Presale: SCL - Scandinavian Consumer Loans IV - · PDF file · 2015-09-04Presale:...

Presale:

SCL - Scandinavian Consumer LoansIV

Primary Credit Analyst:

Ryan Butler, London (1) 212-438-2122; [email protected]

Secondary Contact:

Miguel Barata, London (44) 20-7176-7132; [email protected]

Table Of Contents

Transaction Summary

Strengths, Concerns, And Mitigating Factors

Transaction Structure

Collateral Description

Credit And Cash Flow Analysis

Scenario And Sensitivity Analysis

Monitoring And Surveillance

Related Criteria And Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 23, 2014 1

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Presale:

SCL - Scandinavian Consumer Loans IV

Norwegian Krone-Denominated Asset-Backed Floating-Rate Notes

This presale report is based on information as of May. 23, 2014. The ratings shown are preliminary. This report does not constitute a

recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the

preliminary ratings.

Class Prelim. rating*

Prelim. amount

(mil. NOK)

Available credit

enhancement

(%)§ Interest

Step-up margin

(%)

Legal final

maturity

A AAA (sf) TBD 57.5 One-month

NIBOR plus a

margin

TBD Jan. 15, 2037

B AA (sf) TBD 47.5 One-month

NIBOR plus a

margin

TBD Jan. 15, 2037

C A (sf) TBD 30.5 One-month

NIBOR plus a

margin

TBD Jan. 15, 2037

D BBB (sf) TBD 20.5 One-month

NIBOR plus a

margin

TBD Jan. 15, 2037

E NR TBD N/A One-month

NIBOR plus a

margin

TBD Jan. 15, 2037

*The rating on each class of securities is preliminary as of May 23, 2014, and subject to change at any time. We expect to assign final credit

ratings at closing subject to a satisfactory completion of a satisfactory review of the transaction documents, and legal opinion. Standard & Poor's

ratings address timely payment of interest and ultimate principal. §Available credit enhancement includes a cash reserve (senior credit

enhancement reserve required amount equivalent to 2% of the initial asset balance), which the issuer will fund at closing, using the proceeds of the

subordinated loan. NIBOR--Norwegian interbank offered rate. NR--Not rated. N/A--Not applicable. TBD--To be determined.

Transaction Participants

Issuer SCL - Scandinavian Consumer Loans IV (secondary name for Nordax

Nordic 3 AB (publ))

Originator, first seller, first subordinated loan provider, and servicer Nordax Finans AB (publ)

Lead manager Deutsche Bank AG (London Branch)

Collections account bank Nordea Bank Norge ASA

Reserves account bank Citibank N.A. (London Branch)

Note trustee and security trustee Citicorp Trustee Co. Ltd.

Standby servicer Emric Finance Process Outsourcing AB

Standby cash manager, principal paying agent, and agent bank Citibank N.A. (London Branch)

Supporting Ratings

Institution/role Ratings

Citibank N.A. (London Branch)* as reserves account bank A/Stable/A-1

Nordea Bank Norge ASA as collections account bank AA-/Negative/A-1+

*The rating is derived from the parent.


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Transaction Key Features

Expected closing date TBD

Collateral Promissory notes issued by consumers in Norway, which Nordax

Finans AB originated

Structure True sale revolving

Principal outstanding (bil. NOK)* 2.021

Country of origination Norway

Average outstanding promissory note balance (NOK)* 170,455

Weighted-average seasoning (years)* 2.01

Weighted-average remaining term (years)* 9.89

Weighted-average interest rate (%)* 14.25

30+ day arrears None

Initial cash reserve (% of initial portfolio balance) 2

Initial liquidity reserve (% of initial portfolio balance) 2

Substitution period (years) 2

Credit enhancement Excess spread, cash reserve, and subordination

*As of April 2, 2014. TBD--To be determined.

Transaction Summary

Standard & Poor's Ratings Services today assigned its preliminary credit ratings to SCL - Scandinavian Consumer

Loans IV's (SCL4) class A, B, C, and D floating-rate notes. At the same time, SCL4 will issue unrated class E notes.

