Note: This presale report is based on information as of Sept. 29, 2021. The ratings shown are preliminary. Subsequent information may result inthe assignment of final ratings that differ from the preliminary ratings. Accordingly, the preliminary ratings should not be construed asevidence of final ratings. This report does not constitute a recommendation to buy, hold, or sell securities. *Our preliminary ratings addresstimely payment of interest and ultimate payment of principal on the class A and B notes and ultimate payment of interest and principal on theclass C notes. §Available credit enhancement consists of subordination on the class A, B and C notes. NR--Not rated. 1mE--One-month EuroInterbank Offered Rate.
- S&P Global Ratings has assigned its preliminary credit ratings to SCF Rahoituspalvelut XDAC's asset-backed floating-rate class A, B, and C notes. At closing, SCFRahoituspalvelut X will also issue unrated asset-backed class D notes.
- This is Santander Consumer Finance Oy's (SCF Oy) 10th publicly rated ABS transactionand the second we rate after SCF Rahoituspalvelut IX DAC in 2020.
- The underlying collateral comprises Finnish loan receivables for primarily cars and asmaller proportion of light commercial vehicles, motorbikes, caravans, and campers.SCF Oy originated and granted the loans to its private and commercial retail customers.According to the pool, 62.9% of the current principal balance amortize with a finalballoon payment.
- Like its predecessor transaction, SCF Rahoituspalvelut X DAC revolves for a period of sixmonths from closing, ending in May 2022. During this time, all principal proceeds areused to purchase new assets. The revolving period would terminate earlier upon theoccurrence of a revolving period termination event. Once the transaction starts toamortize, collections received are distributed monthly according to separate principaland interest waterfalls. Principal is paid pro rata once the required subordination is builtup on the class A notes. However, principal payment switches definitively to sequentialupon occurrence of a sequential payment trigger event.
- At closing, a liquidity reserve will be funded through a subordinated loan. The reserve isavailable to cure any shortfalls on the senior fees, expenses, and interest on the class Aand B notes. A servicer advance reserve is also funded at closing to be drawn to pay anyamount to an obligor or deposit with the Finnish enforcement authority on the obligor'sbehalf in relation to repossession of the financed vehicle.
- A combination of excess spread and subordination provides credit enhancement.Commingling and set-off risks are fully mitigated, in our view.
- The assets pay a monthly fixed interest rate, and the notes pay one-month EuroInterbank Offered Rate (EURIBOR) plus a margin subject to a floor of zero. The ratednotes benefit from an interest rate cap until the rated notes redeem.
- The issuer can fully redeem the notes if the seller exercises a clean-up call on thepayment date on which the collateral pool balance and defaulted amounts less realizedrecoveries is lower than 10% of the collateral pool's balance at closing.
- Our ratings on class A and B notes address timely payment of interest and ultimatepayment of principal; our rating on the class C-Dfrd notes addresses ultimate paymentof interest and principal.
- Our structured finance sovereign risk criteria do not constrain our ratings on the notes.We expect counterparty risk to be adequately mitigated in line with our counterpartycriteria. We expect that the legal opinions at closing will adequately address any legaland operational risk in line with our criteria.
BNP Paribas Securities Services, Dublin Branch astransaction bank account provider*
ICR: A+/Stable/A-1 A N/A
Skandinaviska Enskilda Banken AB, Helsinki branch ascollection bank account provider*
ICR: A+/Stable/A-1 A N/A
Banco Santander S.A. as interest rate cap provider RCR: A+ A- A-
*Based on the rating on the parent company, BNP Paribas Securities Services S.C.A., in line with our bank-branch criteria (see "Relatedcriteria").**Based on the rating on the parent company, Skandinaviska Enskilda Banken AB, in line with our bank-branch criteria (see "Related criteria").N/A--Not applicable. RCR—Resolution counterparty rating. ICR—Issuer credit rating. TBD-to be determined
The Credit Story
Strengths, Concerns, And Mitigating Factors
Strengths Concerns and mitigating factors
The preliminary pool is granular and well diversified across brandsand geographically. As of the preliminary pool cut-off date, thelargest and top 10 borrowers are 0.05% and 0.36%, respectively.The portfolio's weighted-average down payment is 13.2%,indicating a strong loan-to-value ratio.
About 36% of the used vehicles in the pool correspondto vehicle models that are at least six years old. Whilethis is slightly higher than in other jurisdictions,historical recoveries have remained consistentlystrong.
As of the preliminary cut-off date, the portfolio does not containany delinquent or defaulted contracts.
About 62.9% of the current principal balance of theloans in the preliminary pool are balloon loans thathave a final installment payment that is significantlyhigher than previous installments. This proportion canincrease up to 63.5% during the revolving period. In astressed environment, the balloon payment couldresult in the obligor experiencing a payment shock, ifthe vehicle's value declines and the originator does notprovide follow-up financing. We have accounted for theadditional losses resulting from payment shock after amarket value decline of the underlying vehicles underour ratings scenario.
Although the structure is revolving for a period of six months, itincorporates necessary triggers to cause the revolving period toterminate upon breach.
