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Rating Report 18 July 2012
European ‐ Structured Finance ABS Germany
Bavarian Sky S.A., Compartment 3
Transaction Closing Date: 18 July 2012
Analysts Mike Babick Senior Vice President 44 20 7855 6676 [email protected] Bruno Franco Senior Vice President 44 20 7855 6603 [email protected] Claire Mezzanotte Managing Director 44 20 7855 6672 [email protected]
Table of Contents Transaction Summary P1 Rating Rationale P2 Assessment of the Sovereign P2 Sector Analysis P3 Transaction Parties and Rele‐vant Dates P3 BMW Bank P4 Underwriting and Servicing P4 Collateral Analysis P6 Historical Performance P7 Transaction Structure P7 Priority of Payments P9 Transaction Counterparty Risk P10 Cash Flow Analysis P11 Legal Structure P14 Credit Enhancement P14 Methodologies Applied P15 Monitoring and Surveillance P15 Representations & Warranties P15
Ratings
Notes: The ratings address the payment of timely distribution of scheduled interest and ultimate principal.
+Credit enhancement includes subordination and a cash reserve account in the amount of €44,000,000. Transaction Summary DBRS, Inc. (DBRS) has assigned final ratings to the Class A and Class B Notes issued by Bavarian Sky Com‐partment 3 as listed above. There will be two classes of rated notes included in Bavarian Sky – Compartment 3. Initial Class A credit support of 9.30% will include a cash reserve account (5.50%), (funded at inception, non‐declining), and the subordination of Class B (3.80%). Initial Class B credit support of 5.50% consists of the cash reserve account. Additionally, both classes are afforded credit protection by the approximate 3.00% of excess spread expected in the transaction as long as BMW is the servicer. The receivables securitised in Bavarian Sky – Compartment 3 consist of a pool of automobile leases to pri‐vate and commercial customers secured by new and used vehicles. Unless an early amortisation occurs, the transaction will have a one year revolving period whereby collections on the receivables will be used to purchase additional receivables. The initial collateral pool has a weighted average original term of ap‐proximately 37 months and a weighted average remaining term of 27 months. In addition, leases repre‐senting new vehicles will initially constitute approximately 90% of the total receivables. Notable Features
• After the revolving period, Class A and Class B will be repaid sequentially. While the Class B Notes will not receive any principal payments until the Class A Notes are paid in full, the non‐declining reserve account provides sufficient protection to investors consistent with the rating of the Class B Notes.
• In addition, the Notes benefit from turbo amortisation, as all excess spread is used to redeem the Notes.
Strengths • The initial collateral pool has nearly 10 months of seasoning. • Highly experienced, financially strong servicer. • Notes are secured by the lease receivables only, thus there is no residual value risk.
Challenges and Mitigating Factors
• BMW Bank is permitted to commingle collections on the receivables and to make a single deposit to the Issuer Account on the payment date. This risk is mitigated by provisions in the transaction documents that provide for a commingling reserve to be funded if BMW Bank fails to maintain certain rating thresholds.
Debt Par Amount
(€) Initial Credit Enhancement+
Index Note Margin
ISIN Rating Action Rating
Class A Notes
769,600,000 9.3% Euribor 1m 0.48% XS0789919767 Final Rating AAA (sf)
Class B Notes
30,400,000 5.5% Euribor 1m 1.23% XS0789930145 Final Rating A (high) (sf)
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• Set‐off risk in the transaction could result from lessees in the transaction who also have funds in an account at BMW Bank. To the extent the total amount of potential set‐off risk resulting from lessee deposits at BMW Bank exceeds 1% and BMW Bank does not maintain sufficient ratings, then the Seller is obligated to post collateral amounting to the potential set‐off risk to the In‐demnity Reserve as described more fully later in this report. Such amounts are exclusively re‐served to cover set‐off risks.
• There is some potential that the issuer could be subject to German VAT and German Trade Tax. This risk is mitigated by an initial deposit to the indemnity reserve in an amount expected to be sufficient to cover these risks.
Rating Rationale The ratings are based upon a review by DBRS of the following analytical considerations: Transaction capital structure, proposed ratings and form and sufficiency of available credit enhance‐
ment. o Credit enhancement is in the form of subordination in the form of the Class B Notes and
amounts held in the cash reserve account. Credit enhancement levels are sufficient to sup‐port DBRS projected expected cumulative net loss (CNL) assumption under various stress scenarios.
The ability of the transaction to withstand stressed cash flow assumptions and repay investors ac‐cording to the terms in which they have invested. For this transaction, the rating addresses the pay‐ment of timely interest on a monthly basis and principal by the legal final maturity date.
