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Rating agencies split on Volkswagen's debut Italian auto ABS

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Volkswagen Bank GmbH is marketing its debut prime auto-loan securitization in Italy, a split-rated, €500 million transaction.

Driver Italia One S.r.l is the first-ever pooling of prime auto loans originated by the Italian branch of Volkswagen’s European finance arm through about 2,900 Italian Volkswagen, Audi and Skoda dealers.

The static transaction involves 62,768 accounts for primarily new-vehicle loans (92.6% of the pool) with an average discounted principal balance of €7,966 after 16 months of seasoning. The portfolio’s weighted average interest rate is 3.6%.

The capital stack includes a senior €441 million Class A tranche that both Moody’s Investors Service and S&P Global Ratings have rated two notches below each agency’s triple-A level – Moody’s assigned a provisional Aa2 to the 11-year senior-note tranche, while S&P rated the Class A bonds at AA.

DBRS, however, gave the Class A notes its top rating of AAA, saying that the 13.1% credit enhancement level sufficient to withstand stress scenarios of its model.

The single-A-rated tranche of Class B notes is sized at $14 million. There is also a subordinate note tranche totaling $33.1 million that will be used to acquire receivables, and does not form any part of the rated capital structure, according to S&P.

Moody’s cited concerns over the 25.9% concentration of loans with balloon payments at maturity (with either the owner or the dealer receiving the return car responsible for the final payment), as well as a payment waterfall that pays down Class A and B notes simultaneously after a target overcollateralization is reached – thus potentially reducing levels of enhancement for the Class A notes later in the deal’s life.

Another major drawback, according to Moody’s, is the lower-than-average recovery rate assigned to the deal, since under Italian law vehicles do not secure the loans and banks have no recourse to repossess autos for defaults.

Moody’s expects losses to reach 1.7% over the life of the deal, below average for the European/Middle East/Asian auto asset-backed portfolios. But the expected recovery rate of 10% for the portfolio is also below the regional average.

S&P is assuming losses of 1.85%, while DBRS – despite the AAA rating – had higher default expectation of 2.3%, or 2% assuming a recovery rate of 11%.

None of the loans in the pool are in delinquent.

Only 0.77% of the Driver Italia pool involves vehicles equipped with diesel engines related to the 2015 Volkswagen emissions “defeat device” scandal, according to the presale reports.

Citigroup is the arranger on the deal, and jointly leads with Crédit Agricole. The deal is expected to close May 29.

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