SCF Oy services the securitized assets, and thetransaction will not have a back-up servicer at closing.We rely on the general availability of servicing in theFinnish market to mitigate the risk of servicingdisruption and on Santander Consumer Finance S.A.(A-/Stable/A-2) as the back-up servicer facilitator.Furthermore, the liquidity reserve will provideadditional liquidity for the class A and B notes, whichmitigates servicer disruption risk. To further mitigateany liquidity risk, principal funds can be borrowed incase of interest shortfalls on class A and B and onclass C, only if class C is the most senior classoutstanding.
Strengths, Concerns, And Mitigating Factors (cont.)
Strengths Concerns and mitigating factors
The seller will notify borrowers of the sale and transfer of theportfolio at closing, to perfect the purchaser's legal title on theassets financed. Thereafter, all borrowers pay monthly into thecollection account held in the issuer's name. As a result, weconsider commingling risk to be fully mitigated. SCF Oy is not adeposit taking institution and the eligibility criteria excludeborrowers who are employees of the seller. This mitigates anyset-off risk.
There is a revolving period of six months, which canalter the portfolio's credit quality and characteristics.The eligibility criteria ensure that the portfolio'scharacteristics remain within established parametersduring the revolving period. The individual loan andportfolio-wide eligibility criteria are quite protective, inour view, and aim to prevent pool quality fromdeteriorating during the revolving period. Further, inour analysis, we have considered that the closing poolwould migrate to the limits established as per theeligibility criteria at the start of amortization.
An interest rate cap will mitigate the risk that the one-monthEURIBOR paid on class A, B, and C notes exceeds 0% (the capstrike) while assets pay fixed interests. The interest rate cap willhave a fixed schedule, which is based on the rated notes'outstanding balance assuming 0% prepayment rate (CPR). The capnotional amount starts amortizing with a delay of a certain numberof months compared with the amortization schedule of the ratednotes.Every six months (test period), the issuer has the option toreduce the notional amount of the cap to align it to the then currentbalance of the rated notes. This happens through the splitting ofthe interest rate cap into a "continuing cap" agreement based onthe adjusted notional amount and an "excess cap agreement,"whose notional amount is equal to the reduction amount. Duringthe test period the issuer has the option to terminate the excesscap agreement. In that instance the cap provider will pay back tothe issuer, as termination payment, the portion of the up-front fee(paid by the issuer at closing to enter the cap agreement)equivalent to the value of the excess cap agreement.
The cash flow results are still consistent with ourpreliminary ratings on the class A, B, and C-Dfrd notes,if we account for the fixed cap notional amount, evenwhen interest rates increase up to 12% and low CPRscenarios together with stressed delinquencies anddefaults slow down redemption of rated notes. We alsotested the structure being partially unhedged at theend of the life of the transaction and the cash flowresults are still unchanged.We expect that thesix-months adjustment will not impact our cash flowresults. We will be notified if the cap notional amountis reduced and we will monitor its level during oursurveillance activity.
The liquidity reserve is amortizing, resulting in apotential reduction in available liquidity support.Furthermore, subordination and soft excess spread arethe only form of credit enhancement in the structure,in the absence of any hard cash reserve to curepotential losses. We have accounted for this in ourcash flow analysis.
The liquidity reserve does not provide liquidity supportto pay interests on class C and borrowing of principalfor class C's interests is limited only when class C isthe most senior class outstanding. We rated the classC-Dfrd notes based on the payment of ultimateinterest and principal, according to our cash-flow runs.
Strengths, Concerns, And Mitigating Factors (cont.)
Strengths Concerns and mitigating factors
The transaction pays sequentially at the start of theamortization period. However, the paymentmechanism would switch to pro rata once thesubordination on the class A notes builds to 16%.Pro-rata payment can potentially limit the availableabsolute amount of credit enhancement in case ofdelayed defaults, later in the transaction'slife.Sequential payment trigger events however, ensurethat upon the occurrence of any of these events(including the cumulative net loss ratio exceeding thetrigger of 1.7%), the payment mechanism would notswitch to pro-rata or revert to sequential.We haveconsidered these events in our cash flow analysis.Because of the pro rata structure we testedsensitivities applying a slow default curve or delayingthe start of the recession period, which allows thetemporary pro rata redemption of class A to D beforethe cumulative net loss ratio trigger is breached.
There is a risk that the true sale will not be effective onthe date of sale as notices will potentially only beeffective within seven days of closing due to the timetaken to notify the obligors. The transaction istherefore potentially exposed to the insolvency risk ofthe seller during this interim period. We view this riskto be mitigated by the fact that solvency certificateswill be issued at closing and that the timeframes forthis risk to crystalize are very short. We have also takenthe originator's experience and strength into account,including the ownership structure and the fact that wehave recently undertaken a corporate overview.
