Fitch Affirms Silver Arrow Australia 2019-1's Notes at 'AAAsf'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-25 September 2020: Fitch Ratings has affirmed Silver Arrow Australia 2019-1's class A notes at 'AAAsf' with a Stable Outlook. The transaction is a securitisation of Australian automotive finance receivables originated by Mercedes-Benz Financial Services Australia Pty Ltd (MBFSA). The social and market disruption caused by the coronavirus pandemic and related containment measures have not affect the ratings, because the negative effects are offset by sufficient credit enhancement under Fitch's base-case scenario and adequate liquidity. Silver Arrow Australia 2019-1 ----A AU3FN0051041; Long Term Rating; Affirmed; AAAsf KEY RATING DRIVERS Pandemic-Related Economic Shock: Fitch has made assumptions about the spread of the coronavirus and the economic impact of containment measures. In a base-case (most likely) scenario, Fitch assumes an economic bounce in 3Q20 will be followed by a slower recovery trajectory from 4Q20 amid high unemployment and a further pullback in private-sector investment. In a downside (sensitivity) scenario, Fitch assesses a more severe and prolonged period of stress, with recovery to pre-crisis GDP levels delayed until around the middle of the decade. Pandemic-Related Impact: Measures to limit the spread of the coronavirus are affecting Australia's economy, with many businesses continuing to experience a decline in income. We expect these measures to affect loan performance and have factored this into our revised base-case assumptions. Commentary describing Fitch's credit views and analytical approach as a consequence of the coronavirus is available in the following reports: - "Global Economic Outlook - September 2020", at www.fitchratings.com/site/re/10135033 - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", at www.fitchratings.com/site/re/10135320 - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk", at www.fitchratings.com/site/pr/10117224. Liquidity Risk from Payment Holidays: We reviewed the transaction's ability to survive a large proportion of borrowers taking a payment holiday, despite only 0.7% of the outstanding balance having an active payment deferral status at end-August. The transaction benefits from a general reserve fund sized at AUD5.8 million, sufficient to cover 10 months of required payments at the bank-bill swap rate should there be no principal or interest collections. The transaction can also use any principal payments received to pay interest if not all borrowers use a payment holiday. Obligor Default Risk: Obligor default and recovery rates are key assumptions in Fitch's quantitative analysis. The performance of the underlying assets has been better than Fitch's base-case expectations with minimal net losses. Fitch assessed the portfolio's performance and the performance of US auto-loan receivables during the 2007-2008 global financial crisis in reviewing its base-case assumptions. Fitch revised down the remaining default rate to reflect the trust's strong performance, before increasing it by 1.5x to account for the agency's baseline pandemic scenario. Recovery rates were adjusted by 0.9x in the baseline scenario. Fitch also adjusted its rating stress multiples and haircuts to reflect its through-the-cycle approach and to account for the fact that its base cases incorporate an additional element of economic stress. The revised assumptions are shown below and were applied in this analysis. The default base case applied was 3.4%, with a weighted-average 'AAAsf' default multiple of 4.0x. The recovery base case applied was 38.7%, with a 55.8% 'AAAsf' recovery haircut. As of the September payment date, 30+ day arrears were 0.5%, compared with the 2Q20 Dinkum ABS Index 30+ day arrears of 2.7%. Cumulative defaults and losses totalled 0.8% and 0.5%, respectively. Fitch expects loan performance to deteriorate in the near term, but to continue to support the Stable Outlook for the notes. Fitch forecasts Australia's GDP will contract by 3.6% in 2020, with the unemployment rate at 7.1%. This will be partially offset by a low cash rate of 0.25% and the application of both central bank and government stimulus measures. Fitch expects GDP growth to bounce back to 3.9% in 2021 and the unemployment rate to fall to 6.7%. Cash Flow Dynamics: Cash-flow analysis was not performed for the transaction, as the rated notes are rated at the highest possible level, credit enhancement has increased and our 'AAAsf' stressed net loss expectations have decreased since closing, while all other variables are in line with expectations. Structural Risk: Structural risk was evaluated in the initial transaction analysis through the review of transaction documentation, legal opinions and structural features. There have been no material changes to any transaction since closing. Counterparty Risk: Counterparty risk was evaluated in the initial transaction analysis through the review of transaction documentation, legal opinions and structural features. There have been no material changes to any transaction counterparties since closing. Servicer, Operational Risk: All receivables were originated by MBFSA, a wholly owned subsidiary of Daimler AG (DE:DAIGn) (BBB+/Stable/F1). Fitch undertook an onsite operational review and found that the operations of the servicer were consistent with market standards for auto and equipment lenders. Collection and servicing activities have not been disrupted by the pandemic, as staff are able to work remotely and have access to the office, if needed. Residual Value Risk: There is no residual value exposure in this transaction, however, refinance risk exists, as 80% of the remaining outstanding contract balances have balloon contracts. Refinance risk on loans with a balloon payment has been considered in the default multiples. Stable Outlook: The Stable Outlook on the notes reflects liquidity support and the ability to withstand sensitivity to higher defaults stemming from the pandemic. RATING SENSITIVITIES Unanticipated increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case and are likely to result in a decline in credit enhancement and remaining loss-coverage levels available to the notes. Decreased credit enhancement may make certain note ratings susceptible to negative rating action, depending on the extent of the coverage decline. Factors that could, individually or collectively, lead to positive rating action/upgrade: The class A notes are rated at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. Factors that could, individually or collectively, lead to negative rating action/downgrade: A longer pandemic than Fitch expects that leads to deterioration in macroeconomic fundamentals and consumers' financial position in Australia beyond Fitch's baseline scenario. Available credit enhancement cannot compensate for the higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increasing gross default levels and decreasing recovery rates over the life of the transaction. Coronavirus Downside Scenario Sensitivity Under Fitch's downside scenario, re-emergence of infections in the major economies prolongs the health crisis and confidence shock, prompts extensions or renewals of lockdown measures and prevents a recovery in financial markets. The 'AAAsf' rated notes have subordination that is at least 1.8x greater than the 'AAAsf' portfolio loss and can absorb Fitch's downside scenario of the coronavirus-related impacts. For more information on rating sensitivities, please refer to the rating action commentary published on 28 October 2019, available at www.fitchratings.com/site/pr/10099078 Best/Worst Case Rating Scenario International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third-party assessment of the asset portfolio information as part of its ongoing monitoring. Prior to the transaction closing, Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none was available. Prior to closing, Fitch reviewed a small targeted sample of MBFSA's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis, according to its applicable rating methodologies, indicates that it is adequately reliable. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Contacts: Surveillance Rating Analyst Bradley Isaac, Senior Analyst +61 2 8256 0306 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Committee Chairperson Natasha Vojvodic, Senior Director +61 2 8256 0350 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Consumer ABS Rating Criteria (pub. 09 Jun 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10124893) Global Structured Finance Rating Criteria (pub. 17 Jun 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10126475) Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 29 Jan 2020) (https://www.fitchratings.com/site/re/10108544) Structured Finance and Covered Bonds Counterparty Rating Criteria: Derivative Addendum (pub. 29 Jan 2020) (https://www.fitchratings.com/site/re/10108546) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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