Red & Black Auto Germany 8 UG (haftungsbeschränkt) Class B German ABS Notes Rating Raised; Other Ratings Affirmed
Overview
- We reviewed Red & Black Auto Germany 8 UG (haftungsbeschränkt)'s performance by conducting our analysis of the transaction's underlying assets and structural features.
- Following our review, we raised our rating on the class B notes. At the same time, we affirmed our ratings on the class A, C, and D notes.
- The transaction is a securitization of auto finance receivables for new, used, and newly used cars that Bank Deutsches Kraftfahrzeuggewerbe GmbH originated and granted to its private customers.
FRANKFURT (S&P Global Ratings) June 29, 2023--S&P Global Ratings today raised to 'AAA (sf)' from 'AA+ (sf)' its credit rating on Red & Black Auto Germany 8 UG (haftungsbeschränkt)'s class B notes. At the same time, we affirmed our 'AAA (sf)', 'A (sf)', and 'BBB+ (sf)' ratings on the class A, C, and D notes, respectively.
We analyzed the transaction's credit risk under various stress scenarios by applying our revised criteria for rating global auto ABS transactions (see"Global Auto ABS Methodology And Assumptions," published on March 31, 2022).
Our ratings in this transaction address the timely payment of interest and the ultimate payment of principal.
Today's rating actions follow our review of the transaction's performance and the application of our current criteria and reflect our assessment of the payment structure according to the transaction documents (see "Related Criteria").
The transaction closed in October 2021 and immediately started to amortize (see "New Issue: Red & Black Auto Germany 8 UG (haftungsbeschränkt)," published on Oct. 27, 2021). As of March 2023, the performing asset balance decreased to €571.0 million from €1,000.0 million in at closing. Over the same period, the outstanding balance of the class A notes decreased to €511.9 million from €935.0 million and the credit enhancement increased to 10.85% from 7.00%. Credit enhancement also increased to 6.91% from 4.50% for the class B notes, to 2.97% from 2.00% for the class C notes, and to 1.39% from 1.00% for the class D notes.
Cumulative defaults are building up slower than we anticipated, and the pool's weighted-average seasoning increased to 27.5 months from 11.4 months at closing, which considered portfolio data as of September 2021. In our view, Red & Black 8 Auto Germany demonstrates stable asset performance, and its cumulative gross losses generally outperformed our closing assumptions. We therefore reduced our base-case gross loss assumption to 1.20%, compared with 1.90% at closing, reflecting the transaction's seasoning and low realized losses to date. The gross loss base-case calibrated on the current performing balance is 1.52%.
We also lowered the credit multiple to 4.6x from 4.7x in a 'AAA' scenario, and made corresponding decreases for lower ratings. The credit multiple revision reflects the quality and quantity of data we received from the originator over the years and its experience in the structured finance market. At the same time, we kept the balloon risk loss unchanged. In our view, the credit assumptions we considered in our analysis account for the current economic outlook.
We reviewed the recovery data received since closing and believe that the trends display a good performance. We sized the recovery base case at 60%. On this basis, our base-case recovery assumption is 60%. Some of the strong recoveries may stem from a very tight used car market, which has increased prices since the early stages of the COVID-19 pandemic. To account for this, we also used a haircut of 40% at the 'AAA' rating level, resulting in a 36% stressed recovery rate at 'AAA'. At closing we applied a uniform stressed recovery rate of 37%.
Table 1
| Haircuts on the recovery base case | |
|---|---|
| Rating | Haircut (%) |
| AAA | 40.0 |
| AA | 30.0 |
| A | 22.5 |
| BBB | 17.5 |
| BB | 12.5 |
| B | 7.5 |
Table 2
| Credit assumptions | ||
|---|---|---|
| Parameter | At closing | Current |
| Gross loss base case (%) | 1.90 | 1.20 |
| Gross loss base case calibrated on the remaining performing pool (%) | 1.90 | 1.52 |
| Gross loss multiple ('AAA') (x) | 4.7 | 4.6 |
| Gross loss multiple ('A') (x) | 2.7 | 2.6 |
| Gross loss multiple ('BBB+') (x) | 2.28 | 2.20 |
| Recovery base case (%) | 37.0 | 60.0 |
| Stressed recovery rate ('AAA') (%) | 37.0 | 36.0 |
| Stressed recovery rate ('A') (%) | 37.0 | 46.5 |
| Stressed recovery rate ('BBB+') (%) | 37.0 | 48.0 |
| Balloon loss ('AAA') (%) | 7.5 | 7.5 |
| Balloon loss ('A') (%) | 3.5 | 3.5 |
| Balloon loss ('BBB+') (%) | 2.5 | 2.5 |
As of the March 2023 investor report, the level of subordination of the class A notes is above 10%. Therefore, the transaction will pay pro rata unless one of the following sequential triggers is irreversibly breached:
- The cumulative net loss ratio exceeds 1.50%;
- The class E notes' principal deficiency ledger has been fully booked; or
- The aggregate outstanding portfolio balance falls below 10% of the original outstanding portfolio balance.
We have modelled the pro rata features as well as the sequential payment triggers in our cash flow model.
