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Rating Action:

Moody's assigns provisional rating to Mercedes-Benz-sponsored auto loan ABS in China: Silver Arrow China 2018-1 Retail Auto Loan Asset Backed Notes Trust

15 Aug 2018

RMB[8,010] million of securities to be rated

Hong Kong, August 15, 2018 -- Moody's Investors Service has assigned provisional rating to the Class A Notes to be issued by Silver Arrow China 2018-1 Retail Auto Loan Asset Backed Notes Trust, a domestic transaction backed by a pool of auto loans originated by Mercedes-Benz Auto Finance Ltd. (MBAFC) in China.

Silver Arrow China 2018-1 Retail Auto Loan Asset Backed Notes Trust is the fifth auto loan ABS securitization sponsored by MBAFC.

The complete rating action is as follows:

Issuer: Silver Arrow China 2018-1 Retail Auto Loan Asset Backed Notes Trust

.... RMB[8,010,000,000] Class A Notes, Assigned (P)Aa3 (sf)

The RMB[421,578,947.37] Subordinated Notes are not rated by Moody's.

Moody's issues provisional ratings in advance of the final sale of the securities. The ratings, however, only represent Moody's preliminary credit opinion. Upon conclusive review of all transaction and associated documents, Moody's will endeavor to assign definitive ratings to the notes. A definitive rating may differ from a provisional rating.

The rating address the expected loss posed to investors by the legal final maturity. The structure allows for timely payment of interest and ultimate repayment of principal of the rated notes by the legal maturity date.

Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant impact on yield to investors.

RATINGS RATIONALE

The transaction is a static securitization of auto loans extended to individuals in China by MBAFC.

The rating assigned to the Class A Notes is currently constrained by China's local currency country ceiling (LCC, Aa3), which captures the systemic risks associated with the political, institutional, legal and economic factors prevalent in China.

When assigning the rating, Moody's analysis focused, among other factors, on

(1) Characteristics of the securitized pool;

(2) The macroeconomic environment in China;

(3) The lack of historical performance data during an economically distressed period;

(4) The parental support available to the servicer;

(5) The potential disruption of the issuer's cash flow in case of a servicer termination event, and the adequacy of the cash reserve and effectiveness of other structural mechanisms to support timely payments on each class of rated notes;

(6) The payment mechanism to allocate cash flow to the Class A Notes;

(7) The protection provided by credit enhancement against defaults and arrears in the securitized pool; and

(8) The legal and structural integrity of the transaction.

Moody's considered, among other things, the transaction's following key strengths:

(1) Diversified collateral pool composition: Over 60,000 individuals obligors and loans originated all across China.

(2) Favorable pool characteristics: The pool only includes loans to purchase new Mercedes-Benz or Smart passenger car or van, with fully amortizing terms, and monthly payment made by direct debit from all the obligors' bank accounts. The pool's weighted average down-payment rate is 41.47% at origination.

(3) Strong pool performance: The originator has very low delinquency rates in its retail loan portfolio. The highest over 90 days delinquency rate in number of outstanding loan contracts was 0.29% across the quarterly dynamic historical data from Q1 2013 to Q1 2018, and the average extrapolated rates of the sum of the over 90 days delinquent loans, cumulative write-off loans and restructured loans was low at 0.47% among the quarterly vintage historical pool data for the same period.

(4) Static structure with fast amortization: This is a static deal with no revolving period. As a result, the transaction is only exposed to the default risk of the loans in the closing pool, which has a weighted average tenor of about two years.

(5) Strong credit enhancement and interest alignment: The transaction benefits from several sources of credit enhancement, namely (a) the subordination of the notes; (b) over-collateralization, part of which is sized to supplement the yield of the pool, as if each of the loans in the pool -- without such over-collateralization -- earns an effective interest rate which is equal to the higher of 6.65% per annum and the contractual interest rate at the cut-off date; (c) a non-amortizing general reserve that will be fully funded at closing with a balance equal to 1% of the initial adjusted pool balance and can be topped up by excess spread (if any) during the transaction period to maintain the account balance equal to its initial balance at closing; and (d) any available collections after paying for the Class A Notes interest and topping up of the reserve can be used to repay the Class A Notes' principal, subject to the principal distribution amount.

(6) Strong interest alignment: The originator has a strong alignment of interest with the noteholders, given the originator retains the subordinated notes and does not receive interest on them.

Moody's has also considered the following weaknesses and mitigants:

(1) Untested back-up servicing arrangement: No back-up servicing arrangement will be set up at closing. Servicing of the transaction may be subject to disruption if the originator/servicer fails to perform when needed. Any disruption can result in a material impact because the transaction has over 60,000 obligors located in various parts of China, and there are limited viable replacement servicers or collection agents in China capable of covering such a geographic spread and the number of loans should the originator default.