This transaction will securitize a pool of unsecured consumer loans, which Nordax Finans AB (publ) (Nordax Finans)

granted to consumers resident in Norway and subsequently transferred to the issuer.

The issuer is a newly established special-purpose entity (SPE), which Nordax Finans established in Sweden under the

name "Nordax Nordic 3 AB (publ)." The issuer has adopted the secondary name "SCL – Scandinavian Consumer Loans

IV" for marketing purposes. The issuer's share capital is owned by Nordax Finans and pledged to the security trustee.

The transaction will feature a two-year revolving period. Amortization will occur on the earlier of a breach of certain

triggers outlined in the transaction documents, and the interest payment date in June 2016. Redemption of the notes

will be fully sequential. A combination of excess spread, subordination of the junior notes, and a cash reserve will

provide protection for the rated noteholders.

This will be Nordax Finans' fourth public transaction, and the second transaction securitizing assets from its

Norwegian loan book. Structurally, the transaction is similar to the SCL – Scandinavian Consumer Loans II transaction,

in which Nordax Finans securitized a part of its Norwegian business (see "New Issue: SCL - Scandinavian Consumer

Loans II," published on July 5, 2011).

Our preliminary 'AAA (sf)' rating on the class A notes reflects our assessment of the credit and cash flow characteristics

of the underlying asset pool, as well as an analysis of the transaction's counterparty, legal, and operational risks. Our

analysis indicates that the credit enhancement available to all the rated classes of notes will be sufficient to mitigate

the credit and cash flow risks to the classes' respective rating levels.


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Presale: SCL - Scandinavian Consumer Loans IV

Additionally, we consider that the transaction documents will adequately mitigate the counterparty risk from the

transaction account bank providers--Nordea Bank Norge ASA (AA-/Negative/A-1+) and Citibank N.A (London

Branch) (A/Stable/A-1)--to a 'AAA' rating level, in line with our current counterparty criteria (see "Counterparty Risk

Framework Methodology And Assumptions," published on June 25, 2013).

Strengths, Concerns, And Mitigating Factors

Strengths

• Defaults under the underlying promissory note contracts are sensitive to the Norwegian economic environment. In

our view, the global financial crisis had less effect on Norway than the rest of Europe, due largely to the

government's strong macroeconomic policy response. We expect real GDP growth to continue to increase, with an

expected average GDP growth of 1.5%, 1.5%, and 1.8% per year in 2014, 2015, and 2016, respectively (see "Ratings

on Norway Affirmed At 'AAA/A-1+'; Outlook Stable," published on May 2, 2014).

• The securitized portfolio is highly granular and diversified. The eligibility criteria exclude delinquent loans.

• The notes' payment structure is fully sequential and features certain performance triggers that, once hit, would

change the payment order so that interest payments on lower-ranking notes are subordinated to principal payments

on higher-ranking notes. Noteholders will further benefit from a cash reserve and a liquidity reserve, each equal to

2% of the initial portfolio volume, which the issuer will fully fund at closing from the proceeds of the subordinated

loan. The cash reserve will be available to provide credit enhancement and liquidity support throughout the life of

the transaction, while the liquidity reserve will cover interest shortfalls only.

• At closing, the securitized portfolio will have a weighted-average interest rate of approximately 14.25%, which is

substantially higher than the expected senior costs and interest payable under the notes. The issuer can use the

excess spread to pay down the notes to the extent that losses have occurred.

• There is limited operational risk of disruption in servicing provisions, in our view. Emric Finance Process

Outsourcing AB will be the "hot" standby servicer and, due to aligned systems, can take over the servicing duties

from Nordax Finans in a very short timeframe.

Concerns and mitigating factors

• Due to the two-year revolving period, substitution can result in a deterioration in portfolio quality. Certain eligibility

criteria in the transaction documentation, concerning the weighted-average remaining term, yield, and average

balance of the assets in the replenished pool, mitigate this risk. Additionally, early amortization triggers would stop

the substitution, if the performance of the assets deteriorates significantly.