The transaction parties’ capabilities with regards to originations, underwriting and servicing and the financial strength of BMW Bank GmbH.
o BMW Bank GmbH is part of BMW AG, a leading worldwide manufacturer of premium auto‐mobiles and motorcycles.
The credit quality of the collateral and historical and projected performance of BMW Bank’s lease portfolio.
Eligibility and replenishment criteria designed to mitigate any potential for the credit characteristics of subsequent receivables to deviate from the initial receivables.
BMW Bank’s underwriting techniques that include the use of proprietary scorecards and have con‐tinued to result in strong credit performance despite generally weak global economic conditions.
The legal structure and presence of legal opinions that address the true sale of the assets to the is‐suer in addition to the transaction’s consistency with the DBRS Legal Criteria for European Structured Finance Transactions methodology.
Assessment of the Sovereign DBRS, Inc. (DBRS) has assigned ratings on the Republic of Germany’s long‐term foreign and local currency debt at AAA. The trend on both ratings is Stable. The German economy has shown resilience as it is un‐dergoing a strong recovery after the sharp contraction it experienced when world trade collapsed in 2009. Nevertheless, its banking sector has suffered from large holdings of impaired securitised assets and the ensuing extraordinary government support has substantially increased public debt. However, the deterio‐ration in fiscal balances has been limited and it is likely that the fiscal deficit will comply with the Maas‐trich ceiling of 3% of GDP this year. The ratings are underpinned by moderate growth prospects for a mature economy, a high level of produc‐tivity, high national savings and strong price competitiveness. Moreover, the credibility of fiscal consolida‐tion has been enhanced with the approval of a constitutional rule in 2009 that places a ceiling on central government structural net borrowing of 0.35% of GDP from 2016 onward. The return of economic growth has facilitated the ongoing fiscal retrenchment.
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Germany’s economy is the largest in Europe, well diversified, with a large tradable sector and highly pro‐ductive, with output per hour worked at a similar level to France’s and only slightly below that of the United States. All price measures point to a strong level of competitiveness, which has likely helped sus‐tain Germany’s very high share of world goods exports at 8.5% to 10%. With a high national savings rate that easily exceeds domestic investment requirements, Germany has posted consistently high current ac‐count surpluses and was responsible for 12% of worldwide net capital exports in 2010. Despite these strengths, the rapid rise in public debt is a significant challenge. The increase in expendi‐tures combined with the fall in revenues from the downturn in 2009 generated a comparatively moderate worsening of the fiscal balance of about 3% of GDP. A good starting fiscal position, however, with a budg‐et that was close to balance before the crisis, helped cushion the impact on public debt dynamics. Exten‐sive support to the financial sector of EUR 334 billion, or 13.4% of GDP, as of 2010 is mainly responsible for the increase in public debt. These interventions, which did not add significantly to fiscal deficits, pushed public debt to 83.2% of GDP in 2010. Unwinding the extraordinary support measures to the finan‐cial sector and addressing the weaknesses of the Landesbank sector, which suffers from a weak business model, remain challenges. Furthermore, in the event of a sovereign default in Greece German banks could be affected as their expo‐sure to Greek public debt amounts to US$26.3 billion according to BIS statistics from the third quarter of 2010. If, as an additional consequence, stresses to European financial markets were to return, this could negatively impact German banks as they face debt rollover requirements estimated at 40% in 2011 and 2012. Nevertheless, DBRS believes the sovereign is well placed to provide additional support if necessary. Sector Analysis 2011 has turned out as very successful for the German automotive industry even though sentiment has cooled down throughout the year. In 2011 the vehicle population in Germany amounted to 42.9 million passenger cars (+1.5% vs. 2010). The number of newly registered passenger cars in Germany increased by 8.8% to 3.17 million vehicles (2010: 2.92 million). The BMW Group sold 1.67 million BMW, MINI and Rolls‐Royce passenger cars in 2011 and remained the leading premium automobile manufacturer in Ger‐many. The sales volume of 285,000 units (BMW and MINI vehicles) in Germany represented an increase of 6.3% over previous year's level. Transaction Parties and Relevant Dates Transaction Parties Type Name Rating
Issuer: Bavarian Sky S.A. acting in respect of its Compartment 3
N/A
Seller and Servicer: BMW Bank GmbH N/A Trustee: BNP Paribas Trust Corporation UK Limited N/A
Account Bank, Data Trustee: BNP Paribas Securities Services, Frankfurt Branch
DBRS Private Rating
Calculation Agent, Paying Agent and Interest Determination Agent:
BNP Paribas Securities Services, Luxem‐bourg Branch
DBRS Private Rating
Swap Counterparty DZ BANK AG Deutsche Zentral‐Genossenschaftsbank, Frankfurt am Main
DBRS Private Rating
Relevant Dates Type Date Issue Date 18 July 2012 First Interest Payment Date 15 August 2012 Payment Frequency Monthly Legal Final Maturity Date Class A Notes July 2020
