The rating action is as follows:

Class A1 notes, up to EUR 400.0m (currently EUR 385.7m*): assigned new AAA_SF rating

*The analysis considers the portfolio and structure as of 31.12.2017.

RATING RATIONALE

The rating reflects the legal and financial structure of the transaction; the credit quality of the collateral in the context of the macroeconomic conditions and long-term performance of auto ABS in Germany; the ability of the originator and servicer, FCE Bank plc (not rated); and the counterparty exposure to Deutsche Bank AG London Branch (BBB+/ Stable Outlook) as the account bank and paying agent, Lloyds Bank plc (A+/Stable Outlook) as the interest rate swap counterparty and FCE Bank plc as the servicer.

Class A1 notes are protected against potential losses from the receivables portfolio by 12.4% of credit enhancement from subordination and a fully funded cash reserve. The notes benefit from sequential amortisation following the end of the remaining 11-month revolving period (analysis as of 31.12.2017). In addition, 3.75% of excess spread is available to cover periodic payment shortfalls. An interest rate swap with Lloyds Bank safeguards the excess spread against erosion from the fixed-floating mismatch of assets and liabilities.

The transaction is well protected from portfolio underperformance and portfolio migration during the revolving period. FCE Bank would have to provide significant protection to prevent early amortisation if the portfolio composition migrated during the revolving period or if the portfolio underperformed. Scope’s analysis does not consider this additional protection under AAA rating-conditional stress and consequently does not rely on FCE Bank as the protection provider. However, this mechanism represents a positive feature which will support the Class A1 notes.

The transaction benefits from the consistent and sustainable business model of FCE Bank as the European financial services arm of Ford Motor Company. FCE Bank is highly experienced in originating auto loans to support Ford group sales, and the flexible origination criteria are matched to well-structured loans and effective monitoring and recovery of loans, suited to a creditor-friendly jurisdiction like Germany.

The performance of the assets will benefit from the strong and stable German economy. The robust labour market, favourable financing conditions and rising productivity signify a benign macroeconomic environment. Furthermore, Germany has high-quality public institutions which explain the long history of economic stability behind its good credit performance. Scope expects low net losses (i.e. 64 bps) from the loan portfolio, assuming that normal long-term economic conditions persist. The agency assumed portfolio defaults, taking long-term performance conditions into consideration, by assuming: a ‘90-days-past-due’ default rate mean of 3.16% and a coefficient of variation of 51%. In addition, Scope assumed a AAA rating-conditional recovery rate of 47.8%, derived from a stress applied to base case recovery of 79.7%.

The rating reflects the counterparty credit risk in the transaction and its mitigants. FCE Bank has to fund a commingling reserve, equal to two-thirds of the sum of: i) the highest monthly collection, plus ii) 1.7% of the entire balloon exposure. The account bank and paying agent have to be replaced upon the loss of a BBB rating by Scope. The interest rate swap counterparty is subject to a replacement mechanism based on external ratings.

KEY RATING DRIVERS

Credit enhancement (positive). Class A1 benefits from 12.4% of credit enhancement including a 1.15% liquidity reserve which also provides loss coverage in a liquidation scenario.

Excess spread (positive). The transaction benefits from high 3.75% p.a. excess spread at closing, which covers for payment shortfalls and partially hedges the transaction against a default of the interest rate swap counterparty.

Experienced originator (positive). FCE Bank is the financial institution with the longest experience in the German car financing business, dating back to 1929, affording all of the expertise necessary to structure loans based on the vehicle value, supporting Ford Motor Company’s vehicle sales.

Historical performance (positive). FCE Bank’s loan book has shown solid historic performance, even after the financial crisis. Static loan-loss vintage data for a period from 2007 to 2017 show loss rates below 1% with moderate volatility.

Robust structure (positive). The mechanisms implemented effectively address the risks associated with replenishments and a fixed-floating asset liability mismatch. The simple two-tranche, sequentially-amortising structure builds up additional protection for the Class A1 notes as the portfolio amortises.

German economic environment (positive). The healthy economic environment in Germany stabilises the performance of consumer loans, with low unemployment and solid economic growth, which is reflected in rising private household income.

Heterogenous obligor quality (negative). Obligor credit quality is highly heterogenous, due to FCE Bank’s origination strategy and loan products in Germany, which are not very discriminating. This may result in a volatile performance in a distressed environment. However, FCE Bank has a solid loss track record. This reflects effective loss limitation through down payments, guarantees and conservatively-sized balloon payments, based on residual value. Additionally, credit enhancement dynamically reflects the exposure to those product types that are more attractive to riskier obligors.

Balloon exposure (negative). The transaction is exposed to a large proportion of balloon payments which may result in increasing defaults towards the loans’ maturities. This risk is partially mitigated by the adequate sizing of the balloon payments, as well as the buy-back guarantee from the dealer for the Trade Cycle Management (TCM) loans which make up the largest share of the portfolio.

Revolving period (negative). The 11-month remaining revolving period allows portfolio migration towards the portfolio segment with the weakest historical performance. This migration potential is considered in Scope’s portfolio assumptions for the mean default rate (3.16%), the coefficient of variation (51%) and the AAA rating-conditional recovery rate (47.8%). In addition, FCE Bank would have to increase credit enhancement upon such migration.