• Changes since the last rated transaction closed to the underwriting standards include an increase in the maximum

loan limits to NOK420,000 from NOK320,000 and the introduction of borrowers being offered a loan in the amount

of credit they qualify for rather than the value they applied for. This could increase household debt as it would

increase the value of the outstanding loans that each customer has.

• The introduction of new origination channels with higher defaults could increase the overall amount of defaults.

• The originator stopped originating new loans in December 2008, and only restarted in March 2010. Thus, static

gross-loss data was unavailable for the respective cohorts. We have reflected this limitation in the levels of stressed

gross losses used in our analysis (see "Credit And Cash Flow Analysis").


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Transaction Structure

The issuer is a newly established SPE owned by the originator. On the closing date, the issuer will issue four classes of

rated notes and one unrated class of notes, and will use the issuance proceeds to purchase a portfolio of unsecured

promissory notes from Nordax Finans, the seller (see chart 1). At the same time, Nordax Finans, as the first

subordinated loan provider, will fund the liquidity reserve and the payment holiday reserve via a subordinated loan.

Borrowers of the promissory notes will transfer amounts directly into an account in the name of the issuer, from which

the issuer will make payments to the noteholders and other secured parties on each monthly interest payment date.

Priority of payments

The notes will pay interest in arrears on a designated date each month, at a rate of one-month Norwegian interbank

offered rate (NIBOR) plus a margin. The margin will increase after the step-up date, which occurs on the interest

payment date in June 2017.

The transaction has separate priorities of payment for interest and principal. The issuer debits any written-off


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promissory notes or principal payments applied to the waterfall for interest payments to one of the principal deficiency

ledgers (PDLs) in reverse sequential order. The subsequent application of interest payments reduces the PDL balance.

Subject to certain documented conditions, the issuer can borrow principal from the principal waterfall to make

payments under the interest waterfall.

The following amounts are available to make interest payments:

• Interest receipts from the assets, including the originator's portion of the insurance premiums paid by the borrowers;

• Interest earned on the collections account (excluding the equity account) and the reserves account;

• Net recoveries of interest and outstanding fees from defaulted assets that have not been written off;

• Net recoveries of interest, outstanding fees, and principal from defaulted assets that have been written off;

• Amounts withdrawn from the reserves account, to the extent that they are needed to pay any senior fees, class A

interest, and interest on subordinate classes unless a trigger event has occurred for that class; and

• Any other amounts in the collections account or the transaction account, not representing principal receipts.

The issuer applies these funds to:

• Pay trustee fees and expenses;

• Pay other senior expenses, including the issuer's general expenses;

• Top up the liquidity reserve to its required amount;

• Pay interest on the class A notes;

• Pay the class A PDL;

• Pay interest on the class B notes;

• Pay the class B PDL;

• Pay interest on the class C notes;

• Pay the class C PDL;

• Pay interest on the class D notes;

• Pay the class D PDL;

• Replenish the reserve account up to the senior credit enhancement reserve required amount;

• Pay the class E PDL;

• Prior to the repayment in full on the notes, to replenish the credit enhancement reserve to the credit enhancement

reserve amount;

• Pay interest on the class E notes;

• To credit the transaction account up to the float amount (The float amount is an amount not exceeding NOK1.O

million that the issuer can use to cover certain costs and expenses between interest payment dates, such as

reimbursement of borrowers who erroneously paid amounts into the issuer's account.);

• Pay the originator premium portion to the originator;

• On and from the step-up date: To pay (i) the class A notes' principal amounts to redeem the class A notes, followed

by (ii) the class B notes' principal amounts to redeem the class B notes. After the full repayment of the class A and B

notes: To pay (iii) the class C notes' principal amounts to redeem the class C notes, followed by (iv) the class D

notes' principal amounts to redeem the class D notes;

• Following the full repayment of the rated classes of notes, to pay the class E notes' principal amounts to redeem the

class E notes;

• To the extent not provided for elsewhere in the pre-enforcement priority of payments, to pay amounts due to any

other secured parties;

• To pay interest, principal, and any other amounts (in that order) due to the subordinated loan provider under the


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subordinated loan agreement;

• Before the full repayment of the notes, to replenish the payment holiday reserve to the required amount;

• To pay any amounts of the initial purchase price for additional promissory notes acquired during the revolving

period, which remain outstanding after the revolving period end date, followed by deferred consideration to the

seller--less NOK50,000 per year; and

• Any surplus to the equity account.