Class B Notes July 2020
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BMW Bank GmbH
BMW Bank GmbH (the “Bank”) is the seller and servicer of the lease receivables and its registered offices are located in Munich, Germany. Its registered share capital of €12.3 million is held by BMW AG. BMW Leasing was merged into the Bank in 2011. The Bank and its 781 employees (at year end 2011) are re‐sponsible for the banking business and the customer and dealer financing in the financial services seg‐ment of the BMW Group. BMW Group Financial Services contributed significantly to BMW Group’s finan‐cial success in 2011, accounting for nearly 25% of BMW Group’s pre‐tax earnings of €7.3 billion. On a global basis, at the end of 2011, BMW Group Financial Services managed a servicing portfolio of €78.8 bil‐lion consisting of 3.2 million customers and 3.6 million vehicles. Since 1994 BMW Bank has operated with a full banking license and offers financing and leasing of new and used BMW, MINI, Rolls‐Royce vehicles as well vehicles from other manufacturers. In addition, BMW Bank offers automotive insurance, dealer financing, and international importer financing. The Bank’s op‐erations also include motor vehicle leasing and sales support for the BMW Group. BMW Group Financial Services’ German portfolio consisted of €11.95 billion of loans and leases, €1.5 billion of wholesale loans and €2.3 billion of financing related to its fleet business at year‐end 2011. The portfolio of loans and leas‐es is funded diversely through a combination of intercompany loans, ABS, and deposits. The Bank works closely with the dealerships of the BMW Group in Germany to provide customers with knowledgeable, professional, and competent service as well as financing from a single source. Under the dealer agreement, the dealer‐partner is responsible for marketing the products and services of the BMW Group and to service on trade‐marked BMW Group products. The Bank conducts its leasing business by purchasing vehicles from dealers and then financing and servic‐ing the lease receivable. The dealer partner is available as the local contact person to the lessee for the entire life of the contract. The Bank has maintained a high penetration rate in its leasing business providi‐ing lease financing for 55% and 53% for BMW vehicles sold in German in 2010 and 2011, respectively.
Originations and Underwriting The Bank offers a variety of lease products including mileage and residual value contracts (minor part of portfolio) as well as service lease contracts. Mileage contracts are typically for a 36 month term and 30,000 km per year. For residual value contracts, the final payment at the end of the lease term is agreed between the dealer and lessee and in some cases a third‐party appraisal may be provided. All contracts require insurance while maintenance and repairs are the responsibility of the customer. Pricing is set cen‐trally at the Bank’s headquarters and risk management is involved in developing all new products. The Bank receives credit requests through dealers, the internet, phone and fax, although the vast majority of applications are submitted by the dealer. After an initial check for consistency and plausibility of appli‐cation information, the Bank will evaluate the customer’s creditworthiness through various scorecards that are customised by borrower type, for example, employed versus self‐employed. The scorecards are regularly validated and modified, if necessary. The scorecards take into account various credit bureau at‐tributes as well as customer specific information and information relating to the lease contract. The cred‐it decision is based upon the probability of default and overall risk cost calculated by the scorecards. The risk cost is a function of the Bank’s potential amount of unsecured credit outstanding to the customer at the time of default, recoveries, and the customer’s calculated default probability, all of which are derived from historical data of the Bank.
Underwriting and Servicing
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Applications may be automatically approved by the scoring system if the information on the application demonstrates that the applicant meets certain thresholds and no exclusion criteria applies. Such applica‐tions are typically evaluated in two to three minutes. Applications not automatically approved enter the Manual Underwriting department where experienced credit analysts conduct a more in depth analysis of the customer’s application and investigate any discrepancies found on the application. Approval levels in this group are clearly defined based upon the seniority of the underwriter and the risk cost of the cus‐tomer and a credit decision is usually obtained in 15 minutes. Down payments may be required depending upon the borrower’s creditworthiness or alternatively a guarantee from a sufficiently qualified borrower can be obtained. Common reasons for credit denial in‐clude negative credit bureau information and a negative payment history with BMW Group Financial Ser‐vices. In certain circumstances the lessor can terminate a contract without prior notice including if the lessee is engaged in debt composition proceedings, has made untrue statements, or has committed breach of con‐tract or failed to remedy a breach. The only instances whereby the contract can be terminated without prior notice are in the case of a stolen vehicle, damage exceeding 60% of the replacement cost of the ve‐hicle, or death of the lessee.
