AMAG Leasing, the leasing arm of Swiss auto distributor and Volkswagen importer AMAG, plans to issue CHF400 million ($396 million) of securities backed by Volkswagen leases, some of which are impacted by the recent emissions cheating allegations.
This is AMAG’s first securitization of Swiss lease receivables. AMAG will also service the portfolio from closing.
StormHarbour Securities is managing the deal, called Swiss Car ABS 2015-1 AG.
Moody's Investors Service and Fitch Ratings assigned preliminary ratings of 'Aaa'/ 'AAA' ratings to the class A1 notes and 'A2'/ 'A+' ratings to the class B notes, respectively. The class A and B notes benefit from 25% and 18% credit enhancement, respectively; both tranches have a final maturity date of March 2025.
In September, the U.S. Environmental Protection Agency issued Volkswagen a notice of violation of the Clean Air Act. The EPA alleges that certain Volkswagen and Audi vehicles with four-cylinder diesel engines contain software that detects when the car is undergoing official emissions testing; the software turns full emissions controls on only during these tests.
In October, Volkswagen announced that it would recall 8.5 million cars in Europe.
On Nov. 4 Volkswagen announced that 'during the course of internal investigations unexplained inconsistencies were found when determining Type Approval CO2 levels'. Up to 800,000 vehicles may be affected.
Nearly 17% of the leases in the collateral pool backing AMAG's inaugural deal are affected by the EA 189 emissions allegations. In addition the portfolio will also include vehicles that are affected by recent CO2 allegations.
While it’s possible that lessees in the pool could use the emissions scandal as a pretext to stop making payments, they would have no legal right to do so, according to the Fitch. "Such nonpayment would be addressed as a delinquency and finally as default under the lease agreement in the servicer’s normal course of business," the report states.
It’s also possible that technical fixes to the affected vehicles result in higher fuel consumption or degraded performance, which could qualify the vehicle as deficient; in this case, the lessee may take recourse against the dealer and ultimately the manufacturer, but not against AMAG, according to Fitch.
"In case the manufacturer is not able or willing to perform under their obligations (such as repair the car, pay a damage claim, or even replace the car) ...the lessee may not reduce installments or terminate the lease contract," the report states.
Swiss Car ABS 2015-1 AG is only the second bond offering tied to leases impacted by Volkswagen's emissions cheating allegations. On Oct. 29, Volkswagen priced €857 million ($917 million) of bonds backed by VW leasing contracts. A total of 16,933 contracts, or around 20%, of the €100 million portfolio of German auto leases in the VCL 22 pool, are affected by the manufacturer’s recall.
The class A notes were priced at 62 basis points over 1-month Euribor, and the class B notes were priced at 150 basis points over 1-month Euribor. By comparison, VCL 21, which priced on April 30, paid 20 basis points over 1-month Euribor on the class A notes and 60 basis points over 1-month Euribor on the class B Notes. The class A notes in both deals are rated triple-A and the class B notes are rated single-A.
Moody's rated both the Swiss and German deals and currently rates a total of 20 ABS in Europe tied to Volkswagen. On Nov. 12, the rating agency stated in a report that VW's weakened corporate outlook hasn't directly impacted ABS deals that are tied to the company and rated by Moody's because structural features mitigate the added counterparty risk in the transactions.
“For example, European VW ABS that we rate benefit from either a large-scale servicing platform that would likely remain intact in the event of a corporate bankruptcy, or from the presence of a back-up servicer facilitator,” according to Mehdi Ababou, a vice president and senior credit officer at Moody’s.
“The ABS also include liquidity reserves that cover at least 10 months of coupon payments on rated notes in case of a cash flow disruption,” he said.
So far, the performance of VW ABS across the region remains stable. As of the end of the October, 15 European transactions had reported data showing that delinquency rates, including early arrears, were in line with historical performance. However, data for many deals globally have not yet been released and performance might weaken with time.