A class A, B, C, or D trigger event occurs if the issuer records a credit balance on the PDL of a class, i.e., if uncured

losses exceed the subordination available to that class. For as long as a trigger event has occurred and is continuing,

the issuer can use neither the amounts in the liquidity reserve nor principal borrowed toward making interest

payments on the affected class and subordinated classes. It cannot borrow principal to make interest payments on the

class D or E notes.

The credit enhancement reserve is split into two components. At closing, the reserve will be funded to the senior credit

enhancement reserve required amount, defined as 2% of the initial asset balance, with the proceeds of the

subordinated loan. Subject to certain excess spread and delinquency triggers being breached, its junior part will be

topped up dynamically from the excess funds in the waterfall. The issuer may use the reserve to cover any items senior

in the waterfall, including senior expenses, interest payments, and PDL balances on the class A, B, C, and D notes. The

issuer will replenish it before it cures the class E PDL.

The issuer will fund the payment holiday reserve on the closing date with NOK10 million. This will serve to cover any

shortfalls in interest receipts that the servicer would otherwise have collected from those borrowers it has offered a

payment holiday.

The issuer will apply principal payments received from the assets (including capitalized interest), principal recoveries

from defaulted assets that have not been written off, amounts transferred through the PDL, insurance payments

attributable to principal, the proceeds of any repurchase of assets sold by the seller, and during the revolving period

any retained principal amounts to make principal payments to:

• Pay any deficit in revenue receipts for interest on the class A, B, C, and D notes (unless a trigger event has occurred

for that class);

• On the first interest payment date only, to pay the difference between the initial purchase price of portfolio and the

notes issuance proceeds, if any;

• During the revolving period, purchase further eligible assets from the originator to replenish the pool;

• During the revolving period, to reimburse the seller for any payment holiday amounts;

• During the revolving period, to credit any remaining amounts to the GIC account up to the initial purchase price

reserve amount;

• Redeem the class A notes;

• Redeem the class B notes;

• Redeem the class C notes;

• Redeem the class D notes;

• Redeem the class E notes;

• Pay interest and principal due under the subordinated loan;

• Pay deferred consideration to the seller; and

• Credit any surplus to the Equity Account.


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Credit enhancement

At closing, credit enhancement for the notes will consist of the following:

• Subordination: The issuer will redeem the notes sequentially, so that lower-ranking classes provide credit

enhancement for more senior-ranking classes. The class B, C, D, and E notes will provide 55.5% of credit

enhancement to the class A notes; classes C, D, and E will provide 45.5% of credit enhancement to the class B

notes; classes D and E will provide 28.5% of credit enhancement to the class C notes; and the class E notes will

provide 18.5% of credit enhancement to the class D notes.

• Liquidity reserve: During the transaction's life, the cash reserve will be available to mitigate interest shortfalls. The

issuer will also use the cash reserve to redeem notes once the asset balance has reduced to zero, liquidity amounts

exceed the outstanding note balance, or at legal final maturity. Nordax Finans will fund the liquidity reserve at

closing with an amount equal to 2% of the initial pool balance.

• Excess spread: The difference between the interest payments received from the assets on the one hand, and senior

expenses plus interest payable under the notes on the other. The unstressed excess spread at closing will be about

10% per year.

• Credit enhancement reserve: At closing, the seller will fund it to the senior credit enhancement reserve required

amount, equivalent to 2% of the initial asset balance. The reserve will be funded with proceeds from the credit

enhancement reserve loan, which Nordax Finans will grant, as subordinated loan provider, to the issuer. This

portion of the reserve will count as credit enhancement for the notes in our cash flow analysis.

