Ratings Affirmed On Two Classes From Silver Arrow Canada L.P. Series 2018-1

  • We reviewed the Silver Arrow Canada LP Series 2018-1 transaction, which is backed by a pool of prime auto loans originated and serviced by Mercedes-Benz Financial Services Canada Corp.
  • We affirmed our ratings on the two outstanding class A notes from this transaction.
  • The affirmations reflect our views regarding the transaction's future collateral performance, structure, and credit enhancement, among other factors.
TORONTO (S&P Global Ratings) March 24, 2020--S&P Global Ratings today affirmed 
its 'AAA (sf)' ratings on the class A-2 and A-3 notes from Silver Arrow Canada 
L.P. series 2018-1. The issuance is an ABS transaction backed by prime auto 
loans originated and serviced by Mercedes-Benz Financial Services Canada Corp.

Today's rating actions reflect the transaction's collateral performance to 
date and our views regarding future collateral performance, structure, and 
available credit enhancement. Additionally, we incorporated secondary credit 
factors, including credit stability, payment priorities under various 
scenarios, and sector- and issuer-specific analyses. Based on all these 
factors, we believe the notes' creditworthiness is consistent with the 
affirmed ratings.

The transaction has been performing better than our initial expectations. As a 
result, we lowered our loss expectations for the series. In our revised 
expected loss analysis, we accounted for the inclusion of balloon loans and 
the potential impact to losses if obligors defaulted on their balloon 
payments, which could lead to a higher severity of loss. 
 
Table 1
Collateral Performance(i)

                        Pool    Current       60-plus-day
Series     Mo.    factor (%)    CNL (%)    delinquent (%)
2018-1     17          42.86       0.15              0.11

(i)As of the March 2020 distribution date. Mo.--Month. CNL--Cumulative net 
loss.
 
Table 2
CNL Expectations (%)

          Original lifetime    Revised lifetime
Series             CNL exp.         CNL exp.(i)
2018-1            0.40-0.60           0.40-0.50

(i)Revised March 2020. CNL exp.--Cumulative net loss expectations. 

The transaction contains a sequential-pay mechanism that will retire the class 
with the earliest maturity before paying the class with the next-earliest 
maturity. The transaction also has credit enhancement in the form of a 
nonamortizing reserve account, overcollateralization, yield supplement 
overcollateralization, and excess spread. The transaction's reserve account 
and overcollateralization are at their specified targets, which are 0.25% and 
2.50%, respectively, of the initial adjusted receivables pool balance, and 
their credit support continues to increase as a percentage of the amortizing 
collateral balance. 

We incorporated an analysis of the current hard credit enhancement compared to 
the remaining expected cumulative net loss for the class A notes, in which 
hard credit enhancement alone--without credit to the yield supplement 
overcollateralization amount (YSOA) and stressed excess spread--was 
sufficient, in our opinion, to affirm the ratings at 'AAA (sf)' (see table 
3a). 

The series has a YSOA that amortizes according to a predetermined schedule. 
The YSOA is sized to elevate the yields on the contracts with annual 
percentage rates below the series' YSOA discount rate to the YSOA discount 
rate. That is, the YSOA provides enhancement to excess spread for the series 
(see table 3b). 

Table 3a
Hard Credit Support(i)

                              Total hard    Current total hard
                          credit support        credit support
Series      Class    at issuance (%)(ii)    (% of current)(ii)
2018-1      A-2                     2.52                  5.87
2018-1      A-3                     2.52                  5.87

Table 3b
Yield Supplement Overcollateralization Amount(i)

                                              Current YSOA
Series    YSOA at issuance (%)(iii)    (% of current)(iii)
2018-1                        8.56                    7.46

(i)As of the March 2020 distribution date. (ii)Calculated as a percentage of 
the total gross receivables pool balance, consisting of a reserve account and 
overcollateralization. Does not include YSOA. (iii)Calculated as a percentage 
of the total gross receivables pool balance. YSOA--Yield supplement 
overcollateralization amount.
 
We also used a hard credit support multiple analysis to determine the impact a 
moderate ('BBB') stress scenario would have on each class' ability to absorb 
losses and remain within our ratings stability criteria if losses began 
trending higher than our revised base-case loss expectations. We accomplished 
this by applying a 2.0x multiple (in our view, commensurate with a 'BBB' 
stress scenario) to the remaining cumulative net loss expectations as a 
percentage of the current pool balance. We then compared the hard credit 
support coverage multiple for each class against these stressed losses. The 
results demonstrated, in our view, that the classes have adequate credit 
enhancement at the affirmed rating levels. 

We will continue to monitor the performance of the transaction to ensure that 
the credit enhancement remains sufficient to cover our cumulative net loss 
expectations under our stress scenarios for each of the rated classes.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of 
spread and peak of the coronavirus outbreak. Some government authorities 
estimate the pandemic will peak in June or August, and we are using this 
assumption in assessing the economic and credit implications of the pandemic. 
We believe measures to contain COVID-19 have pushed the global economy into 
recession (see "COVID-19 Macroeconomic Update: The Global Recession Is Here 
And Now" and "COVID-19 Credit Update: The Sudden Economic Stop Will Bring 
Intense Credit Pressure," published March 17, 2020), which could also 
negatively affect employment levels or housing markets. As the situation 
evolves, we will update our assumptions and estimates accordingly. 
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