Our operational and legal analysis is unchanged since closing. We consider that the transaction documents adequately mitigate the transaction's exposure to counterparty risk through the transaction bank account provider (Elavon Financial Services DAC) and swap counterparty (DZ BANK AG).
Our cash flow analysis indicates that the available credit enhancement for the class A, B, C, and D notes is sufficient to withstand the credit and cash flow stresses that we apply at the 'AAA', 'AAA', 'A', and 'BBB+' ratings, respectively. We therefore raised to 'AAA (sf)' from 'AA+ (sf)' our rating on the class B notes, and affirmed our 'AAA (sf)', 'A (sf)', and 'BBB+ (sf)' ratings on the class A, C, and D notes, respectively.
We consider the transaction's resilience in case of additional stresses to some key variables, in particular defaults and recoveries to determine our forward-looking view. As of today, our forecast on unemployment rates for Germany is 3.2% over 2023 and 2024 and 3.1% over 2025, while our forecast for inflation is 6.7% over 2023 and then down to 2.9% and 2.0% in 2024 and 2025, respectively.
In our view, the ability of the borrowers to repay their auto loans will be highly correlated to macroeconomic conditions, particularly the unemployment rate and, to a lesser extent, consumer price inflation and interest rates. Furthermore, although used car prices may decline moderately in Germany in the second half of 2023, we do not expect them to fall significantly. A decline in second-hand car values typically impacts the level of realized recoveries the transaction is exposed to, which arises if the liquidation proceeds from the sale of the vehicles are lower than the securitized values.
We therefore ran eight scenarios with increased gross defaults and/or reduced expected recoveries. The results of the sensitivity analysis indicate a deterioration of no more than one rating category on the notes, which is in line with the credit stability considerations in our rating definitions.
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings , Oct. 10, 2021
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities , Dec. 22, 2020
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions , March 8, 2019
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions , Jan. 30, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology , March 29, 2017
- Criteria | Structured Finance | ABS: Global Credit Card ABS Methodology And Assumptions , Oct. 9, 2014
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions , Oct. 9, 2014
- Criteria | Structured Finance | General: Global Derivative Agreement Criteria , June 24, 2013
- General Criteria: Principles Of Credit Ratings , Feb. 16, 2011
- Criteria | Structured Finance | General: Methodology For Servicer Risk Assessment , May 28, 2009
Related Research
- Economic Outlook Eurozone Q3 2023: Short-Term Pain, Medium-Term Gain, June 26, 2023
- European Auto ABS Index Report Q1 2023, May 22, 2023
- European ABS Outlook 2023, Jan. 12, 2023
- Asset Price Risks: European Auto ABS Appear Resilient To A Potential Fall In Used Car Prices, Nov. 29, 2022
- S&P Global Ratings Definitions, Nov. 10, 2021
- New Issue: Red & Black Auto Germany 8 UG (haftungsbeschränkt), Oct. 27, 2021
- ESG Industry Report Card: Auto Asset-Backed Securities, March 31, 2021
- Credit FAQ: Questions Over Electric Vehicle Residual Values In European Auto ABS, May 31, 2019
- 2017 EMEA ABS Scenario And Sensitivity Analysis, July 6, 2017
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- Scenario Analysis: Gross Default Rates And Excess Spread Hold The Answer To Future European Auto ABS Performance, May 12, 2009
Regulatory Disclosures For Each Credit Rating Including Ratings List Table
Disclosures include requirements relating to press releases or reports published in accordance with Article 10(1), 10(2), and 10(5), and Annex I, Section D, I, 1, 2, 2a, 4, and 5. These requirements are available by rating via the link titled "Regulatory Disclosure" and include, but are not limited to:
- Key Elements Underlying The Credit Rating
- ESG Credit Factors
- Solicited Or Unsolicited Status
- Analysts Primarily Responsible For The Credit Rating
- Office Responsible For The Credit Rating
- Materials Used In The Credit Rating Process
- Criteria Applied
- Models Applied, Loss, And Cash Flow Analysis Performed
- Scenario Analysis
- Sensitivity Analysis
- Risk Warning, Understanding Credit Rating Categorizations, And Criteria
- Rated Entity Notification
- Ancillary And Additional Services
- Attributes And Limitations Of The Credit Rating
- Information Specific To Structured Finance And Securitization Instruments
'sf' Identifier
The 'sf' identifier is assigned to ratings on structured finance or securitization instruments when required to comply with an applicable law or regulatory requirement or when S&P Global Ratings believes it appropriate. The addition of the 'sf' identifier to a rating does not change that rating's definition or our opinion about the issue's creditworthiness. For detailed information on the instruments assigned the 'sf' identifier, please see the appendix to "S&P Global Ratings Definitions" for the types of instruments that carry the 'sf' identifier. To see if a credit rating has a 'sf' identifier, visit the standardandpoors.com website and search for the rated entity.
| Primary Credit Analyst: | Roberto Amato, Frankfurt + 49 69 3399 9161; roberto.amato@spglobal.com |
| Secondary Contact: | Sebastian Mauersberger, Frankfurt + 49 1729 913944; sebastian.mauersberger@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.