We do not consider that the additional portion of the credit enhancement reserve will provide credit enhancement at

closing, because it is only funded through the interest waterfall and ranks junior to the class E PDL. We would consider

any potentially funded amounts in our surveillance of the transaction.

We also do not consider that the liquidity reserve or payment holiday reserve will provide credit enhancement at

closing, as amounts on the reserves would not be available to cure losses or to repay notes on the legal final maturity

date.

Amortization period

The transaction will feature a two-year revolving period with the substitution criteria mimicking the eligibility criteria

for the assets in the closing pool. The revolving period will terminate in June 2016 or earlier, if certain trigger events

occur, including:

• A seller insolvency event;

• A note event of default;

• A PDL balance that isn't cured before the next interest payment date;

• Amounts in the initial purchase price reserve exceeding NOK200 million, or NOK100 million and not reducing to

NOK100 million or less on the following interest payment date;

• Cumulative defaults since closing exceeding: 3.00% within 12 months; 4.75% within 18 months; or 6.25% within 24

months of closing;

• The credit enhancement reserve's balance being less than the senior credit enhancement reserve required amount

as of the immediately preceding interest payment date;

• The proportion of promissory notes in the portfolio that is delinquent by two to five months is 4% or more; or

• The liquidity reserve's balance after the application of the revenue receipts (but prior to application of those funds

towards any revenue deficits) being less than its required amount on the next interest payment date.


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The PDL balance trigger inhibits accumulation of losses: The issuer cannot buy any assets into the pool during the

revolving period if there are any uncured defaults outstanding. Cumulative default triggers further inhibit substitution:

Should the performance of the assets in the portfolio fall out of line with that observed historically, any replenishment

would stop. In our cash flow model, we have assumed the amortization would commence if there is a breach of the

PDL balance trigger.

Servicing

Nordax Finans will service the receivables. Under the servicing agreement, Nordax Finans will service the securitized

assets in accordance with the collection and provisioning policy. In exchange for its services, Nordax Finans will

receive from the securitization a servicing fee based on the portfolio's outstanding balance.

The issuer and Nordax Finans, as servicer, will enter into a back-up servicing agreement with Emric at closing. Emric

will remain on standby until the servicing agreement is terminated (such as if Nordax Finans becomes insolvent).

Within 20 days of termination, Emric would step in and assume the role of servicer.

Under the transaction documents, Emric may only terminate the back-up servicing agreement with six months'

advance notice, and will not be released from its obligations until a substitute back-up servicer has been appointed.

Commingling and set-off risk

Collections on the receivables will occur monthly and borrowers (which have been informed about the sale of their

promissory note) will make their payments directly into the issuer's account. This should mitigate the commingling risk

as funds are not paid to the seller. We are unaware of any circumstances that might give rise to set-off risk.

Collateral Description

The collateral pool backing the notes comprises 11,857 promissory notes, with a total principal balance of NOK2.021

billion. The pool is highly granular, with the largest single-borrower concentration being 0.03% and the top 50 loans

comprising less than 1% of the portfolio. The average outstanding loan balance is NOK170,455.

Nordax Finans originated the promissory note contracts mostly in 2011-2014, however it didn't originate any between

December 2008 and February 2010.


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Chart 2

The main difference between SCL4 and its previous transaction (SCL2, also with Norwegian assets from Nordax

Finans), is the existence of different loan product origination channels in the securitized portfolio. Nordax Finans

originated all the loans in SCL2's securitized pool via the direct mail channel, while under SCL4, direct mail only

accounts for 52% of the preliminary securitized pool.

In SCL4, the direct mail channel has a floor of 50% of the securitized pool under the eligibility requirements. The other

origination channels are mail drops and "others" (mostly internet), and both have experienced different default trends

compared with direct mail. We have received static cohort data for defaults and recoveries in each of the three

origination channels and will size a base-case assumption for each. The "others" channel has experienced the most

defaults and will be limited to 20% of the securitized pool under the eligibility criteria.