Servicing The first lease payment is due when the vehicle is licensed and registered in the lessee’s name and subse‐quent payments are due on the first of the month. In 2011, approximately 96% of the Bank’s lease port‐folio paid by direct debit. Customers not paying by direct debit provide standing payment orders to their banks or pay by cheque. The Bank’s collection process is highly organised and structured and integrates the use of technology to optimise collection efforts. Every effort is taken to avoid unnecessarily irritating good customers while maintaining an aggressive effort for customers that are deemed have a serious risk of non‐payment. To this end, prior to engaging in collection efforts on an overdue customer, the Bank will use internal and ex‐ternal data to score the customer’s probability of payment, and based upon the resulting score, the cus‐tomer will be placed into a segment that will determine the proper tonality, channel, and contact fre‐quency for receiving payment. In 2011, approximately 6% of direct debits were not honoured and in roughly 81% of these cases the cause was due to insufficient funds. In such cases, a second direct debit will be attempted after 5 days. If this second direct debit is returned, customers receive a reminder with a payment deadline between 7 and 11 days (depending upon the customer segmentation described above). If the lessee fails to respond to the first reminder, then a second reminder is sent out after another eight to thirteen days once again identifying another payment deadline of between 7 and 13 days. During this time, the bank may supple‐ment its collection efforts through a series of outbound telephone calls. To the extent payment is not re‐ceived after the second reminder, then another reminder is sent out approximately 2 weeks later advising that collection agencies or lawyers will be mandated to resolve the delinquency. At this point, the Bank will utilise home collection agents who will visit the lessee at their home in order to obtain payment. If these “door knockers” are unsuccessful, then the case is handed over to an external lawyer. Approximately 15% of terminated cases return to performing status illustrating the Bank’s success at managing defaulted accounts through extra‐judicial means and viewing repossession as the last resort. All repossessed vehicles are sold through auction and the average time from repossession to sale at auc‐tion is approximately 60 days. During the process outlined above, the collections system will check whether the criteria has been met al‐lowing the Bank to terminate the lease contract. For commercial lessees, the criteria is at least two pay‐
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ments are overdue and for private individuals, two or more payments are overdue representing 10% or more of the total value of the lease contract or 5% when the lease contract term is over three years. If the termination criteria are met, a letter is sent prior to termination allowing the lessee 17 days to pay. If the lessee does not pay or voluntarily return the vehicle, then a forced repossession order is generated and the car will be collected by an external partner. After the car is sold, to the extent there are any re‐maining deficiencies, customers are sent a final invoice requesting payment within two weeks. The employees of the collections and recovery departments of BMW Bank are authorised to grant justifi‐able payment extensions and those extensions are closely monitored and reviewed.
The receivables being securitised in Bavarian Sky Compartment 3 are lease receivables arising under the lease agreement, exclusive of the vehicle’s residual value. At the end of the contract the lessee gives back the car to the dealer and the lessee is not responsible for any residual value risk that arises due to any de‐viation between the market value and the contractual residual value. Lessees are required to maintain in‐surance and are also responsible for maintenance and repair of the vehicle during the contract term. The chart below shows the receivables characteristics as of 30 June 2012. The pool is well seasoned with nearly 10 months of seasoning and the diversification by model is consistent with BMW’s historical sales patterns in Germany. At 90.5%, new vehicles represent the vast majority of the pool, and lessees paying by direct debit represent approximately 99% of borrowers. The pool is also highly granular as the top 20 lessees represent .65% of the receivables.
Pool Characteristic Bavarian Sky - 3 Outstanding Discounted Receivables Balance (€000's) 799,999 Number of Contracts 71,847 Average Outstanding Discounted Contract Balance 11,135 Weighted Average Original Term (months) 36.9 Weighted Average Remaining Term (months) 27.3 Seasoning (months) 9.6 Pool Characteristics (% Outstanding Discounted Receivables Balance): Model BMW 5 Series 28.7% X-Model 28.4% BMW 3 Series 22.1% BMW 1 Series 9.1% Mini 5.3% Other 0.4% New /Used 90.5% / 9.5% Private /Commercial 16.5% / 83.5% Direct Debit 99.3% Top 20% 0.65% Contracts per Lessee 1 77.7% 2-4 18.0% 5-7 2.5% 8-10 0.8% >10 1.1%
Collateral Analysis
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Historical Performance The chart below shows delinquency history for the Bank’s leasing portfolio since 2005. As can be seen, delinquencies have remained at manageable levels despite the continued weak global economic envi‐ronment due to the Bank’s adherence to established underwriting guidelines and robust servicing prac‐tices. The “Cash Flow Analysis” section below will discuss the historical loss performance for the Bank’s leasing portfolio.
