September 22, 2017 / 9:52 AM / a year ago

Fitch Assigns Final Ratings to Mercedes-Benz Auto Finance's Silver Arrow China 2017-2

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, September 22 (Fitch) Fitch Ratings has assigned final ratings to Silver Arrow China 2017-2 Retail Auto Loan Asset Backed Notes Trust's fixed-rate notes. The issuance consists of notes backed by Chinese automotive-loan receivables originated by Mercedes-Benz Auto Finance Limited (MBAFC), a directly and indirectly wholly owned subsidiary of Daimler AG (A-/ Stable/F2). This is MBAFC's second auto-loan ABS transaction rated by Fitch, but the company's fourth in China. The ratings are as follows: CNY4,980 million Class A notes: 'AA+sf'; Outlook Stable CNY262.1 million subordinated notes: 'NRsf' The notes are issued by CITIC Trust Co. Ltd. in its capacity as trustee of Silver Arrow China 2017-2. At the cut-off date of 30 June 2017, the total collateral pool consisted of 35,615 auto loan receivables with a total balance of CNY5,927.1 million. The expected rating on the class A note was upgraded by one notch on 20 September 2017 from the rating first assigned on 12 September 2017 based on Fitch's updated Structured Finance and Covered Bonds Country Risk Rating Criteria, which was published on 18 September 2017 (see <a href="">Fitch Takes Positive Rating Actions on China ABS on Criteria Change). The analysis for both expected and final ratings are based on the updated criteria. KEY RATING DRIVERS Stresses Commensurate with Rating: Fitch expects a lifetime default rate for the MBAFC portfolio of 1.4%. We applied a stress multiple of 6.0x at 'AA+sf' on defaults to take into account the limited history of car finance in China, particularly through an economic cycle, and Fitch's expectation that emerging-market securitised assets are prone to greater stress than those in developed markets for the same rating category. Fitch's recovery expectation was limited to 15%, subject to a further haircut by 50% at 'AA+sf'. Strong Portfolio Characteristics: The original weighted-average (WA) loan-to-value (LTV) ratio is 59.81%. This portfolio has a WA original term of 35.4 months, and has been seasoned for 9.6 months. The pool is well-diversified - the maximum single-obligor concentration was 0.03% of the outstanding principal balance at the cut-off date. The portfolio has no loans subject to refinancing risk for repaying balloon payments and all the vehicles are new. Adequate Credit Enhancement and Liquidity: Hard-credit enhancement in the form of subordination and overcollateralisation support the rating of the class A notes. In addition, this transaction features an amortising yield supplement overcollateralisation (YSOC), which is used to boost the transaction yield. Liquidity support will be provided by the general reserve amount, which will be fully funded at closing for CNY57.3 million - representing 1% of the adjusted pool balance. This amount is required to be maintained as long as there are notes outstanding. Sector Outlook, Sovereign Cap: Our outlook on the assets of this portfolio is stable - based on its characteristics. We forecast China's unemployment rate and GDP growth at 4.0% and 6.7% in 2017, respectively, and 4.0% and 6.3% in 2018. The 'AA+sf' rating is the cap on Chinese structured finance transactions due to the Chinese securitisation markets' early stages of development, and China's Long-Term Local-Currency Issuer Default Rating of 'A+'. RATING SENSITIVITIES Unexpected increases in default rates and unexpected decreases in recovery rates on defaulted loans could produce loss levels higher than Fitch's base case, which could lead to negative rating action on the notes. Fitch has evaluated the sensitivity of the ratings to increased gross default levels and decreased recovery rates over the life of the transaction. The analysis found that the notes' ratings are susceptible to downgrade in moderate and severe default scenarios. The analysis found the senior notes may be downgraded to 'AAsf' if the base-case default rate were to increase by 50% and 'A+sf' if the base-case default rate were to increase by 100%, assuming all other factors remain constant. The rating on the senior notes is not sensitive to a lower recovery rate, even when it is reduced to zero, assuming all other factors remain constant. The analysis of the combination stress scenarios found that the senior notes may be downgraded to 'AAsf' under the moderate combination stress (50% increase in default rate and 50% decrease in recoveries) and 'Asf' under the severe combination stress (100% increase in default rate and 100% decrease in recoveries). 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. 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 is available by accessing the appendix referenced under "Related Research" below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the special report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated 31 May 2016. DATA ADEQUACY Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis. Fitch conducted a review of a small targeted sample of MBAFC'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. SOURCES OF INFORMATION The information below was used in the analysis: - Static historical delinquent data by bucket in monthly vintage form for its total retail auto loan book, covering May 2011 to June 2017; - Dynamic monthly delinquency data by bucket from January 2012 to June 2017; - Dynamic monthly prepayment data from January 2012 to June 2017; and - Pool stratification and cash flow from MBAFC as of 30 June 2017. - Capital structure and structural features information provided by MBAFC as of July 2017 - Transaction documentation provided by Hogan Lovells International LLP, the transaction counsel. - Legal opinion and letter of undertaking provided by MBAFC as at July 2017 The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. Contacts: Primary Analyst Hilary Tan Senior Director +852 2263 9904 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Kan Zhou Associate Director +86 21 5097 3051 Committee Chairperson Atsushi Kuroda Senior Director +813 3288 2692 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Consumer ABS Rating Criteria (pub. 25 May 2017) here Global Structured Finance Rating Criteria (pub. 03 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Country Risk Rating Criteria (pub. 18 Sep 2017) here Related Research Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions here Silver Arrow China 2017-2 Retail Auto Loan Asset Backed Notes Trust - Appendix here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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