Rating action

Scope Ratings GmbH (Scope) has performed the following rating actions after completing a monitoring review of the notes issued by Red & Black Auto Germany 6 UG:

• Class A (ISIN XS2057072394); EUR 103.75m outstanding; affirmed at AAA_SF
   
• Class B (ISIN XS2057072634); EUR 7.45m outstanding; upgraded to AAA_SF from AA+_SF
   
• Class C (ISIN XS2057073368); EUR 2.79m outstanding; upgraded to AA-_SF from A-_SF
   
• Class D (ISIN XS2057073442); EUR 1.86m outstanding; upgraded to A-_SF from BBB-_SF
   
• Class E (ISIN XS2057073871); EUR 5.00m outstanding; not rated

Transaction overview

The transaction is a German auto ABS securitisation issued in November 2019. A detailed description of the transaction features and analytical assumptions, at closing, can be found in the transaction’s rating report, available on this LINK.

As of pool cut-off date (31 July 2023), the underlying portfolio of assets has an expected remaining weighted average life (assuming zero defaults and prepayments) of approximately 0.9 years, and the pool factor stands at 0.12. Credit support including subordination and available cash reserve has evolved as follows since closing: the class A, B, C and D notes increased to 15.4%, 9.2%, 6.9%, 5.4% respectively, from 7.5%, 3.5%, 2.0% and 1.0%.

The issuer’s amortising cash reserve fund remains at 100% of its target level, equivalent to 0.15% of the rated notes’ initial closing balance.

At the latest interest payment date, gross excess spread (measured as the realised portfolio yield minus the weighted average cost of the rated notes and the weighted average issuer fixed-leg swap payments) was at around 2.2% per year.

The issuer remains primarily exposed to the following main counterparties: Bank Deutsches Kraftfahrzeuggewerbe GmbH as originator and servicer, Elavon Financial Services DAC as issuer account bank, and Royal Bank of Canada as interest rate swap counterparty.

Rating rationale

The review addressed i) the observed performance of the collateral as of the review cut-off date: ii) Scope’s forward-looking performance assumptions, in the context of the expected macroeconomic environment over the remaining life of the transaction; iii) the transaction’s updated asset and liability structure: and iv) the issuer’s exposure to key transaction parties.

Beyond the key rating drivers addressed further below, the main analytical considerations addressed during this periodic review are:

Observed collateral performance¹: The portfolio continued to perform well since the last monitoring. The following key metrics, as of the reporting cut-off date, reflect the overall good portfolio performance: low cumulative default rate at 0.7%; low 90 days-past-due dynamic delinquency rate at 0.8%; high observed to date cumulative recovery rate on defaulted exposures of 78.4%; and an annualised constant prepayment rate of 17.3%.

Note amortisation^1,2: As expected, the notes are being repaid on a pro-rata basis. The past notes’ deleveraging, combined with the good collateral performance, has led to higher credit support across all rated notes and this has been favourable for all rated notes.

Available excess spread^1,2: Realised cumulative defaults since closing have been fully provisioned through available excess spread. Scope expects excess spread to be stable, knowing that the rated notes benefit from an effective interest rate swap.

Liquidity protection^1,2: Available liquidity continues to support the ratings of the notes, in accordance with Scope’s General Structured Finance Methodology. The current size of the issuer’s cash reserve fund provides ample liquidity protection for the rated notes.

Counterparty risk²: The key transaction counterparties continue to support the ratings. No rating-change drivers related to counterparty risks have taken place since Scope’s last rating action.

Key rating drivers

The positive key rating drivers continue to be aligned with those disclosed in the rating action release dated 19 November 2021. The previous negative rating drivers (pro-rata amortisation, limited cash reserve, high prepayments) have ceased to apply or become immaterial. Scope has considered the following new negative rating driver applicable to classes C and D:

• Portfolio tail risk^1,2: The most junior tranches are particularly exposed to a sudden performance deterioration resulting from current delinquencies rolling into default or increased borrower concentration.

Key rating-change drivers

All else equal, the following factors may constitute upside or downside rating drivers:

• A material deviation of observed transaction performance from Scope’s forward-looking performance assumptions.
   
• Material changes in Scope’s forward-looking macro-economic outlook.

All else equal, the following factor may constitute upside rating drivers:

• Continued deleveraging of the capital structure and the reduction of the transaction’s risk horizon.

All else equal, the following factor may constitute downside rating drivers:

• Rating downgrade of a transaction’s key counterparty beyond a level that would cease to be compliant with Scope’s Counterparty Risk Methodology.

Quantitative analysis and assumptions

Scope used a proprietary cash flow model to calculate the expected loss and expected weighted average life of each rated tranche, considering the transaction’s assets and liability structure. Asset cash flows are projected based on the securitised portfolio amortisation schedule and on performance assumptions agreed on by the rating committee, which reflect the characteristics and quality of the portfolio. The model replicates the transaction’s key structural features, including the capital structure, the order of priority of the issuer’s liabilities, and enhancement features such as excess spread and cash reserves.

The key analytical assumptions remain unchanged and include the following: an inverse-gaussian distribution of the portfolio’s remaining lifetime defaults, with a mean of 0.8% and a coefficient of variation of 83.3% for the consumer segment; a mean of 2.1% and a coefficient of variation of 72.2% for the entrepreneur segment; rating-conditional recovery rates ranging from 50% under a B scenario to 30% under a AAA scenario for the consumer segment and ranging from 57% under a B scenario to 34% under a AAA scenario for the entrepreneur segment; high and low constant prepayment rate scenarios of 15% and 0%, respectively; and stressed senior fees of 1%.

Sensitivity analysis

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

• A 50% increase in the mean default rate assumption has a zero-notch quantitative impact on the class A, B, C and D notes.
   
• A 50% decrease in Scope’s rating-conditional recovery rate assumptions has a zero-notch quantitative impact on the class A, B, C and D notes.

Rating driver references
1. Investor reports (Confidential)
2. Transaction documents (Confidential)

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 Rating’s Cash Flow Structured Finance Expected Loss Model Version 1.1, incorporating default and recovery rate assumptions over the portfolio’s amortisation period, 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, (General Structured Finance Rating Methodology, 25 January 2023; Counterparty Risk Methodology, 13 July 2023; Consumer and Auto ABS Rating Methodology, 3 March 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings is (Scope Cash Flow Structured Finance Expected Loss Model Version 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.

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 at closing. The external due diligence assessment/asset audit 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 Ratings 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: Miguel Barata, Director
Person responsible for approval of the Credit Ratings: 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 19 November 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures 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.

Conditions of use / exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund 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.