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Delinquency Rates (monthly)
31‐60 days overdue 61‐90 days overdue 91‐120 days overdue
Transaction Structure The transaction structure is illustrated below. Bavarian Sky S.A., is a securitisation company within the meaning of the Luxembourg Securitisation Law and has been established as a multi‐issuance, multi‐seller vehicle that purchases assets on a singular or revolving basis, as will be the case with Bavarian Sky S.A. Compartment 3. Each Compartment is separated from all existing Compartments and future Compart‐ments.
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In the present transaction the issuer will acquire the seller’s rights to receive lease instalments relating to the initial lease receivables as well as the additional receivables against customers in Germany. The col‐lateral granted to the issuer also consists of title to the leased vehicle, insurance claims related to the ve‐hicle, any claims of the seller relating to damages or excess mileage, and any other security that the seller may have under its agreements with the lessees. The purchase of the additional receivables is subject to certain eligibility and replenishment criteria that should mitigate any potential for the credit characteristics of the additional receivables to materially devi‐ate from those of the initial receivables. Additional purchases are only permitted if after giving effect to such purchase, the limits noted below are not breached. Notable eligibility and replenishment criteria are as follows: 1. The portion of new vehicles will not fall below 82% 2. The portion of commercial lessees does not exceed 90% 3. The portion of non‐BMW or MINI brands does not exceed 5% 4. The term of any contract does not exceed 60 months 5. Contracts with a remaining term of 37 months or more do not exceed 30%, 43 months or more do
not exceed 28%, 49 to and including 53 months does not exceed 17%, and 54 months or more does not exceed 12%, all with respect to the aggregate discounted lease balance.
6. Lease receivables with respect to any single lessee will not exceed €1.5 million. Early Amortisation Events The transaction will revolve until, but excluding August 2013 unless one of the following early amortisa‐tion events occurs: (a) as of any Cut‐Off Date, the Cumulative Net Loss Ratio exceeds (i) 0.40% for any Payment Date fal‐
ling in or before January 2013; and (ii) 0.80% for any Payment Date falling between February 2013 and July 2013;
(b) the occurrence of an Enforcement Event; (c) on two consecutive Cut‐Off Dates, the amount deposited in the Replenishment Fund exceeds
10% of the Aggregate Discounted Lease Balance; (d) amounts in the Replenishment Fund are lower than the Replenishment Available Amount; (e) the Swap Agreement has been terminated; or (f) the occurrence of a Servicer Termination Event. Enforcement Events The Trustee has the sole discretion to declare that an Enforcement Event has occurred. If any of the four events described below occurs and the Trustee has served an Enforcement Notice upon the Issuer, the transaction will cease revolving and available funds will be distributed in the priority described below af‐ter the occurrence of and Enforcement Event in the section titled below titled “Priority of Payments”. (a) subject to the availability of funds in accordance with the Applicable Priority of Payment, a de‐
fault occurs in the payment of Interest on any Payment Date (and such default is not remedied within two (2) Business Days of its occurrence) or the payment of Principal on the Legal Final Ma‐turity Date (and such default is not remedied within 2 Business Days of its occurrence) in respect of the most senior class of Compartment 3 Notes (but not in respect of the Subordinated Loan Agreement);
(b) the Issuer fails to perform or observe any of its other obligations under the Conditions or the Transaction 3 Documents (other than the Subordinated Loan Agreement) and, in each such case (except where the Trustee certifies that, in its opinion, such failure is incapable of remedy when
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no notice will be required) such failure is continuing for a period of thirty (30) days following the service by the Trustee on the Issuer of a notice requiring the same to be remedied;
(c) it is or will become unlawful for the Issuer to perform or comply with any of its obligations under or in respect of the Class A Compartment 3 Notes, the Class B Compartment 3 Notes, or any Transaction 3 Document (other than the Subordinated Loan Agreement); or
(d) an Insolvency Event has occurred with respect to the Issuer. Servicer Termination Events (a) an Insolvency Event has occurred with respect to the Seller or the Servicer; or (b) the Seller or the Servicer fails to make any payment or deposit required by the terms of the Rele‐
vant Transaction 3 Document within five (5) Business Days of the date such payment or deposit is required to be made; or
(c) the Seller or the Servicer fails to perform any of its material obligations under the Lease Receiv‐ables Purchase Agreement and/or the Servicing Agreement (other than a payment or deposit re‐quired), and such breach, if capable of remedy, is not remedied within twenty (20) Business Days of written notice from the Issuer or the Trustee; or
(d) any representation or warranty in the Lease Receivables Purchase Agreement or in the Servicing Agreement or in any report provided by the Seller or the Servicer is materially false or incorrect, and such inaccuracy, if capable of remedy, is not remedied within twenty (20) Business Days of written notice from the Issuer or the Trustee and has a Material Adverse Effect in relation to the Issuer.