Interest rate mismatch (negative). The fixed-floating asset-liability mismatch in this transaction is well mitigated by a fixed-floating swap with Lloyds Bank plc (A+/Stable Outlook). The swap has collateralisation and replacement mechanisms.

Complex documentation (negative). The transaction documents feature an accurate but complex description of the terms and conditions. This complexity increases risks of misinterpretation of the intended meaning by a court of law upon a liquidation scenario. This relatively remote risk is partially mitigated by the non-petition language against the issuer entered into by all parties.

Subjective loss metric (negative). One of the structural mechanisms to increase credit enhancement depends on write-offs as subjectively determined by the servicer, which results in wrong-way risk. This is partly mitigated by the importance of the securitisation tool to the originator, and the well-established processes which make loss-recognition dependent on objective factors.

POSITIVE RATING-CHANGE DRIVER

Increased credit enhancement resulting from deleveraging, accompanied by good performance, may strengthen the Class A1 rating further.

NEGATIVE RATING-CHANGE DRIVER

Worse-than-expected performance of the assets could negatively impact the ratings.

QUANTITATIVE ASSUMPTIONS

Scope performed a cash flow analysis of the transaction over the amortisation period, incorporating important structural mechanisms into the analysis. The agency used a large homogenous portfolio approximation approach to analyse the highly granular collateral pool. Scope assumed that portfolio defaults followed an inverse Gaussian distribution to calculate the expected loss of the rated tranche. The analysis also provided the expected weighted average life of each tranche. Scope considered asset and liability amortisation and the evolution of pool composition during the revolving period. Scope’s analysis considered four distinct asset segments: the segments for Standard and TCM loans, each split into new and used vehicle financing.

Scope’s analysis incorporates an adverse migration of the portfolio within the limits of the eligibility criteria and the expected amortisation over the 11-month remaining revolving period. Scope assumed a portfolio that is comprised of 12.2% ‘Standard NEW’ loans, 27.7% ‘Standard USED’ loans, 51.8% ‘TCM NEW’ loans and 8.3% ‘TCM USED’ loans. Scope maintained the currently available credit enhancement for its analysis. Thus, Scope did not incorporate the additional credit enhancement that FCE Bank would have to advance upon such portfolio migration or upon adverse portfolio performance.

Scope’s portfolio assumptions highlighted in the rating rationale section reflect segment-specific assumptions for the ‘90-days-past-due’ default rate mean, coefficient of variation and AAA rating-conditional recovery rate: ‘Standard NEW’ (1.7% / 90% / 42%), ‘Standard USED’ (5.0% / 40.0% / 48.0%), ‘TCM NEW’ (2.5% / 50.0% / 48.0%) and ‘TCM USED’ (3.3% / 65.0% / 51.0%). Scope derived the assumptions from FCE Bank loss vintage data, covering the years 2007-2017, a period which incorporates the bank’s performance in both a distressed and benign environment in Germany. In addition, Scope took into account obligor-segment-specific loss vintage data and dynamic ‘90+ days past due’ delinquency data provided by FCE Bank, which reflect the bank’s internal servicing and recovery practices plus standard foreclosure costs.

Scope analysed the transaction under a high (10%) and low (0%) prepayment assumption.

RATING SENSITIVITY

The stability of the ratings is supported by: i) strong protective mechanisms in the structure; and ii) Scope’s use of both rating-conditional recovery rate assumptions and a long-term performance reference for the assets.

Scope tested the sensitivity of the analysis to deviations from the main input assumptions: i) the mean default rate; and ii) recovery rates. This analysis illustrates the sensitivity of the rating to input assumptions but is not indicative of expected or likely scenarios.

The following shows how the results for Class A1 compared to the assigned credit rating when:

• The mean default rate is increased by 50%, negative 0 notch; and
• The recovery rate is reduced by 50%, 1 notch.

Interest rate stresses have no impact on the notes because interest rate risk is perfectly hedged.

EDITORIAL NOTE

On 30 April 2018, the sensitivities have been amended, in the press release 26 March 2018 the sensitivities were stated:

• The mean default rate is increased by 50%, negative 1 notch; and
• The recovery rate is reduced by 50%, 0 notch.

METHODOLOGY
The methodologies applicable for this final rating are the ‘Auto ABS Rating Methodology’, dated August 2017, the 'General Structured Finance Rating Methodology' dated August 2017, and the ‘Methodology for Counterparty Risk in Structured Finance’, dated August 2017. All files are available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
Scope analysts are available to discuss all the details of the rating analysis and the risks, to which this transaction is exposed.

SOLICITATION, KEY SOURCES AND QUALITY OF INFORMATION
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings GmbH has relied on a third-party asset due diligence/asset audit. The external due diligence/ asset audit / internal analysis has no impact on the credit rating.
Prior to the issuance of the rating action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

REGULATORY DISCLOSURES
This credit rating is issued by Scope Ratings GmbH.
Lead analyst Sebastian Dietzsch, Associate Director
Person responsible for approval of the rating: Guillaume Jolivet, Managing Director
The rating was first released by Scope on 26 March 2018.
The rating concerns a financial instrument, which has been rated by Scope for the first time.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

CONDITIONS OF USE / EXCLUSION OF LIABILITY
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