There is no precedent in China of actual servicing transfers to date. Moody's considers the high likelihood of parental support for the servicer from its majority shareholder company, Daimler AG (A2/P-1, stable), and the short weighted average life of the rated notes as key mitigants to this concern. Although there is no explicit guarantee from Daimler AG, the servicer, as the captive company of Daimler AG in China, is strategically important to Daimler's auto business.

(2) Limited liquidity buffer: The issuer has a cash reserve account, fully funded at closing in an amount equal to approximately 1.0% of the initial adjusted pool balance. This amount of liquidity coverage appears to be weak because this amount can only cover just two months of senior fees and rated notes interest calculated based on original notes amount. Moody's considered the following mitigants in determining the operational risks in this transaction: (a) the parental support available to the servicer, (b) the short tenor of this transaction, (c) the flexibility to apply principal collection to pay interest on the rated notes, and (d) the increase in the liquidity coverage periods over time, and (e) perfection of the trust's right over the assigned loans through notification to the underlying obligors soon after a servicer termination event.

(3) Commingling risk with servicer's fund: The servicer will auto-debit the obligors' bank accounts on each of the loans' monthly instalment dates, and deposit such collections with its own funds. This amount will be subject to commingling risk until the servicer transfers such collections to the issuer's trust account seven business days before the notes payment date in the immediate following month. We have considered the credit quality of the servicer and its majority shareholder company and the payment mechanism in this transaction, and modeled for a commingling exposure equal to one and a half months of collections.

(4) The lack of historical performance data during an economically distressed period: Both dynamic and static pool performance data from Q1 2013 to Q1 2018 were provided to Moody's. The data period is relatively short and also coincided with strong economic growth in China. Accordingly, Moody's has increased its default rate assumptions and reduced its recovery rate assumptions compared to historical pool performance data to reflect the prospects of a slowdown in the economic growth of, and the rising credit concerns in China.

(5) Negative interest carry between the asset pool and the transaction funding costs: The current weighted average interest rate of the asset pool is 4.14%. This is lower than the funding costs of the transaction which includes the transaction fees, expenses and notes interests. To compensate for the above negative carry, the transaction will benefit from the target over-collateralization and yield supplement over-collateralization.

MAIN MODEL ASSUMPTIONS:

Moody's assumed a mean default rate of 1.60% and a coefficient of variation of default of 65.0% for the securitized pool. A recovery rate of 10% is used as the other main input for Moody's cash flow model ABSROM. These assumptions have taken into account the credit quality and composition of the underlying loans, the historical performance trends of similar securitization transactions and that of the originator's managed portfolio, and the current expectations for future economic conditions in China.

RATINGS METHODOLOGY:

The principal methodology used in this rating was Moody's Global Approach to Rating Auto Loan- and Lease-Backed ABS published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING:

Factors that may cause an upgrade of the rating of the Class A Notes include a decrease in non-diversifiable country risk in China.

Factors that may cause a downgrade of the rating of the Class A Notes include an increase in non-diversifiable country risk in China; a decline in the overall performance of the pool; a significant deterioration in the credit profile of the originator or its majority shareholder company and the absence of the implementation of any mitigating actions for the deal.

The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range may indicate that the collateral's credit quality is stronger or weaker than what Moody's had previously anticipated.

THE COMPANY:

Mercedes-Benz Auto Finance Ltd. is the originator and servicer of this transaction. It is a non-bank financial institution, and was established in September 2005 in China. It is 52.2% owned by Daimler AG (A2/P-1, stable) and 47.8% owned by Daimler Greater China Ltd.

The issuer is a newly established special purpose trust incorporated in the China.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's took into account one or more third party due diligence assessment(s) regarding the underlying assets or financial instruments (the "Due Diligence Assessment(s)") in this credit rating action and used the Due Diligence Assessment(s) in preparing the ratings. This had a neutral impact on the rating.

The Due Diligence Assessment(s) referenced herein were prepared and produced solely by parties other than Moody's. While Moody's uses Due Diligence Assessment(s) only to the extent that Moody's believes them to be reliable for purposes of the intended use, Moody's does not independently audit or verify the information or procedures used by third-party due-diligence providers in the preparation of the Due Diligence Assessment(s) and makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of the Due Diligence Assessment(s).

The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

For PRC only: Neither MCO nor any of its majority-owned affiliates is a qualified credit rating agency within the PRC. Any rating assigned by MCO or any of its majority-owned affiliates: (1) does not constitute a rating as required under any relevant PRC laws or regulations; (2) cannot be included in any registration statement, offering circular, prospectus or any other documents submitted to the PRC regulatory authorities; and (3) cannot be used within the PRC for any regulatory purpose or for any other purpose which is not permitted under relevant PRC laws or regulations. For the purposes of this paragraph, "PRC" refers to the mainland of the People's Republic of China, excluding Hong Kong, Macau and Taiwan.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Cecilia Chen
Analyst
Structured Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Jerome Cheng
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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