Prior to an Enforcement Event and during the revolving period, noteholders will receive only interest and any remaining available funds will be used to purchase additional receivables. After the revolving period and prior to an Enforcement Event, Classes A and B shall be repaid sequentially from principal collections and excess spread as more fully described below. first, amounts payable by Bavarian Sky S.A. in respect of taxes under any applicable law (if any); second, all fees (including legal fees), costs, expenses, other remuneration, indemnity payments and other amounts; third, on a pari passu basis, amounts payable to the Data Trustee, Rating Agencies, Servicer, Corporate Administrator, Interest Determination Agent, Paying Agent, Issuer Account Bank, and amounts for auditor and tax return filing fees; fourth, Swap Net Cashflow payable by the Issuer to the Swap Counterparty and any swap termination payments due to the Swap Counterparty, unless the Swap Counterparty is the defaulting party or the Swap has been terminated due to a downgrade of the Swap Counterparty; fifth, accrued and unpaid Class A interest (including overdue interest); sixth, accrued and unpaid Class B interest (including overdue interest); seventh, to the Cash Reserve, until equal to the Required Cash Reserve; eighth, during the Revolving Period, to the Replenishment Fund an aggregate amount equal to the Replenishment Available Amount; ninth, after the expiration of the Revolving Period, Class A principal until the Class A Notes are redeemed in full; tenth, after the expiration of the Revolving Period, Class B principal until the Class B Notes are redeemed in full; eleventh, subordinated amounts due to the Swap Counterparty as described under “fourth”; twelfth, accrued and unpaid interest payable to the Subordinated Lender under the Subordinated Loan Agreement; thirteenth, an amount equal to the Subordinated Loan Redemption Amount only, principal payable to the Subordinated Lender under the Subordinated Loan until the Subordinated Loan has been
Priority of Payments
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redeemed in full; and fourteenth, to pay all remaining excess to the Seller. After the occurrence of an Enforcement Event, available funds will be distributed as described below. first, amounts payable by Bavarian Sky S.A. in respect of taxes (if any); second, all fees (including legal fees), costs, expenses, other remuneration, indemnity payments and other amounts; third, on a pari passu basis, amounts payable to the Data Trustee, Rating Agencies, Servicer, Corporate Administrator, Interest Determination Agent, Paying Agent, Issuer Account Bank, and amounts for auditor and tax return filing fees; fourth, Swap Net Cashflow payable by the Issuer to the Swap Counterparty and any swap termination payments due to the Swap Counterparty, unless the Swap Counterparty is the defaulting party or the Swap has been terminated due to a downgrade of the Swap Counterparty; fifth, accrued and unpaid Class A interest (including overdue interest); sixth, Class A principal until the Class A Notes are redeemed in full; seventh, accrued and unpaid Class B interest (including overdue interest); eighth, Class B principal until the Class B Notes are redeemed in full; ninth, subordinated amounts due to the Swap Counterparty as described under “fourth”; tenth, accrued and unpaid interest payable to the Subordinated Lender under the Subordinated Loan Agreement; eleventh, as from the date on which all Compartment 3 Notes are redeemed in full, principal payable to the Subordinated Lender under the Subordinated Loan Agreement; twelfth, to pay all remaining excess to the Seller.
Transaction Counterparty Risk As long as BMW Bank is the servicer of the receivables, they will not receive a servicing fee and as a result initial excess spread is equal to approximately 3.00%. However, if a Servicer Termination event occurs, the replacement third party servicer is entitled to receive a servicing fee. The Bank will service the receivables in accordance with its customary practices and with the same care and consideration as receivables it ser‐vices on its own behalf. The servicer’s duties will include administrative functions, collections on the re‐ceivables, and if necessary, enforcing the Issuer’s rights with respect to the lease receivables and collateral. To the extent BMW AG fails to meet certain investment grade rating thresholds or BMW AG ceases to own 100% of the share capital of the Bank or the profit and loss transfer agreement between BMW AG and BMW Bank ceases to exist, then if the total amount of potential set‐off risk resulting from lessee deposits at BMW Bank exceeds 1% of the aggregate discounted lease balance, BMW Bank is obliged to post collat‐eral amounting to the potential set‐off risk that will be adjusted on a monthly basis. This set‐off amount will be deposited into the Indemnity Reserve and is exclusively reserved to cover set‐off risks. During the life of the transaction BMW Bank as servicer will be allowed to commingle collections provided that they meet certain investment grade rating thresholds or if BMW AG ceases to own 100% of the share capital of BMW Bank or the profit and loss transfer agreement between BMW AG and BMW Bank is no longer in effect. Failure to meet either of the conditions noted above will result in a commingling reserve trigger event whereby the Servicer will fund the commingling reserve. The servicer will have the option to fund the commingling reserve with either 2 months of collections and that will permit continued commin‐gling subject to a monthly sweep to the Account Bank or 1 month of collections and provided funds are swept on a daily basis.
