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Fitch Rates Silver Arrow Australia 2020-1's Class A Notes 'AAAsf'; Outlook Stable

Published 18/11/2020, 04:23 pm
Updated 18/11/2020, 04:24 pm
© Reuters.

© Reuters.

(The following statement was released by the rating agency) Fitch Ratings-Sydney-18 November 2020: Fitch Ratings has assigned ratings to Silver Arrow Australia 2020-1's class A pass-through floating-rate notes. The issuance consists of notes backed by a pool of first-ranking Australian automotive-loan receivables originated by Mercedes-Benz Financial Services Australia Pty Ltd (MBFSA). The notes will be issued by Perpetual Corporate Trust Limited as trustee for Silver Arrow Australia 2020-1. This is a separate and distinct series created under a master trust deed. The collateral pool totalled AUD554 million and consisted of 8,791 loans with weighted-average (WA) seasoning of 11.1 months at the 31 October 2020 cut-off date. Silver Arrow Australia 2020-1 ----A AU3FN0057386; Long Term Rating; New Rating; AAAsf; Rating Outlook Stable ----B AU3FN0057394; Long Term Rating; New Rating; NRsf KEY RATING DRIVERS Adequate Credit Enhancement for Pandemic-Adjusted Base-Case Expectations: Fitch assigned base-case default and recovery expectations as well as 'AAAsf' default multiples and recovery haircuts for each portfolio product category, with a WA default assumption of 3.2% and recovery-rate assumption of 38.7%. The WA 'AAAsf' default multiple and recovery haircut were 4.3x and 44.8%, respectively. Fitch considered the historical performance of MBFSA's portfolio and that of US auto-loan receivables during the 2007 global financial crisis to determine its baseline pandemic scenario. Default expectations and 'AAAsf' default multiples for consumer loans were 2.3% and 4.9x, respectively, and for commercial loans 3.4% and 4.2x. Recovery expectations are 38.7% for both loan types, with a 44.8% 'AAAsf' recovery haircut. See the following links for Fitch's pandemic-related credit views and analytical approach: - "Global Economic Outlook - September 2020", published September 2020, available at www.fitchratings.com/site/re/10135033 - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published September 2020, available at www.fitchratings.com/site/re/10135320 - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk", published April 2020, available at www.fitchratings.com/site/pr/10117224 Limited Liquidity Risk from Payment Holidays: We reviewed the transaction's ability to survive a large proportion of borrowers taking up payment holidays, despite the pool having no active payment holidays as of the cut-off date. The transaction benefits from a non-amortising general reserve fund sized at AUD5.55 million, sufficient to cover eight months of required payments at the bank-bill swap rate should there be no principal or interest collections. Principal collections can also be used to pay interest if not all borrowers take up a payment holiday. Structural Risks Addressed: Counterparty risk is mitigated by the structural mechanisms documented, which ensure remedial action takes place in the event that the swap provider or issuer account bank fall below certain ratings. Fitch completed full cash-flow modelling for the transaction and determined that full and timely payment of principal and interest was made to the rated notes in all 'AAAsf' scenarios. Low Operational and Servicing Risk: All receivables were originated by MBFSA, a wholly owned subsidiary of Daimler AG (DE:DAIGn) (BBB+/Stable/F1). Fitch undertook an operational review via teleconference and found that the operations of the originator and servicer were consistent with market standards for auto and equipment lenders. The pandemic has not disrupted collection or servicing activity, as staff are able to work remotely and have access to the office, if needed. Medium-Term Economic Rebound Supports Outlook: Fitch expects loan performance to deteriorate in the near term, but to continue to support the Stable Outlook on the rated notes. Fitch forecasts Australia's GDP to contract by 3.6% in 2020, with the unemployment rate at 7.1%, to be partially offset by a low cash rate of 0.10% and the application of central bank and government stimulus measures. Fitch expects GDP growth to bounce back to 3.9% in 2021 and for the unemployment rate to fall to 6.7%. The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action. RATING SENSITIVITIES Unanticipated increases in the frequency of defaults and reduction of recoveries 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. Hence, Fitch conducts sensitivity analysis by stressing a transaction's initial base-case assumptions. This section provides insight into the model-implied sensitivities the transaction faces when assumptions - defaults or recoveries - are modified, while holding others equal. The modelling process uses the modification of default and recovery assumptions to reflect asset performance in up and down environments. The results below should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. Factors that could, individually or collectively, lead to positive rating action/upgrade: The rated notes are 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 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 transactions. Downgrade Sensitivity: Notes class: A Current Rating: AAAsf Impact on note ratings of increased defaults: Increase defaults by 10%: AAAsf Increase defaults by 25%: AAAsf Increase defaults by 50%: AAAsf Impact on note ratings of decreased recoveries: Reduce recoveries by 10%: AAAsf Reduce recoveries by 25%: AAAsf Reduce recoveries by 50%: AAAsf Impact on note ratings of multiple factors: Increase defaults by 10% and reduce recoveries by 10%: AAAsf Increase defaults by 25% and reduce recoveries by 25%: AAAsf Increase defaults by 50% and reduce recoveries by 50%: AA+sf Coronavirus Downside Scenario Sensitivity: Fitch has added a coronavirus downside sensitivity analysis that contemplates a more severe and prolonged period of stress, with recovery to pre-crisis GDP levels delayed until around the middle of the decade. Under this more severe scenario, Fitch tested a 2.00x increase in defaults combined with a 1.15x increase at the 'AAAsf' level, which is scaled down with the lower rating stresses, and a 0.77x decrease in recoveries. This results in a WA default base case of 4.3% as well as a lower WA recovery base case of 34.8%. This compares with default and recovery base cases of 3.2% and 38.7%, respectively in the baseline scenario. The 'AAAsf' default multiple is reduced to 3.5x, compared with 4.3x in the baseline scenario, to reflect the higher degree of stress already included in the base case, while the 'AAAsf' recovery haircut is also reduced to 41.9%, from 44.8% in the baseline. Notes class: A Current Rating: AAAsf Impact on note ratings of downside scenario: AAAsf 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 Prior to the transaction closing, Fitch sought to receive a third-party assessment conducted on the asset portfolio information, but none was available. Fitch conducted a review, as part of its ongoing monitoring, of 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. REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool was not prepared for this transaction, although Offering Documents for this market sector typically do include it. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Contacts: Primary Rating Analyst Bradley Isaac, Senior Analyst +61 2 8256 0306 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Timothy Groombridge, Associate Director +61 2 8256 0339 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 Chris Stankovski, Senior Director +61 2 8256 0341 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 Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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