Under the Finnish laws, at the time of repossession,and the remaining amounts owed by the borrower onthe loan are determined based on the government'svaluation of the refinanced vehicle. Should the vehiclereceive a government valuation higher than theborrower debt, the excess needs to be paid to theborrower, along with VAT to the government withrespect to the resale. These payments rank senior topayments to noteholders in the payment waterfall. Atclosing, SCF Oy will fund a servicer advance reserve tobe drawn for these payments. We have reviewed thesepayments since 2018 and sized for a stressed amountto test the potential effect of these amounts exceedingthe servicer advances reserve in our analysis.
Asset Description
As of the cut-off date of on Sept. 12, 2021, the collateral pool backing the notes comprised 26,227auto loans totaling €449.98 million. The loans represent hire purchase contracts for new and usedvehicles to private customers or commercial borrowers. The loans are either amortizing or have alower monthly installment with a balloon payment at the end of the contract term. Installmentsare monthly and fully invoiced.
Environmental, Social, And Governance (ESG) Factors
Our rating analysis considers a transaction's potential exposure to ESG credit factors. For the autoABS sector, we view the exposure to environmental credit factors as above average, social creditfactors as average, and governance credit factors as below average (see "ESG Industry ReportCard: Auto Asset-Backed Securities," published on March 31, 2021). In our view, the exposure toESG credit factors in this transaction is in line with our sector benchmark. The transaction's aboveaverage exposure to environmental credit factors results from the collateral pool primarilycomprising vehicles with internal combustion engines (ICE), which create emissions of pollutantsincluding greenhouse gases. In particular, this transaction is exposed to around 40% dieselvehicles. European governments are implementing certain restrictions on driving diesel vehicles inmajor European cities, which may reduce market values of those vehicles. We believe that ourcurrent approach to evaluating recovery and balloon risks adequately account for diesel vehiclevalues over the transaction's relatively short expected life. Loans to electric vehicles are limited to10%, so not sufficiently high to consider a potential impact of future regulation on their value inthis transaction.
Eligibility criteria and concentration limits
The transaction documents set out certain eligibility criteria for the receivables and clientaccounts, some of which are highlighted below:
- The borrower is either an individual of Finland or a corporate entity registered in Finland and isnot an employee, officer, or affiliate of the seller.
- The borrower is not entitled to draw any further amounts under the contract and does not haveany deposit with the seller.
- The loan must be euro-denominated and not delinquent, defaulted, or disputed.
- The principal amounts of the purchased HP contracts owed by any borrower who is anindividual does not exceed 0.06% of the total collateral balance. The principal amounts owed bythe top 10 individual borrowers does not exceed 0.5% of the total collateral balance.
- A minimum of one installment must have been paid and no principal payment have beendeferred except for those under a payment holiday.
- The loan has an original maturity not less than 72 months and a remaining term of not less thanthree months.
- All loans are valid, binding, and enforceable, and comply with all applicable Finnish laws.
- The seller owns the contract free of any adverse claims and is entitled to dispose of thecontract free of any third-party rights.
During the six-month revolving period, new purchases will have to comply with the eligibilitycriteria as well as the replenishment criteria limits listed below. We have used these to size theworst-case pool composition at the start of the amortization period.
Table 3
Closing Pool Compared With Replenishment Criteria Limits
Collateral Characteristics Closing pool Limit
WA interest rate (%) 2.59 2.35
Maximum WA remaining term (months) 52.6 56.0
Maximum single borrower concentration (%) 0.05 0.06
Maximum top ten borrower concentration (%) 0.36 0.50
Maximum share of balloon contracts (%) 62.9 63.5
Maximum share of commercial borrowers (%) 8.7 10.0
Maximum share of used vehicles (%) 72.2 74.0
WA--Weighted-average.
Originator And Servicer
SCF Oy is a wholly owned subsidiary of Santander Consumer Bank AS (SCB AS), and belongs to theconsolidation group of Banco Santander S.A. As of Q1 2021, the SCB AS Nordic Group had totalassets of Norwegian kroner (NOK) 173.8 billion and 1,452 employees. As the Finnish business unitof SCB AS's Nordic Group, SCF Oy originates auto, consumer loans, and durables, through a largedealer network. It established its auto operations in 2007, and has grown to have a significantmarket share of 20.7% as of Q1 2021 in the Finnish car and leisure financing segment. SCF Oy'srisk management is integrated with Banco Santander.
In June 2021, we reviewed SCF Oy's origination, underwriting, collections, servicing, and riskmanagement policies. In our view, SCF Oy's origination process and servicing procedures are inline with market standard and our criteria for assessing operational risk.
In our operational risk analysis, we look at the risk that cash flows may be disrupted following anoperational failure of the servicer. The transaction will not have a back-up servicer at closing. Werely on the general availability of servicing in the Finnish market to mitigate the risk of servicingdisruption and on Santander Consumer Finance S.A. as the back-up servicer facilitator. We havealso considered available mitigants and incorporated necessary assumptions in our cash flowanalysis, to analyze any impact from servicer disruption risk.
Credit Analysis And Assumptions
Macroeconomic and sector outlook
In our analysis, we considered the following economic data and their baseline effect on collateralcredit quality in determining our credit assumptions (see "Related Research").