Servicer
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The swap counterparty is DZ BANK AG Deutsche Zentral‐Genossenschaftsbank, Frankfurt am Main. Under the terms of the swap agreement, on a monthly basis the Issuer will remit a fixed interest rate to the swap counterparty and will receive a floating rate equal to 1 Month Euribor. The swap contains downgrade pro‐visions relating to the swap counterparty consistent with DBRS legal and swap criteria. The Issuer Account C‐3 and Cash Reserve (maintained as a separate ledger to Issuer Account C‐3) will be held by BNP Paribas Securities Services, Frankfurt Branch. DBRS has conducted an internal assessment on the bank and concluded that the bank meets DBRS criteria for account banks. The transaction contains downgrade provisions relating to the account bank consistent with DBRS criteria. Cash Flow Analysis Data Quality and Historical Performance DBRS reviewed the historical cumulative gross and net loss performance for BMW Bank’s lease portfolio by quarterly vintage going back to Q1 2005 for both commercial and private lessees. While many lenders experienced deterioration during the recent global economic downturn, BMW Bank’s strict adherence to their established underwriting guidelines and credit and collections polices resulted in strong perform‐ance during this stressful period. The charts below show the gross and net loss vintage history for both commercial and private lessees since 1Q 2005. During this time there were only minor variations in the customer distribution.
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Month of Gross Loss since Origination
Cumulative Gross Loss Cohort Analysis ‐ Total (quarter of origination)
2005 ‐ Q1 2005 ‐ Q2 2005 ‐ Q3 2005 ‐ Q4 2006 ‐ Q1 2006 ‐ Q2 2006 ‐ Q3 2006 ‐ Q4 2007 ‐ Q1 2007 ‐ Q2
2007 ‐ Q3 2007 ‐ Q4 2008 ‐ Q1 2008 ‐ Q2 2008 ‐ Q3 2008 ‐ Q4 2009 ‐ Q1 2009 ‐ Q2 2009 ‐ Q3 2009 ‐ Q4
2010 ‐ Q1 2010 ‐ Q2 2010 ‐ Q3 2010 ‐ Q4 2011 ‐ Q1 2011 ‐ Q2 2011 ‐ Q3 2011 ‐ Q4 2012 ‐ Q1
Swap Counterparty
Bank Accounts
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Month of Net Loss since Origination
Cumulative Net Loss Cohort Analysis ‐ Total (quarter of origination)
2005 ‐ Q1 2005 ‐ Q2 2005 ‐ Q3 2005 ‐ Q4 2006 ‐ Q1 2006 ‐ Q2 2006 ‐ Q3 2006 ‐ Q4 2007 ‐ Q1 2007 ‐ Q2
2007 ‐ Q3 2007 ‐ Q4 2008 ‐ Q1 2008 ‐ Q2 2008 ‐ Q3 2008 ‐ Q4 2009 ‐ Q1 2009 ‐ Q2 2009 ‐ Q3 2009 ‐ Q4
2010 ‐ Q1 2010 ‐ Q2 2010 ‐ Q3 2010 ‐ Q4 2011 ‐ Q1 2011 ‐ Q2 2011 ‐ Q3 2011 ‐ Q4 2012 ‐ Q1 To establish an expected loss estimate for the current transaction, losses were projected for unseasoned vintages using historical data relating to loss timing. The data received from BMW Bank was considered to be satisfactory. The DBRS gross cumulative loss expectation for the transaction is 2.46% based upon a customer mix of 90% commercial and 10% private, which is the most conservative distribution possible under the transaction documentation. Based upon the historical data, DBRS assumed a recovery rate of 60% for repossessed vehicles resulting in a cumulative net loss estimate of 0.99%. For cash flow modeling purposes, recoveries were lagged three‐months. Prepayments As shown in the chart below, recent prepayment experience has averaged between 2% and 4% CPR.
