DBRS Confirms Rating on Bavarian Sky S.A. acting in respect of its Compartment German Auto Leases 4

DBRS Ratings Limited (DBRS) has today confirmed its rating of AAA (sf) on the EUR 348,008,833 Class A Notes (the Notes) issued by Bavarian Sky S.A. acting in respect of its Compartment German Auto Leases 4 (the Issuer).

The confirmation reflects an annual review of the transaction and is based on the following analytical considerations, as described more fully below:
-- The overall portfolio performance as of the November 2016 payment date, in particular with regard to low levels of cumulative net defaults and delinquencies.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms and conditions of the Notes.
-- The increased levels of credit enhancement available to the Notes to cover expected losses assumed in line with the AAA (sf) rating level.

The rating assigned to the Notes addresses the timely payment of interest and the ultimate payment of principal on or before the Final Maturity Date in December 2022.

The Issuer is a securitisation of auto leases originated and serviced by BMW Bank GmbH (BMW Bank). The EUR 423.4 million portfolio as of the November 2016 payment date comprises leases for the purchase of new (95.1%) and used (4.9%) vehicles, granted to both commercial (69.5%) and private individuals (30.5%). The residual values associated with the auto leases have not been securitised in this transaction.

As of the November 2016 payment date, 30-day to 60-day delinquencies were 0.1% of the aggregate discounted lease balance and 60-day to 90-day delinquencies were less than 0.1%, while delinquencies greater than 90 days were 0.1%. The gross cumulative default ratio (as a percentage of the original portfolio, not including the proceeds from the sale of the vehicle) is 0.1%, of which 10.0% has been recovered to date.

Credit Enhancement (CE) is provided by overcollateralisation, the subordination of the junior obligations and the Cash Reserve. CE for the Class A Notes increased to 19.7% in November 2016 from 7.8% at closing in December 2015. Contributing to this increase has been a cash-trapping mechanism, according to which excess spread is used to pay down the Notes.

The transaction closed with the support of a non-amortising EUR 8.0 million Cash Reserve, funded with the proceeds from a subordinated loan. This is available to cover shortfalls on senior fees, the interest on the rated Notes and any principal shortfall on the Notes at maturity. The Cash Reserve has remained at its target level of 1.0% of the initial collateral balance since closing and represents 1.9% of the current collateral balance.

To mitigate against any potential commingling risks, the Servicer undertakes to fund a Commingling Reserve if the DBRS rating of the BMW Bank’s parent company, BMW AG, falls below specific thresholds as defined in the legal documentation. The reserve continues to be unfunded as the rating trigger has not been breached to date.

Elavon Financial Services DAC, UK Branch (Elavon) serves as Account Bank for the transaction. The DBRS private rating of Elavon complies with the Minimum Institution Rating, given the current rating of the Notes, as described in DBRS’s “Legal Criteria for European Structured Finance Transactions” methodology.

To mitigate the interest rate risk arising from fixed-rate receivables and floating-rate notes, the Issuer entered into a swap agreement. Under this agreement, the special-purpose vehicle will receive one-month Euribor and will pay a fixed rate on each payment date based on a notional amount equal to the amount of principal outstanding of the Class A Notes. DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ Bank) is the Swap Counterparty for this transaction. The DBRS public rating of A (high) of DZ Bank complies with the First Rating Threshold defined in DBRS’s “Derivative Criteria for European Structured Finance Transactions” methodology.

Notes:
All figures are in euros (EUR) unless otherwise noted.

The principal methodology applicable is: “Master European Structured Finance Surveillance Methodology”.

DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

A review of the transaction legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

Other methodologies referenced in this transaction are listed at the end of this press release.

These may be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to DBRS commentary “The Effect of Sovereign Risk on Securitisations in the Euro Area” on: http://www.dbrs.com/industries/bucket/id/10036/name/commentaries/.

The sources of information used for this rating include monthly investor reports provided by BMW Bank.

DBRS does not rely upon third-party due diligence in order to conduct its analysis.

DBRS was supplied with third party assessments at the Initial Rating. However, this did not impact the rating analysis.

DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The last rating action on this transaction took place on 16 December 2015, when DBRS finalised the provisional rating assigned to the Class A Notes.

The lead responsibilities for this transaction have been transferred to Joana Seara da Costa.

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios, as compared to the parameters used to determine the rating (the Base Case):

-- DBRS expected a Base Case probability of default (PD) and loss given default (LGD) for the portfolio based on a review of the current assets. Adverse changes to asset performance may cause stresses to Base Case assumptions and, therefore, have a negative effect on the credit ratings.

-- The Base Case of PD and LGD of the current pool of assets of receivables are 2.0% and 45.0%, respectively.

-- The risk sensitivity overview below illustrates the ratings expected for the Notes if the PD and LGD increase by a certain percentage over the Base Case assumptions.

For example, if the LGD increases by 50%, the ratings for the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. If the PD increases by 50%, the ratings for the Class A Notes would be expected to remain at AAA (sf), ceteris paribus. Furthermore, if both the PD and LGD increase by 50%, the ratings for the Class A Notes would be expected to remain at AAA (sf), ceteris paribus.

Class A Notes risk sensitivity:
-- 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD, expected rating of AAA (sf)
-- 25% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 25% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD, expected rating of AAA (sf)
-- 50% increase in PD and 25% increase in LGD, expected rating of AAA (sf)
-- 50% increase in PD and 50% increase in LGD, expected rating of AAA (sf)
For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Joana Seara da Costa, Senior Financial Analyst
Rating Committee Chair: Christian Aufsatz, Senior Vice President
Initial Rating Date: 18 November 2015

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor, London EC3M 3BY United Kingdom
Registered in England and Wales: No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

-- Master European Structured Finance Surveillance Methodology
-- Legal Criteria for European Structured Finance Transactions
-- Operational Risk Assessment for European Structured Finance Servicers
-- Rating European Consumer and Commercial Asset-Backed Securitisations
-- Unified Interest Rate Model for European Securitisations
-- Derivative Criteria for European Structured Finance Transactions

A description of how DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375.