Accelerating vaccination rollouts will allow further lifting of restrictions, thus boosting privateconsumption. This would particularly benefit the hard-hit services sector. Significantaccumulated savings will support a quick recovery of household spending.
Due to the domestic and external fallout from the COVID-19 pandemic, Finland's real GDPcontracted by 2.9% in 2020. We considered this decline modest in a eurozone comparison andlargely because of Finland's resilient manufacturing sector and measures to contain the virus intandem with targeted fiscal support, which had amplified comprehensive income supportframeworks and supported the resilience of domestic demand components through 2020.
We now expect Finland's GDP to rebound by 2.0% in 2021 and to positively grow by 1.7% in 2022.
Unemployment levels increased to 7.7% in 2020 from 6.7% in 2019 and we forecastunemployment at 7.7% in 2021 and 7.5% in 2022.
Sources: National Statistics offices, Eurostat, S&P Global Ratings.
We analyzed the transaction's credit risk under various stress scenarios by applying our Europeanauto ABS criteria.
Defaults
There are two definitions of default. The old default definition (ODD) applies from closing until thebeginning of 2021, after which the new default definition (NDD) applies. Under the ODD, a loan isconsidered defaulted if it has more than 180 days overdue installments or if the servicer haswritten it off as per its credit and collection policy. Under the NDD, a loan is considered defaultedif it has any unpaid amount exceeding certain materiality thresholds for more than 180 days or is
written off by the servicer. Both definitions of default exclude loans in payment holidays.
We have received static gross loss and recovery data from Q3 2007 to Q2 2021, split intosubportfolios under the ODD. We also received static gross loss data based on the NDD from Q12015 to Q1 2021. The data provided is in line with our minimum quality, timeliness, and reliabilitystandards.
We have considered in our credit analysis historical delinquencies and the prevailingmacroeconomic conditions while sizing our base-case assumptions.
Gross defaults base case
Charts 4 and 5 show quarterly static cumulative gross defaults from third-quarter 2007 tosecond-quarter 2021 for new and used vehicles according to the old default definition.
We have sized our base cases separately for each subportfolio. This reflects performance trendsin the historical data provided, our view of portfolio quality, and our analysis of the originator'sunderwriting and servicing standards. We also accounted for the NDD historical default data,which are on average higher than the ODD, because the NDD is a tighter default definition.
We expect a 2.6% default rate for new vehicles and 3.1% default for used vehicles in ourbase-case scenario. Based on the worst pool composition, this results in a weighted-averagegross default base case of 3.0% (compared to 2.35% in SCF Rahoituspalvelut IX DAC). We applieda gross default multiple of 4.65x at 'AAA' (lower than 4.75x in SCF Rahoituspalvelut IX DAC) toreflect that the NDD is a tighter default definition compared with the ODD. We have also givenbenefit to historically stable originations, good data quality, and our experience with the originatorin other Nordic markets.
The Nordic and Finnish auto markets' performance has remained relatively resilient in the currentmacroeconomic environment, compared to other European markets. We expect Finland's fiscaland monetary measures to substantially mitigate shocks to the economy and also support thebanking system. In our analysis, we also did not observe any material deterioration in the eligiblepool's performance since March 2020. Given these factors, we have not made any incrementaladjustments to our base-case gross defaults because of the prevailing recessionary outlook forEurope.
Recoveries and recovery timing
Charts 6 and 7 show quarterly static recovery data from second-quarter 2008 to second-quarter2021 for new and used vehicles.
Under our European auto ABS criteria, we apply a uniform stressed recovery rate at all ratinglevels. We establish recovery rate assumptions based primarily on an analysis of historicalrecovery rates for the issuer and the market, the volatility of past performance as well as credit,operational, or other factors that might affect the timing, amount, and sustainability of recoveryrates. We also accounted for our expectation of higher recovery rates but potentially over a longerrecovery period, from loans falling into the new default definition (and which would not meet theODD), because we expect some borrowers fall into default for some overdue amounts but will keeppaying instalments regularly. Under our European auto ABS criteria, the typical stressed recoveryrates assumed are generally between 30% to 45%.
Considering the historical recovery data, portfolio features (such as down payment, vehicle age,etc.), the current macroeconomic conditions and the legal environment in Finland, we haveassumed a stressed recovery rate of 46% for both new and used vehicles.
The recovery timing assumption is 18 months following default. In SCF Rahoituspalvelut IX DAC,we assumed 40% recovery 12 months after default, testing an extension of recovery timing by sixmonths to 18 months.
Worst-case pool composition
The transaction has a six-month revolving period (scheduled to end in June 2021), during whichborrower repayments may be used to reinvest in new receivables, subject to concentration limits.Our rating analysis considers a migration to a worst-case pool composition during the revolvingperiod, based on the documented portfolio concentration limits and our review of the historicalperformance by product type.
Balloon contracts may introduce additional obligor default risk to the transaction, if we assumethat obligors expect to be able to finance the final balloon payment through the sale of the vehicleat contract maturity. In a stressed economic environment, these obligors may default on theballoon payment because the vehicle's market value could have declined to below the amountneeded to pay the final balloon payment.