Via the direct mail channel, Nordax Finans only directs its products to pre-selected customers who fulfil a certain

credit quality criteria, and addresses the letters by name. The mail drops system, on the other hand, sends letters to

potential customers as unaddressed mail. Additionally, customers are targeted using little or no pre-selection

information about their credit quality. Finally, the "others" channel consists of online or paper product advertising.

There is no pre-selection of clients with this method.


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No accounts are more than 30 days past due. In our opinion, the securitized portfolio has a better credit quality than

the originators' overall loan book. The receivables in the securitized pool are based on similar contracts and generally

have the following characteristics, which will be maintained during the revolving period via replenishment criteria:

• They are unsecured loans to individuals resident in Norway, either by single or joint application.

• The maximum tenor is 15 years and one month. The weighted-average seasoning of the provisional pool is 2.08

years, while the weighted-average remaining term is 9.89 years.

• The receivables have variable interest rates, based on a cost of funds set with relation to one-month NIBOR. The

current weighted-average interest is 14.25%.

• They are fully amortizing through fixed installments (unless the rate changes).

• The maximum loan amount is NOK400,000.

• Each receivable has full prepayment and early termination rights (a legal requirement).

• Any benefit of any insurance policy and/or other right or claim in respect of a borrower's obligations are transferred

to the issuer alongside the promissory note.

• Minimum of 50% of the portfolio is originated via direct mail and maximum 20% via the "other" channels.

The borrowers are evenly spread across the populated areas of Norway and are largely concentrated in the urban

areas. There are some concentrations in the regions of Oslo, Stavanger, and Drammen (see table 1).

Table 1

Geographic Concentration

Province Pool principal balance (mil. NOK) % of pool

Oslo 202.30 10.01

Drammen 33.17 1.64

Stavanger 27.76 1.37

Skien 26.54 1.31

Trondheim 26.38 1.31

Moss 22.77 1.13

Bergen 21.24 1.05

Sandnes 20.40 1.01

Kristiansand 19.81 0.98

Sandefjord 19.18 0.95

Other 1,601.54 79.24

*As of April 2, 2014.

The scheduled amortization shown in chart 3 highlights that the amortization is rather gradual.


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Chart 3

Credit And Cash Flow Analysis

Our rating analysis includes an assessment of the credit risk inherent in the transaction under various stress scenarios.

We based our credit analysis for each class of SCL4's notes on our rating methodology for analyzing consumer finance

transactions (see "European Consumer Finance Criteria," published March 10, 2000).

We received quarterly static gross loss and recovery data from Q1 2005 to Q4 2013, split by origination channel. We

have compared the historical composition of Nordax Finans' loan book (by origination channel) with the securitized

portfolio, to check that the overall pool data were representative of the securitized pool. We rely on the covenant in

the transaction documents to keep the share of loans originated through direct mail at no less than 50% and "others" at

no more than 20%, to assess the overall portfolio.

We based our analysis on the quarterly static gross loss cohorts included below, including static data for the direct

mail, drop mail, and "other" subpools.


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Chart 4


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Chart 5


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Chart 6

Overall, the data indicate a fairly stable loss performance for the direct mail and drop mail origination channels, with

deterioration for the loans originated in 2007 and 2008, and higher volatility in the 2009 cohort. This performance is in

line with our expectations since the origination volumes in 2009 were much smaller, and we regard the 2007-2008

cohorts as affected by the slightly stressed economic conditions in 2008/2009. However, the gross losses experienced

are highest in the drop mail subpool compared with those of the direct mail, and therefore its gross loss multiple is

higher than that for direct mail.

The data indicate more variations in the gross loss performance in the "other" origination channel, with similar

deterioration points as the other origination channels. As there were lower loan originations in the "others" channel

subpool compared with direct mail and drop mail, the performance of these vintages is more pronounced. That said,

our base case reflects the fact that this trend is more indicative of the origination channel as a greater number of loans

have been originated at this point. Additionally, Nordax Finans strengthened the credit score requirements in the

underwriting standards in January 2014 for loans originated via the "others" channel. This measure gives us comfort

when sizing the base case using the newer vintages.

