BMW Bank plans to issue a new €800 million ($858 million) securitization of German auto leases, according to Standard & Poor's.
The transaction, Bavarian Sky German Auto Leases 4, will offer a €746 million senior tranche with a preliminary rating of ‘AAA’ and an subordinatd unrated €54.4 million class B tranche. The class A notes benefit from 7.8% credit support. All of the notes have a final maturity of December 2022.
BavSky Lease 4 also forgoes the a claims reserve fund that is used to cover certain seller-related risks such as German trade tax risks, VAT risk, and deposit set-off risks.
Set-off risk occurs when a debtor is able to reduce the outstanding amount of its securitized debt by the amount of any unpaid claims (such as bank deposits, bonds and amounts owed under other contracts) it has against a defaulting originator.
BMW Bank accepts deposits from its customers. If the seller becomes insolvent, the lessees that have deposits with BMW Bank may exercise their right to set-off amounts they owe under the lease contract against amounts they deposited with the insolvent seller. Under the transaction's eligibility criteria, lessees that have a deposit with BMW Bank at closing are excluded from the securitized pool. However, the set-off exposure may build up as lessees deposit funds with BMW Bank over time.
S&P believes the deposit-related set-off risk is limited because of the transactions short weighted-average life and has factored only an additional loss of €1.6 million.
There is also a residual risk that the issuer may become liable to pay German trade tax and/or VAT risk. Since the deal doesn't benefit from a reserve to mitigate this risk S&P has sized an additional loss of €10 million.
Lessees in the pool finance either new or used vehicles. Typically, lease contracts comprise two elements: The regular lease installments, which cover the depreciation in value of the vehicle over the life of the contract, and the residual value of the vehicle when the lease contract expires. BavSky4 only securitizes the lease installments, not the residual values.
The leases have a weighted average original term of 36 months and on average have paid 10 months of installments.
Commerzbank and Societe Generale are the joint lead managers on the deal.