S&P's Downgrade of VW Has No Impact on Auto ABS

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Standard & Poor's downgrade of Volkswagen will have no immediate impact on its three U.S. auto loan and one auto lease asset-backed securities transactions it rates originated by  VW Credit Inc., the rating agency said late Wednesday.

On Dec. 1, S&P cut the long- and short-term ratings on VW to 'BBB+/A-2'   from 'A-' as the result of the emissions scandal.

In Wednesday’s report, the rating agency said that the recent events surrounding VW may decrease the resale value of the vehicles included in the collateral backing VW auto loan ABS transactions, which could affect the recovery values on defaulted loans.

For VW auto loan ABS, where the only exposure to resale values is from recoveries on repossessed vehicles, we expect lower resale values to have little impact because the obligors are prime borrowers who we believe have a low likelihood of default.

The three auto loan transactions S&P rates, Volkswagen Auto Loan Enhanced Trust 2012-2, Volkswagen Auto Loan Enhanced Trust 2013-2, and Volkswagen Auto Loan Enhanced Trust 2014-2, are performing within its expectations. These transactions also benefit from increasing credit enhancement through continued deleveraging due to their sequential payment structures.

Auto lease ABS is more exposed to falling residual values, since the value realized on returned vehicles could decline. However, the performance of the one lease deal that S&P rates, Volkswagen Auto Lease Trust 2014-A, is also performing within expectations.

The transaction has experienced a cumulative residual gain of $5.5 million so far, but the monthly gains have been declining month to month since June. “At this point, we believe that the market value decline assumptions we used when we rated this transaction adequately mitigate potential future residual value risk,” the report states. “Our 'AAA' analysis assumed that the pool's aggregate undiscounted base residual value would decline by approximately 24.9%.” 

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