Santander's Next Finnish Auto ABS Excludes VW Brand
Santander Consumer Bank's consumer and auto lending unit, Santander Consumer Finance Oy plans to sell €389.4 million ($442.7 million) of bonds backed by Finnish auto loans receivables, according to Moody's Investors Service.
SCF Rahoituspalvelut I Designated Activity Company is backed by portfolio of Finnish auto loans to finance the purchase of new (36.6%) and used (63.4%) vehicles. The pool entirely excludes loans that finance vehicles manufactured by Volkswagen Group.
Volkwagen was the second largest brand represented in Santander's previous Finnish securitization, completed in October 2014. The bank’s two previous Finnish transactions also featured loans financing VW cars.
The largest manufacturer featured in the SCF Rahoituspalvelut I Designated Activity Company pool is Volvo, followed by Kia and the Mercedes.
Santander's decision to exclude the VW brand is likely part of the fallout of the diesel emissions scandal. On Sept. 22, 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.
On Thursday, VW announced that it would recall 8.5 million cars in Europe. That came on top of the nearly half a million diesal cars recalled in the U.S. last month, which analysts said would most impact likely bonds backed by dealer floorplan financing.
Auto ABS pools in Europe have higher percentage of diesel vehicles relative to U.S. transactions, according to a Moody's report published on Sept. 29. The emissions problem is therefore expected to impact not just floorplan deals but also European loan and lease securitizations with exposure to the VW brand.
"The recent news will have a negative effect on market values and thus recoveries on the vehicles in VW’s outstanding transactions, at least until there is clarity on which models are affected, VW’s ability to fix the vehicles, and the effect of the required fixes on vehicle performance," Moody's stated in the September report.
In the best case scenario, VW fixes the affected vehicles in Europe and, as necessary, support its dealer network, which gives VW lessees and loan borrowers in Europe less of an incentive to rescind on their obligations. However, in a worst-case scenario, "higher return rates in a lower recovery environment could result in higher losses, increasing tail risk" in the transactions, said Moody's.
Many European auto loans call for regular installments during the loan term and significant balloon payments at the end of the loan. For example, balloon loans represent 41.7% of the collateral pool backing Santander's latest transaction. The borrower is ultimately liable for all payments under the loan contract; however they have the option to sell the vehicles to their dealers at a fixed price under a repurchase agreement at loan maturity.
"Under a worst case scenario, the defaults by European borrowers on balloon payments under loan contracts could rise while recoveries deteriorate as a result of lower market values of the VW vehicles," said Moody's. "The dealerships could come under financial pressure if an increasing number of borrowers exercise the option to sell the vehicles back to the dealers, and if VW does not support them financially".
Moody's plans to rate €338.7 million of senior notes issued by SCF Rahoituspalvelut I Designated Activity, 'Aaa'. The notes benefit from 13% credit enhancement, which is less than the 16% credit support on the senior notes issued from the previous trust.
At the subordinate level, the trust will offer €27.2 million of 'Aa2' rated class B notes that benefit from 6% credit support; €5.8 million of 'A2' rated class C notes that benefit from 4.5% credit support; €3.8 million of 'Baa1' rated class D notes that benefit from 3.5% credit support; €6.6 million of 'Ba1' rated class E notes that benefit from 1.8% credit support; and €7.3 million tranche of unrated class F notes. All of the notes are structured with legal final of November 2024.
Bank of America Merrill Lynch, RBC Capital Markets and Santander are the joint lead managers.