Fitch Expects to Rate Mercedes-Benz Auto Receivables Trust 2023-1; Issues Presale

Fitch Ratings expects to assign ratings and Rating Outlooks to Mercedes-Benz Auto Receivables Trust (MBART) 2023-1.

RATING ACTIONS

Entity / Debt

Rating

MBART 2023-1

A-1

LT

NR(EXP)sf

Expected Rating

A-2

LT

AAA(EXP)sf

Expected Rating

A-3

LT

AAA(EXP)sf

Expected Rating

A-4

LT

AAA(EXP)sf

Expected Rating

Page

of 1

VIEW ADDITIONAL RATING DETAILS

KEY RATING DRIVERS

Collateral Performance – Consistent Credit Quality: The 2023-1 pool is consistent with recently issued MBART transactions. The weighted average (WA) Fair Isaac Corporation (FICO) score is 759, among the lowest to date for this platform. The concentration of FICO scores above 750 continues to decrease at 52.61% of the pool. Seasoning is consistent with prior transactions at 13 months. Geographic and segment diversifications remain strong.

Forward-Looking Approach to Derive Base Case Loss Proxy: Fitch considered economic conditions and future expectations by assessing key macroeconomic and market conditions when deriving the series loss proxy. MBFS’ managed portfolio and securitization performance over the past several years has been strong and within expectations. Fitch’s forward-looking cumulative net loss (CNL) proxy is 1.10% for 2023-1, down from 1.20% in the last Fitch-rated 2020-1 transaction.

Payment Structure – Sufficient Credit Enhancement (CE): Total initial hard CE for class A notes totals 2.75%, comprising 2.50% overcollateralization (OC) and a non-declining reserve account of at least 0.25%, consistent with prior transactions, with the exception of 2020-1, which had slightly higher CE from a larger reserve account. Initial CE is sufficient to withstand Fitch’s base case CNL proxy of 1.10% at a 5.0x multiple for the class A notes.

Operational and Servicing Risks – Stable Origination/Underwriting/Servicing: Fitch believes MBFS to be a capable originator, underwriter and servicer for prime auto loan collateral, as evidenced by the historical delinquency and loss performance of its securitizations and managed portfolio and securitizations. Fitch’s current Long-Term (LT) Issuer Default Rating (IDR) for Mercedes-Benz Group AG, parent of MBFS, is ‘A-” with a Positive Outlook.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Unanticipated increases in the frequency of defaults could produce CNL levels that are higher than the base case and would likely result in a decline of CE and remaining net loss coverage levels available to the notes. Additionally, unanticipated declines in recoveries could also result in a decline in net loss coverage. Decreased net loss coverage may make certain note ratings susceptible to potential negative rating action, depending on the extent of the coverage decline.

Fitch conducts sensitivity analyses by stressing a transaction’s initial base-case CNL and recovery rate assumptions and examining the rating implications on all classes of issued notes. The CNL sensitivity stresses the CNL proxy to the level necessary to reduce each rating by one full category, to non-investment-grade (BBsf) and to ‘CCCsf’ based on the break-even loss coverage provided by the CE structure.

Fitch also increases the CNL proxy by 1.5x and 2.0x to represent moderate and severe stresses, respectively. Fitch evaluates the impact of stressed recovery rates on an automobile loan ABS structure and the rating impact with a 50% haircut. These analyses are intended to provide an indication of the rating sensitivity of the notes to unexpected deterioration of trust performance.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Stable to improved asset performance driven by stable delinquencies and defaults would lead to increasing CE levels and consideration for potential affirmations. Given all classes of notes are rated ‘AAAsf’, up stresses were not considered.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAAsf’ to ‘Dsf’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by KPMG LLP. The third-party due diligence described in Form 15E focused on comparison and re-computation with respect to 100 sample loan contracts, all selected randomly. Fitch considered this information in its analysis and it did not have an effect on Fitch’s analysis or conclusions.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction’s representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled ‘Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions’.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg

Additional information is available on www.fitchratings.com

Leave a Comment