This section was amended on 28 September 2021. On the publication date of 25 November 2020, the section originally stated: "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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