For balloon loans originated by SCF Oy, the borrower remains liable to make the final balloonpayment. If a borrower defaults on the balloon payment, we anticipate that SCF Oy will incur anadditional loss equal to the difference between the balloon installment and the vehicle's saleproceeds.
Under our criteria, we have set our balloon loan gross loss assumption at a 'AAA' level at 7.5%,based on the significant vehicle type diversification, SCF Oy's balloon setting policy, and theoverall size and concentration of maturing balloon payments.
In applying the additional loss rate in our cash flow analysis, the aggregate balloon payments onloans securitized are adjusted to reflect stress scenario defaults and prepayments to establish anadjusted balloon payment amount. The applicable additional balloon loss rate is multiplied by theadjusted balloon payment amount as a percentage of the total pool balance to calculate theincremental balloon gross loss rate.
Transaction Structure
In this transaction, SCF Oy sells auto loan receivables to SCF Ajoneuvohallinto X Ltd., thepurchaser. SCF Rahoituspalvelut X DAC, the issuer, will apply the class A, B, C-Dfrd, and C notes'net proceeds to make a loan advance to the purchaser for an amount equal to the initial purchaseprice. The loan advance will have four tranches corresponding to the each issued notes' principalamount.
The purchaser is an Irish special-purpose entity established for acquiring the purchased hirepurchase contracts using funds advanced by the issuer. The issuer is also an Irish special-purposeentity established for issuing ABS. We consider both bankruptcy remote entities, in line with ourlegal criteria (see "Related Criteria").
Based on the legal opinions, there is a risk that the true sale will not be effective on the date ofsale as notices will potentially only be effective within seven days of the closing date and eachsubsequent purchase date, due to the time taken to notify the obligors. The transaction istherefore potentially exposed to the insolvency risk of the seller during this interim period. We viewthis risk to be mitigated by the fact that solvency certificates will be issued at closing and that thetimeframes for this risk to crystalize are very short. We have also taken the originator's experienceand strength into account, including the ownership structure and the fact that we have recentlyundertaken a corporate overview.
We anticipate the issuer's cash flows to be sufficient to meet all the identified tax liabilities basedon the tax opinions under the current tax legislations.
The transaction has a separate interest and principal waterfalls for both the purchaser and issuer.Interest on the loan advances and notes is payable monthly in arrears in accordance with theinterest waterfall.
Cash flows redeem sequentially at the start of amortization in accordance with the priority ofpayments, but switch to paying pro-rata once sufficient credit enhancement is built on the class Anotes. However, the payment priority would switch back to sequential payment upon occurrenceof a sequential payment trigger event, which is irreversible.
If the security trustee delivers an enforcement notice to the issuer or purchaser following an eventof default, all funds from the enforced security are distributed according to post-enforcementpriority of payments. We expect that both the purchaser and issuer events of defaults are remotein our ratings scenarios. As a result, our analysis solely focuses on the priority of payments prior toan event of default.
Revolving period and early amortization
The key asset performance triggers listed below guard against any significant deterioration in thereceivables' credit performance and provide some degree of comfort as to the performance of thetransaction during the revolving period.
Asset performance triggers:
- The three-month rolling average delinquency ratio exceeds 3%;
- The cumulative net loss ratio exceeds 0.5%;
- There is a debit on the principal deficiency ledger (PDL) following the application of interestreceipts; and
- The amount of principal receipts not applied for purchased assets are above 15% on averagefor two consecutive payment dates.
Other early amortization triggers:
- An issuer event of default;
- A servicer termination event;
- The seller becomes subject to insolvency proceedings;
- A change of control with respect to the seller; and
- An event of default or an additional termination event has occurred and no remedy was put inplace.
In our analysis, we modelled early amortization triggers to breach at closing, whereby thetransaction starts to amortize immediately.
Clean-up call
SCF Oy can exercise a clean-up call option as soon as the aggregate of the collateral's principalbalance outstanding and the principal balance on defaulted contracts less any realized recoveries
is below 10% of the principal balance at closing, or upon occurrence of any regulatory change ortax event. In our analysis, we have not considered a clean up call to occur.
Available interest and principal
Table 7
Purchaser Available Amounts
Interest amounts Principal amounts
Interest collections Principal collections (scheduled andprepayments) payable to issuer.
Taxes and liabilities paid by the seller due to delayed payment of these taxes forthe portfolio purchase, indemnities, and any default interest thereon as per theservicing agreement.
Amounts available in the reinvestmentaccount.
Interest received on the purchaser's bank account and net recoveries.
Table 8
Issuer Available Amounts
Interest amounts Principal amounts
Interest and fees payable by the purchaser on the loan advances. Amounts payable by purchaser on loanadvances.
Interest received on the issuer's bank account and liquidity reserve excessamount upon amortization.
Payments to cure principal deficiencies.
The liquidity reserve.
Cap receipts.
Principal amounts to the extent available after principal redemption.
