MERCEDES-BENZ GROUP AG
Fitch Ratings has assigned expected ratings and Rating Outlooks to the notes of
RATING ACTIONS
Entity / Debt
Rating
A-1
LT
NR(EXP)sf
Expected Rating
A-2A
LT
Expected Rating
A-2B
LT
Expected Rating
A-3
LT
Expected Rating
A-4
LT
Expected Rating
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VIEW ADDITIONAL RATING DETAILS
KEY RATING DRIVERS
Collateral and Concentration Risks - Strong Credit Quality: MBALT 2024-A is a prime portfolio with a weighted average (WA)
Lease-End Residual Value Risk - Concentration Risk: 2024-A has a RV maturity distribution which is more mid and back-weighted compared to recent transactions, with 72.3% and 25.9% of base RV of the leases scheduled to mature after 24 month and 36 months from closing, respectively. No more than 7.1% of base RV is expected to come due in any month, up from 5.5% in 2023-A. To account for strong RV performance and recent strength of the wholesale vehicle market (WVM), Fitch used the 18-month average residual disposition losses in deriving its 'BBsf' rating case RV proxy.
Forward-Looking Approach to Loss Proxy - Increasing Credit Losses; Strong RV Gains:
Payment Structure - Adequate Credit Enhancement: Initial hard credit enhancement (CE) for 2024-A class A notes will be 12.50% of the aggregate initial SV, consistent with 2023-A (NR) and 2021-B though the lowest among all other prior transactions. Initial hard CE comprises non-declining overcollateralization (OC; 12.25%) and a non-declining reserve account (0.25%). Initial excess spread is expected to be 4.90%. Loss coverage is adequate to support Fitch's 'AAAsf' stressed assumptions.
Operational and Servicing Risks - Adequate Originator/Underwriter/Servicer: Fitch rates
Fitch's base case loss expectation, which does not include a margin of safety and is not used in Fitch's quantitative analysis to assign ratings, is 0.60% based on Fitch's 'Global Economic Outlook -
Fitch's base case RV loss expectation, which does not include a margin of safety and is not used in Fitch's quantitative analysis to assign ratings, is near 0% based on Fitch's 'Global Economic Outlook -
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Unanticipated decreases in the value of returned vehicles and/or increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than the rating case and would likely result in declines of CE and loss coverage levels available to the notes. Hence, Fitch conducts sensitivity analysis by increasing a transaction's initial rating case RV and credit loss assumptions and examining the rating implications on all classes of issued notes. The increases to the rating case losses are applied such that they represent moderate and severe stresses and are intended to provide an indication of the rating sensitivity of notes to unexpected deterioration of a trust's performance.
During the sensitivity analysis, Fitch examines a transaction structure through cash flow modeling to test the ability to cover stressed credit and RV losses. Fitch calculates loss coverage levels for each rating category by first applying credit defaults to the pool, then increases residual realization haircuts until the first dollar of note principal is lost.
As rating case credit or RV losses are increased, the modeled loss coverage supported under the CE structure may fall below the target level for each rating category and could potentially be subject to a negative rating action absent any mitigating factors. The rating sensitivity for each rated class of notes is outlined in the text below, with corresponding passing ratings displayed in the table above.
The first rating sensitivity scenario is to increase the rating case credit loss assumptions by a moderate and severe stress. As illustrated in the table above, under a moderate stress scenario of 1.5x the rating case credit loss, the decrease in targeted loss coverage would not likely result in a downgrade of the class A notes.
The resilience is partially due to the strength of the structure of the CE, as well as the tradeoff that occurs when credit defaults are increased. As credit defaults are increased, less of the collateral is subject to residual stresses upon lease end. Under the more severe credit loss stress of 2.5x the rating case credit losses, changes in target coverage would not likely result in a downgrade of the class A notes.
Comparatively, rating stability is more sensitive to fluctuations in RV losses than credit losses in auto lease ABS transactions. A moderate stress to the RV loss estimate, an increase in the rating case to 25%, would likely result in a downgrade of one rating category for class A notes. Under the severe RV loss stress, an increase in the rating case to 30% would likely result in a downgrade of approximately two rating categories for class A notes.
Fitch also conducted a rating sensitivity to increased residual lag (time to sell vehicles at auction) to examine the impact of an increased lag between lease return and the receipt of residual proceeds. This stress consisted of increasing the residual lag time to four months from two months in the primary stress scenario. In this sensitivity scenario, the notes saw a nominal decrease in loss coverage; however, it is unlikely that loss coverage would decrease enough to warrant a downgrade to any of the notes.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Due to all classes of notes are rated 'AAAsf', up stresses were not considered. However, if RV losses are 20% less than the 'BB' RV loss proxy, the expected ratings would be maintained for class A notes with higher cushion levels.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Fitch was provided with third-party due diligence information from
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
The concentration of electric vehicles (EVs) and plug-in HEVs (PHEVs) of 9.8% and 3.1%, respectively, of the pool did not have an impact on Fitch's ratings analysis or conclusion on this transaction; therefore, it has no impact on Fitch's ESG RS.
The 2024-A transaction, along with all auto and fleet lease transactions, has an ESG Relevance Score (RS) for Labor Relations and Practices of '3' (low impact on credit), which is higher than the baseline RS of '2' (no impact) for the general North American auto sector. The difference in RS for this ESG factor was driven by the presence of a titling trust structure, which gives rise to superior liens on vehicles from the
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Additional information is available on www.fitchratings.com
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