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Peugeot German auto ABS features heavy exposure to balloon payments

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The German captive finance arm of French automaker Peugeot S.A. is marketing a €861.3 million (US$1.01 billion) securitization of new- and used-vehicle loans that features heavy exposure to both balloon payments and diesel engines.

The collateral for PSA Bank Deutschland GmbH's transaction, dubbed PBD Germany Auto 2018 UG. will revolve for an initial 12-month period. The initial pool of receivables consists of 81,172 commercial and consumer loans, 99% of which are for Citroën and Peugeot models sold through 367 affiliated dealers and 864 agents in Germany.

Moody’s Investors Service and Fitch Ratings each assigned provisional triple-A ratings to the deal’s floating-rate Class A notes, which are expected to make up 90% of the final transaction size at closing (with a coupon to be determined). The senior notes carry 11.9% credit enhancement, slightly higher than peer German auto loan securitizations due to the larger-than-normal batch of balloon loans, according to Moody’s.

The remaining notes to be sold through the fixed-rate Class B tranche are unrated.

Balloon loans are common in German auto ABS portfolios; Fitch last year estimated that captive-finance lenders had 44% exposure to the loan types in their managed portfolios.

The PBD transaction includes a 76% concentration of amortizing, balloon installment loans in which the weighted average final scheduled balloon payment is nearly half (47.64%) of the original outstanding loan balance. The pool's cap on balloon-loan exposure is 85%, Fitch's report stated.

Both Fitch and Moody's applied a higher default risk factor in stress modeling the transaction due to the balloon-loan exposure. "Borrowers may face a payment shock if they cannot refinance the balloon amount, for example,due to a default ... or sell the car for the balloon amount in a downturn of the used-car market," according to Fitch.

Balloon loans also create “lumpy,” inconsistent cash flows for ABS portfolios due to prepayments and refinancings, Moody’s stated.

Over 53% of the vehicles in the pool are diesel-powered, despite declining consumer interest and sales, as well as expanding restrictions on driver use in some urban centers (including outright bans.) By comparison, 9% of the vehicle loans in PSA’s €2.59 billion managed portfolio involve diesel-engine cars that only meet older Euro 5 emission standards, putting them at a higher risk of restricted use and potentially lower resale values.

The percentage of diesel cars within the PBD Germany Auto 2018 UG pool that don’t meet the newer Euro 6 standards was not provided by the issuer, according to Moody’s.

Moody’s published a default expectation rate of 4.5% and a recovery rate of 45%. Fitch, meanwhile, published a base-case default rate of 2.4%, and a more optimistic 53.4% recovery rate based on the vehicles' potential resale value in the pool.

Moody's stated its recovery rate for the transaction is in line with the auto-loan average across its Europe/Middle East/Asia coverage zone, as the uncertainty over the resale values of diesel-engine as well as alternative-fuel vehicles (AFVs) permeates the European automotive ABS market. The rising popularity of AFVs “introduces uncertainty in the future price trends of both legacy engine types and AFVs themselves due to evolutions in technology, battery costs and government incentives,” the report stated.

The 12-month revolving cash securitization of receivables from auto loans originated and serviced by PSA Bank Deutschland GmBH, an unrated lender in Germany co-owned by Banque PSA Finance (rated A3 by Moody’s) and German subsidiary of Santander Consumer Finance S.A.

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