By contrast, we set rating multiples at the high end of those outlined in our criteria to reflect the higher-than-usual

uncertainty regarding younger cohorts due to (i) data discontinuity; (ii) changed origination composition; (iii) changes


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to the underwriting standards; and (iv) the unknown effect of a potential interest rate hike on default performance,

given higher average household leverage.

Table 2

Base Case Credit Assumptions

Gross loss (%) Recoveries (%) Worst pool mix (%)*

Direct mail 12.0 20.0 50.0

Mail drop 15.0 20.0 30.0

Others 20.0 20.0 20.0

Weighted average 14.5 20.0 N/A

*Based on concentration limits in eligibility criteria. N/A--Not applicable.

Table 3

Stressed Credit Assumptions

Rating scenario Gross loss (%) Recoveries (%)

Base case 14.5 20.0

AAA 72.5 11.0

AA 58.0 12.0

A 40.6 13.0

BBB 27.6 14.0

We have received recovery data for the each origination channel spanning between Q2 2006 and Q4 2013. While

vintages from late 2006 and early 2007 display recovery rates that exceed 40%, 2008 and 2009 weren't favorable years

for collections, and curves trended much lower. We have seen a moderate pick-up in the levels achieved from late

2009 onward, which could be due to the originator's shift from generating new business and instead focusing on

maximizing recoveries.

We have set our recovery base-case assumption at the same level for each origination channel. In our view, collection

and recovery policies are idiosyncratic to the originator/servicer. We believe that little information can be derived

from past data when analyzing the likely levels in an originator insolvency scenario. We have assigned a base-case

recovery rate of 20%. Our stresses applied at each rating level reflect the quality of data provided, the period over

which they are observed, and the assumption of originator insolvency.

We have tested the ability of each class of notes to pay timely interest and ultimate principal under the outlined stress

assumptions through a cash flow model. We ran different interest paths (up to 12%, down to 0%, and flat) and different

prepayment speeds (0.5% and 24.0% constant prepayment rates). We also modeled stressed servicing fees. The results

were consistent with the ratings we have assigned to each individual tranche.

Scenario And Sensitivity Analysis

This scenario analysis section incorporates:

• A description of our methodology and scenario stresses;

• Results of the effects of the stresses on ratings; and


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• Results of the effects of the stresses on our cash flow analysis.

Methodology

When rating European consumer asset-backed securities (ABS) transactions, we have developed a scenario analysis

and sensitivity testing model framework. This demonstrates the likely effect of scenario stresses on our ratings in a

transaction over a one-year outlook horizon. For this asset class, we consider scenario stresses over a one-year horizon

to be appropriate, given the relatively short weighted-average life of the assets backing the notes. For these types of

securities, there are many factors that could cause the downgrade and default of a rated note, including asset

performance and structural features. However, for the purposes of this analysis, we focused on the three fundamental

drivers of collateral performance, namely:

• Gross loss rate,

• Recovery rate, and

• Prepayment rate.

Given current economic conditions, the stress scenarios proposed reflect negative events for each of these variables.

Increases in gross default rates could arise from a number of factors, including rises in unemployment and company

insolvencies, together with falls in house prices and a reduction in the availability of credit. In addition, these effects

would most likely cause collateral recovery rates to fall as the structural imbalance between supply and demand leads

to reductions in asset prices. In this environment, we also expect prepayment rates to fall as fewer refinancing options

leave obligors unable to prepay finance agreements and demand for replacement vehicles falls.

For this analysis, we have included two stress scenarios to demonstrate the rating transition of a note (see table 4).

Table 4

Scenario Stresses

Rating variable Scenario 1 (relative stress to base case) Scenario 2 (relative stress to base case)

Gross loss rate (%) 30.0 50.0

Recovery rate (%) (30.0) (50.0)

Constant prepayment rate (%) (20.0) (33.3)

Our base-case assumptions for each transaction are intended to be best estimates of future performance for the asset

portfolio. Our approach in determining these base cases would take account of historically observed performance and

an expectation of potential changes in these variables over the life of the transaction. The sensitivity of rated notes in

each transaction will differ depending on these factors, in addition to structural features of the transaction, including its

reliance on excess spread, payment waterfalls, and levels of credit enhancement at closing.

