Rating action

The rating actions are as follows:

Class A notes, current outstanding EUR 401.1m: affirmed at AAA_SF

Class B notes, current outstanding EUR 28.8m: upgraded to AA+_SF from AA_SF

Class C notes, current outstanding EUR 10.8m: upgraded to A-_SF from BBB+ _SF

Class D notes, current outstanding EUR 7.2m: upgraded to BBB-_SF from BB+_SF

The review undertaken by Scope Ratings GmbH (Scope) was based on transaction data up to the October 2021 reporting date.

Transaction overview

Red & Black Auto Germany 6 UG is a static cash securitisation of German auto loans, originated and serviced by Bank Deutsches Kraftfahrzeuggewerbe GmbH (BDK). The current portfolio (EUR 452.9m versus EUR 1,000.0m at closing) is comprised of private clients (89.4%) and commercial clients (10.6%) based in Germany, who used the loans to acquire new (20.4%), newly used (43.0%) and used (36.6%) 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 deleveraging, robust structural protection and sound asset performance. Scope acknowledges the risk factors related to Covid-19. Scope believes that this risk 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 during the pandemic; and iii) the country’s large and diversified economic base with limited exposure to the hard-hit travel and tourism sector.

In addition, Scope considered the potential impact of the recent European Court of Justice ruling, which allows German consumers to revoke loan agreements at any point of time if it can be substantiated that they were not appropriately informed about the conditions. Scope believes this has a limited impact on the transaction’s performance, as the agency expects: i) a reduced likelihood of debtors exercising the revocation option due to high seasoning and the obligation of repayment if such cases materialise; and ii) the originator to reimburse the issuer if a revocation results in a loss for the transaction.

Credit enhancement from subordination has increased since closing as follows: Class A (11.4% from 7.0%), Class B (5.1% from 3.0%), Class C (2.7% from 1.5%), and Class D (1.1% from 0.5%). The transaction continues to benefit from a fully funded liquidity reserve, along with significant excess spread (1.6%). The EUR 2.3m amortising reserve fund provides liquidity and covers senior fees, senior notes’ interest and can be used to cover losses at transaction termination.

The portfolio performance is better than Scope’s expectation at closing. The observed cumulative default ratio at 0.48% compares well to Scope’s mean default expectation of 1.73% up to October 2021. The share of loans which are 90+ days past due are 0.3% of the outstanding portfolio. The share of borrower types has not changed materially 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. Scope monitors the transaction counterparties’ credit quality using public information, including external ratings.

Key rating drivers

CREDIT-POSITIVE (+)

Increased credit enhancement: Classes A to D are protected against potential losses via increased credit enhancement from subordination of 11.4%, 5.1%, 2.7% and 1.1%, respectively.¹

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

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.^2,3

Germany’s Covid-19 relief measures: Employment support and salary compensation measures implemented by the German government provide a strong backstop for the performance of private clients, which form 89.4% of the asset portfolio.¹

Non-captive originator: BDK’s non-captive status allows it to be selective regarding its customers, while providing flexible financial solutions.³

No interest rate risk: The interest rate swap feature mitigates any fixed-floating asset-liability mismatch.³

CREDIT-NEGATIVE (-)

Pro-rata amortisation: The pro-rata priority of payment mechanism could expose the rated notes to backloaded default scenarios. Pro-rata amortisation began after Class A credit enhancement reached 11.0% in March 2021 but can revert back to sequential amortisation if performance deteriorates or the outstanding portfolio volume drops below 10% of the initial balance.³

Limited cash reserve: The cash reserve is 0.5% of the rated notes’ balance. 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.^1,3

High prepayments: The average annualised prepayment rate since closing is 12.5%. While prepayments are a credit positive as they accelerate deleveraging, they can be detrimental under back-loaded default scenarios because they reduce available excess spread otherwise used to cover potential loan defaults. This risk is exacerbated by the pro-rata amortisation feature mentioned above.¹

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 macro-economic backdrop: A severe macro-economic dislocation in the coming years 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. The transaction was modelled based on two distinct sub-segments in the portfolio, consumers and entrepreneurs.

Scope’s cash flow analysis of the highly granular portfolio projects the cash flows from the portfolio during the amortisation period, incorporating the probability distribution of the portfolio’s default rate. Scope assumes this distribution to follow an inverse Gaussian distribution in order 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 assumed a 90-days-past-due mean default rate of 1.7% and a coefficient of variation of 56.3% versus 1.9% and 33.6%, previously. The updated assumptions factor in a lowered risk due to amortisation while acknowledging the long-term uncertainty that the agency observed from the vintage data. Scope assumed a 15.0% prepayment rate.

The pro-rata amortisation mechanism makes the transaction sensitive to the timing of defaults. Scope tested a back-loaded scenario 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.

The prepayment and recovery rate assumptions are unchanged since closing.

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 results for the rated instruments would 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%, one notch; sensitivity to recovery rates – 50%, zero notches;
   
• Class C: sensitivity to mean default rate + 50%, one notch; sensitivity to recovery rates – 50%, one notch;
   
• Class D: sensitivity to mean default rate + 50%, one notch; sensitivity to recovery rates – 50%, one notch.

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

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

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow SF EL Model Version 1.1 incorporating the relevant asset assumption, taking into account the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The outcome of the analysis is an expected loss and an expected weighted average life for the notes.

Methodology
The methodologies used for these Credit Ratings, (Scope’s General Structured Finance Rating Methodology, 14 December 2020; Consumer and Auto ABS Rating Methodology, 3 March 2021; Methodology for Counterparty Risk in Structured Finance, 13 July 2021) are available on https://www.scoperatings.com/#!methodology/list.
The model used for these Credit Ratings is (Scope Cash Flow SF EL Model Version 1.1) available in Scope Ratings’ list of models, published under: https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit 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/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit/internal analysis was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Sebastian Dietzsch, Director
Person responsible for approval of the Credit Rating: Antonio Casado, Executive Director
The final Credit Ratings were first released by Scope Ratings on 21 November 2019. The Credit Ratings were last updated on 25 November 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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 19 November 2021 after the initial publication. In the original publication, the section stated: "See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings."

Conditions of use / exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.