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Bavarian Sky S.A. – Compartment 3 Report Date 18 July 2012
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Annualised Prepayment Rates (monthly)
DBRS modeled the cash flows of the assets relative to the established priority of payments in the transac‐tion. Given the short remaining tenor of the lease receivables, losses were distributed over three years as summarised below. In addition, cash flows were modeled at 0%, 5%, and 10% CPR for these three differ‐ent loss distributions.
Year Front Belly Back 1 50% 20% 20% 2 30% 50% 30% 3 20% 30% 50% 100% 100% 100%
Summary of Cash Flow Analysis Based upon the results of the cash flow modeling, the loss protection afforded to the Class A and Class B Notes is consistent with the respective assigned ratings of AAA (sf) and A (high) (sf). Sensitivity Analysis The tables below illustrate the sensitivity of the rating to various changes in the base case default rates and loss severity assumptions relative to the base case assumptions used by DBRS in assigning the ratings.
Class A
0 25 500 AAA AA (low) A25 AA (low) A A (low)50 A A (low) BBB
Increase in Default Rate %
Increase in
LG
D %
Class B
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Bavarian Sky S.A. – Compartment 3 Report Date 18 July 2012
0 25 500 A (high) A (low) BBB25 A (low) BBB BB (high)50 BBB BB (high) B (high)
Increase in Default Rate %
Increase in
LG
D %
Legal Structure The swap agreement and deed of charge and assignment will be governed under English law while the other transaction documents will be subject to German law. The Issuer has expressly elected in its Articles of Incorporation to be governed by Luxembourg Securitisation Law. Under the Lease Receivables Purchase Agreement, the Issuer will purchase the lease receivables from BMW Bank, exclusive of VAT or any amounts relating to the residual value of the vehicles. Representatives and Warranties Please reference the attached report that contains a detailed description of the representations and war‐ranties in the transaction. Buy‐Back/Indemnity Mechanics Please reference attached report that contains a detailed description of the representations and warran‐ties and enforcement mechanisms in the transaction. Credit Enhancement Credit enhancement for Bavarian Sky Compartment 3 will be comprised of a cash reserve and subordina‐tion, and excess spread. Class A Notes: Initial hard credit enhancement for the Class A Notes is 9.30% and is made up of the following compo‐nents: subordination of the Class B Notes, (3.80%), and the non‐declining cash reserve of (5.50%). As
Transfer/Assignment of the Receivables
Law(s) Impacting the Transaction
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Bavarian Sky S.A. – Compartment 3 Report Date 18 July 2012
long as BMW Bank is the servicer, credit protection is also afforded by excess spread of approximately 3.00%. Class B Notes: Initial hard credit enhancement for the Class B Notes is 5.50% in the form of the non‐amortising cash re‐serve. The Class B notes will also benefit from the expected 3.00% excess spread in the transaction as de‐scribed above under “Class A Notes”. Performance Triggers The primary performance trigger relates to cumulative net losses during the revolving period. As previously described under the section titled “Early Amortisation Events” if as of any Cut‐Off Date, the Cumulative Net Loss Ratio exceeds (i) 0.40% for any Payment Date falling in or before January 2013; and (ii) 0.80% for any Payment Date falling between February 2013 and July 2013, the transaction will cease to revolve and noteholders will begin to receive principal. In addition, in the unexpected event that performance was to deteriorate such that amounts held in the Replenishment Fund are lower than the Replenishment Amount (amount by which the note balance exceeds the lease balance), the transaction would enter early amortisation.
Methodologies Applied The following are the primary methodologies DBRS applied to assign a rating to the above referenced transaction, which can be found on www.dbrs.com under the heading Methodologies.
• Legal Criteria for European Structured Finance Transactions. • Swap Criteria for European Structured Finance Transactions. • Rating European Consumer and Commercial Asset‐Backed Securitisations. • Operational Risk Assessment for European ABS and SME CLO Servicers. • Unified Interest Rate Model for European Securitisations
Monitoring and Surveillance The transaction will be monitored DBRS in accordance with its Master European Structured Finance Surveillance Methodology available at www.DBRS.com Representations and Warranties The Rule 17g‐7 Report of Representations and Warranties is hereby incorporated by reference and can be found at http://dbrs.com/research/249411/dbrs-17g-7-disclosure-report-bavarian-sky-s-a-acting-in-respect-of-its-compartment-3.pdf Note: All figures are in Euro unless otherwise noted.
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Bavarian Sky S.A. – Compartment 3 Report Date 18 July 2012
This report is based on information as of July 2012, unless otherwise noted. Subsequent information may result in material changes to the rating assigned herein and/or the contents of this report.
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