For each proposed scenario stress, we separate the applied methodology into three distinct stages. In the first stage,

we stress our expected base-case assumptions over a one-year period to replicate deviations away from our expected

performance over the stress horizon. We assume that the stresses that we apply occur at closing and apply gross

losses based on our expectation of a cumulative default curve for the portfolio.

In the second stage, we apply our usual rating methodology, including revising our base-case assumptions at the

one-year horizon to reflect the assumed deviations as a result of the stressed environment. In the final stage of the


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analysis, we re-rate the transaction at the one-year horizon, after revising our base-case assumptions and applying our

standard credit and cash flow stresses at each rating level. The output of the analysis shows the likely rating transition

of the rated notes, given the applied stresses and the value and timing of any forecasted principal and interest shortfalls

under the most stressful scenario.

Transaction analysis

When applying scenario stresses in the manner described above, the results of this modeling are intended to be a

simulation of what could happen to the ratings on the notes for the given transaction. For the purposes of our analysis

for this transaction, we applied the two scenarios described above in our cash flow modeling. Tables 5 and 6 show the

implied base-case stress and scenario stress results.

Table 5

Scenario Stresses

Stress horizon 12 months

Rating variable Base case Scenario 1 Scenario 2

Weighted-average gross loss rate

(%)

14.50 18.85 21.75

Class A multiple 5.00 4.00 4.00

Class B multiple 4.00 3.00 3.00

Class C multiple 2.80 2.00 2.00

Class D multiple 1.90 1.80 1.80

Recovery rate (%) 20.00 14.00 10.00

Constant prepayment rate (%) 10.00 8.00 6.67

Table 6

Scenario Stress Analysis: Rating Transition Results

Scenario stress Class Initial preliminary rating Scenario stress rating

Scenario 1 A AAA (sf) AAA (sf)

B AA (sf) AA (sf)

C A (sf) A (sf)

D BBB (sf) BBB (sf)

Scenario 2 A AAA (sf) AA+ (sf)

B AA (sf) AA (sf)

C A (sf) A (sf)

D BBB (sf) BBB- (sf)

Where the most senior notes experience interest or principal shortfalls, the holders of these notes and/or the trustee

can call an event of default. This could lead to multiple events, such as to the issuer applying the post-enforcement

priority of payments. All of these events would have an effect on the transaction's cash flows. For the purposes of the

analysis above, we make a simplified assumption that the trustee will not call an event of default.


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Monitoring And Surveillance

We regularly assess the following as part of our ongoing surveillance of this transaction:

• The performance of the underlying portfolio, including defaults, delinquencies, and prepayments;

• The supporting ratings in the transaction; and

• The servicer's operations and its ability to maintain minimum servicing standards.

Standard & Poor's 17g-7 Disclosure Report

SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security

as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms

available to investors and a description of how they differ from the representations, warranties and enforcement

mechanisms in issuances of similar securities.

The Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available at

http://standardandpoorsdisclosure-17g7.com/2383.pdf

Related Criteria And Research

Related criteria

• Europe Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, Sept. 13, 2013

• Counterparty Risk Framework Methodology And Assumptions, June 25, 2013

• Global Derivative Agreement Criteria, June 24, 2013

• Methodology: Credit Stability Criteria, May 3, 2010

• European Consumer Finance Criteria, March 10, 2000

Related research

• Ratings On Norway Affirmed At 'AAA/A-1+'; Outlook Stable, May 2, 2014

• European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic

Factors, March 14, 2012

• Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors,

Nov. 4, 2011

• Scenario Analysis: Gross Default Rates And Excess Spread Hold The Answer To Future European Auto ABS

Performance, May 12, 2009

Additional Contact:

Structured Finance Europe; [email protected]


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