On the first payment date, the difference between the note principal balance and the portfoliobalance will be advanced to the purchaser. We have considered assets and liabilities to be at parat closing. We have also not given benefit to any potential subsequent payment from the seller tothe purchaser in our analysis.
The servicer receives a monthly handling contractual fee (set by a dealer and clearly written in theloan contract), which is a part of the effective interest rate payable by the borrower. The monthlycontractual fees set by the dealer on each loan contract ranges from €0-€25, and we consider thatit could migrate to the lower end of this range during the revolving period. This additional yield forthe issuer is fixed for each contract and therefore it depends on the number of contractsoutstanding from time to time. To account for this, in our worst-case composition, we increasedthe weighted-average coupon to 2.85% from 2.35%.
Priority of payments
The notes start to amortize after the revolving period ends. During the revolving period, thepurchaser will use the amortization amount to purchase additional assets at par. Any unusedamount remains in the reinvestment account.
Unless redeemed earlier, the issuer will redeem the notes at their legal final maturity in October2031, which we expect to be after the maturity of the pool's longest-term loan at the end of the
On each monthly interest payment date, the purchaser would pay the issuer and the issuer pays tonoteholders in arrears the interest and principal as follows:
Table 9
Purchaser Payment Waterfall
Interest waterfall Principal waterfall
Purchaser taxes and senior expenses, and issuer taxes and senior expenses. Issuer taxes and senior expenses if revenuereceipts are insufficient.
Payment due in connection with ownership of the financed vehicle and topup the servicer advance reserve to required level.
Principal payable on loan advances from theissuer.
Tranche A loan interest. Remaining as per purchaser interestwaterfall.
Required amount to cure the class A notes' PDL.
Tranche B loan interest.
Required amount to top up the liquidity reserve.
Required amount to cure the class B notes' PDL.
Tranche C-Dfrd loan interest.
Required amount to cure the class C-Dfrd notes' PDL.
Tranche D loan interest.
Required amount to cure the class D notes' PDL.
Interest and then principal payable by the issuer to the subordinated loanprovider.
Interest and then principal payable by the issuer to the expenses provider.
Any amounts payable to the seller.
Deferred purchase price.
PDL--Principal deficiency ledger.
Table 10
Issuer Payment Waterfall
Interest waterfall Principal waterfall
Senior expenses. Until pro-rata trigger event, the class A notes' principal.
Any termination payment received by the interest ratecap provider upon termination of any excess capagreement is paid to the purchaser.
Upon pro-rata payment trigger event, pro-rata as follows:the classA notes' principal, class B notes' principal,class C-Dfrd notes'principal and class D notes' principal.
Class A notes' interest. Upon sequential payment trigger event: the class A notes untilredeemed, the class B notes until redeemed, the class C notes untilredeemed, andthe class D notes until redeemed.
Class A notes' PDL. Remaining as per issuer interest waterfall.
Interest and then principal on the subordinated loan.
Interest and then principal on expenses advance.
To the purchaser, to be applied as per the purchaser interest waterfall.PDL—Principal deficiency ledger.
Principal deficiency ledger
The transaction features a separate PDL for each class of notes that records principaldeficiencies. Principal deficiencies may occur either because of net losses on receivables or theredirection of principal proceeds to make up for shortfalls in certain senior interest waterfall itemsthat may include the class A and B notes' interest and the class C or D notes, when class C or Dnotes are the most senior class of notes outstanding.
Principal deficiencies are first debited to the class D notes' PDL until the cumulative debits exceedthe class D notes' balance, then to the class C notes' PDL, to the class B notes' PDL, and finally tothe class A notes' PDL. Debits may subsequently be cleared through the interest waterfall startingwith the class A notes' PDL debits, then the class B notes' PDL debits, the class C notes' PDL andfinally the class C notes' PDL.
Principal payable
On any monthly payment date, the amount of principal due under the notes is calculated as:
- Prior to the occurrence of the pro-rata trigger event, all or a portion of the class principalbalance outstanding as per the principal waterfall;
- Upon breach of the pro-rata trigger event, principal amount allocated on a pro-rata basis to allthe notes (from A to D) outstanding; and
- On or after a sequential payment trigger event, all or a portion of the class principal balanceoutstanding as per the principal waterfall.
Pro-rata trigger event
The issuer payment priority will switch to pro-rata once the subordination on the class A notesequals or exceeds 16%, and provided no sequential payment trigger event has occurredpreviously. In our cash flow analysis, we tested sensitivities applying a slow default curve ordelaying the start of the recession period; in this latter scenario, the payment mechanismswitches temporarily to pro-rata among class A to D, before the sequential trigger is breaches andafter the build-up of the class A notes' subordination to 16%.
Occurrence of any of the following events would cause the transaction to switch to or continuepaying principal sequentially:
- Cumulative net loss ratio is above 1.7% on that and the previous two payment dates;
- The aggregate of collateral balance outstanding and defaulted receivables less realizedrecoveries is less than 10% of the collateral balance at closing;
- The three-month rolling average delinquency ratio is 5% or above;
- A servicer termination event occurs; or
- Upon the downgrade of a swap counterparty, none of the remedies as per the transactiondocuments are put in place within the specified timeframe.
Excess spread
Excess spread results from the difference between:
- The interest income received from the assets; and
- The interest on the rated notes plus any senior fees and servicing fees.
The structure benefits from positive excess spread and it suffers in high CPR scenario the most. Inour analysis, we further sized for yield compression risk by modeling a gradual compression of theportfolio yield by 90 bps in high CPR scenarios.
Liquidity reserve
The structure benefits from a liquidity reserve, which will be fully funded at closing from theproceeds of a subordinated loan. The reserve's total required amount is set at 0.5% of the initialbalance of the class A and B notes. The liquidity reserve is fixed during the revolving period.
During the amortization period, it would amortize on each payment date to the higher of:
- 0.5% of the class A and B notes' outstanding balance; or
- 0.15% of the class A and B notes' initial balance.
The liquidity reserve can only be applied to cure any shortfalls on senior fees and expenses, andinterest on the class A and B notes. It is replenished on each payment date through the priority ofpayments up to its required amount, before the class B notes' PDL is cured. Any excess reserveamounts, upon amortization and once the class A and B notes have been fully redeemed arereleased into the issuer interest waterfall.
Servicer advance reserve
At closing, the seller would fund a servicer advance reserve for €100,000. The purchaser can drawupon this reserve, when required by law or otherwise to pay:
- Any amount to a borrower or deposit with the Finnish enforcement authority on the borrower'sbehalf following repossession of any financed vehicle, and
- Any VAT to the Finnish tax authorities on the resale of a financed vehicle, followingrepossession.
Any draws on the servicer advance reserve or any such payments in excess of the availableservicer advance reserve is payable prior to payment of interest on the rated notes, as per theinterest waterfall.
In our cash flow analysis, we considered the annualized maximum historical payouts made by thepurchaser since 2018. To the extent the servicer advance reserve is insufficient the availableinterest amounts are applied to make payments as per the interest waterfall.
Expenses advance facility
At closing, SCF Oy will make available an interest-bearing expenses advance facility, which can bedrawn upon to pay certain amounts under the transaction documents, including fees, costs, andexpenses payable at closing. Repayment of amounts drawn thereunder are subordinated topayment of interest on the notes.
As advances from the facility will be used to pay costs and expenses incurred at closing, andrepayment to the facility is subordinated to payment to noteholders, we do not give it any benefitin our analysis.
Interest rate cap
The receivables are fixed rate, while the class A and B notes pay a floating rate.
An interest rate cap will mitigate the risk that the one-month EURIBOR paid on class A, B, and Cnotes exceeds 0% (the cap strike). The issuer will purchase the cap at closing using funds from theexpenses advance facility provided by the Seller. We have not modelled any cap cost for the issuer.
The interest rate cap will have a fixed schedule based on the rated notes outstanding assuming0% CPR.
The cash flow results are still consistent with our preliminary ratings on the class A, B, and C-Dfrdnotes, if we account for the fixed cap notional amount, even when interest rates increase up to12% and low CPR scenarios together with stressed delinquencies and defaults slow downredemption of the rated notes. We also tested the structure being partially unhedged at the end ofthe life of the transaction and the cash flows results are still unchanged.
Every six months (test period), the issuer has the option to reduce the notional amount of the capto align it to the then current balance of rated notes in case of over-hedging. This happens throughthe splitting of the original interest rate cap into a "continuing cap" agreement based on theadjusted notional amount and an "excess cap agreement," whose notional amount is equal to thereduction amount. During the test period the issuer has the option to terminate the excess capagreement. In that instance the cap provider will pay back to the issuer, as termination payment,the portion of the up-front fee (paid by the issuer at closing to enter the cap agreement) equal tothe value of the excess cap agreement.
Eligible investments
Eligible investments and minimum rating of temporary investments under the transaction'sdocuments are in line with our "Global Investment Criteria For Temporary Investment In
Transaction Accounts," published on May 31, 2012, and can support a maximum rating of 'AAA'.
To the extent not invested in eligible securities, amounts standing on the issuer collectionaccount, purchaser and issuer transaction bank accounts, in the name of the issuer andpurchaser, accrue interest. The interest rates on these accounts, however, do not incorporate afloor. In the negative interest rate environment, the purchaser and issuer would be exposed toadditional costs. In our cash flow assumption, we have additionally stressed for interest paymentsto the account bank provider, with the interest rates falling to negative 1.0%.
Mitigation Of Seller Risks
Commingling risk
At closing, the seller will notify all borrowers about the sale and transfer of the receivables to thepurchaser, to obtain legal perfection. Thereafter, all borrowers pay monthly into the collectionaccount held in the issuer's name. All collected amounts belonging to the issuer are transferredmonthly into the purchaser or issuer transaction account as applicable.
We therefore consider commingling risk fully mitigated in the transaction and have applied nofurther stresses in our analysis.
Set-off risk
In general, if the servicer becomes insolvent, setoff risk may arise. This is because obligors can setoff their loan installments against:
- Their salary (employee setoff);
- Insurance obligations (if the insurance provider becomes insolvent);
- Loan administration fees; or
- Their deposits (deposit setoff).
Both employee and deposit set-off risk are mitigated by the eligibility criteria not permittingreceivables from employees, officers, or affiliates of the seller and borrowers holding depositswith the seller, to form a part of the securitized portfolio. Further, SCF Oy does not offer anydeposit related product.
Insurance payments are directly made to and received from the insurance provider by theborrower, with no involvement from the seller. As such, we consider any set-off risk on account ofinsurance obligations also mitigated.
We have therefore applied no further stresses in our analysis, in relation to set-off risk.
Cash Flow Assumptions
In our cash-flow modeling, we did not consider the revolving period. We analyzed the transaction'scash flows only during the amortization stage.
Length of recession Weighted-average life (33 months)
Cumulative gross loss curve (i) Evenly distributed over the weighted-average life; (ii) back loaded(10%-20%-30%-40%)
Recovery lag 18 months
Delinquency Two-thirds of credit losses recovered six months later
Stressed servicing fees and trusteefee (%)
1.0
Fixed fees (€) 200,000
Replacement bank cost 100,000
Prepayments (high/low)(%) 30.0/0.5
Interest rate Up: current to 14% with 2% monthly increase.Down: current to 0% with 2% monthlydecrease.Flat: at current level.
Initial WAC (%) 2.85 (2.35 plus 50 bps of handling fees)
Relative WAC compression (%) 3.012
Commingling stress --
Set-off stress (%) --
WAC--Weighted average coupon.
We have stressed bank account provider replacement costs to the extent the issuer may beexpected to incur at the time of replacement. We have tested the notes' ability to pay timelyinterest and ultimate principal on the class A and B notes and ultimate interest and principal onthe class C-Dfrd under the above stress assumption through a cash flow model.
Based on the assumptions discussed above, the high prepayment and back-loaded defaultscenarios are most stressful, mostly because of compression of excess spread.
Chart 8 shows the collateral and the note amortization profile under our most stressful scenario.
The issuer is exposed to BNP Paribas Securities Services, Dublin Branch, as issuer and purchasertransaction account bank provider and Skandinaviska Enskilda Banken AB, Helsinki branch as thecollection bank account provider. The replacement mechanisms for the account bank providers indraft documents we received adequately mitigate the transaction's exposure to counterparty riskin line with our counterparty criteria to support 'AAA' ratings.
Banco Santander S.A. acts as the interest rate cap provider. We expect that at closing thetransaction documents provide for an adequate collateral posting framework and swapreplacement triggers, which is consistent with our counterparty criteria to support a 'AAA' rating.At closing, the documented collateral posting framework will require the counterparty to postcollateral if we lower the resolution counterparty rating (RCR) below 'A-'. The counterparty wouldneed to be replaced below 'A-'. If the swap counterparty defaults, there are no terminationpayments due by the issuer in the waterfall. The issuer has the right to terminate the interest ratecap if the cap provider fails to post collateral and/or replace itself within the remedy period.
We expect that the final interest rate cap documentation will be in line with our counterpartycriteria to support 'AAA' ratings.
Sovereign Risk
Under our structured finance sovereign risk criteria, the maximum differential between the ratingon the security and the rating on the sovereign depends on the asset sensitivity to country risk and
the sovereign rating. We view the asset sensitivity to the country risk as low, and our long-termunsolicited sovereign rating on Finland is 'AA+'. Consequently, our sovereign risk criteria do notcap our preliminary ratings on the rated notes.
Scenario Analysis
We analyzed the effect of a moderate stress on the credit variables and its ultimate effect on ourratings on the notes. We ran two stress scenarios to demonstrate the rating transition of a note(see tables below).
Scenario Stress Class Initial Rating Scenario Stress Rating
Scenario 1 A AAA AAA
B A A
C-Dfrd BBB BBB
Scenario 2 A AAA AA
B A BBB+
C-Dfrd BBB BB+
We analyzed the effect of a moderate stress on the credit variables and its ultimate effect on ourpreliminary ratings on the notes. For this purpose, we ran eight scenarios by either increasingstressed defaults and/or reducing expected recoveries as below.
Table 14
Scenario Stresses
Recovery rate base case (%)
Gross default rate base case (%) 0.0 (10.0) (25.0)
0.0 Base case Scenario 3 Scenario 4
10.0 Scenario 1 Scenario 5 Scenario 7
25.0 Scenario 2 Scenario 6 Scenario 8
The results of the above sensitivity analysis indicate an up to two notches deterioration on theclass A notes, and no lower than one category on the class B notes. Transaction features such asinitial subordination levels and liquidity reserve enhance the stability of the ratings under eachscenario.
We assess quarterly the underlying portfolio's performance, including defaults, delinquencies,payment holidays, and the cap notional amount.
Additionally, we also assess annually:
- The supporting ratings;
- The servicer's operations and its ability to maintain minimum servicing standards; and
- Whether the then-available credit enhancement for each class of notes is sufficient towithstand losses that are commensurate with the current ratings assigned.
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