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Volkswagen launches €1.25B prime UK purchase-contract ABS

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Volkswagen Financial Services is pooling €1.25 billion in prime auto loans originated in the U.K. into collateral for bonds, according to S&P Global Ratings.

The transaction, called DRIVER UK Multi-Compartment S.A., Compartment Private Driver UK 2018-1, will issue two tranches of notes with preliminary ratings from S&P: €918.7 million of floating-rate Class A notes with credit enhancement of 27.7% are provisionally rated AAA and €87.5 million of Class B notes with 19.5% credit enhancement are rated A+.

There will also be a €217.6 million unrated tranche.

The notes are backed by 66,073 loan contracts, with an average balance of €18,918. Most of the contracts in the pool (93.7%) are personal contract plans, which do not fully amortize, repaying the bulk of principal in a final, balloon payment. This subjects the notes to additional risk that investors will not be able to recover all of their principal in the event borrowers default and the vehicles are repossessed and resold.

The weighted-average original term of the loans in the pool are 46.17 months, with an average seasoning of 4.74 months.

The deal is similar to that of Volkswagen’s previous U.K. auto-loan securitization, completed in September (DRIVER UK 6), except that the U.K. affiliate for Volkswagen Bank GmbH now has a 24-month revolving period during which it can add more loans to the pool, instead of just six.

The latest transaction is also nearly three times the size of DRIVER UK 6 pool.

The available CE level has increased 2.1% over DRIVER 6 levels, due to additional overcollateralization added to the deal.

A majority of the autos securing the loans in the pool are Audi-branded vehicles (51.23%), followed by Volkswagen (31.35%) and Skoda (9.11%).

The level of diesel-engine autos in the pool has declined to 44.77%, from 47.2% in DRIVER UK 6. S&P notes that 2% of the preliminary pool by loan volume includes vehicles equipped with the EA 189 diesel-engine types impacted by the 2015 global nitrogen-oxide (NOx) emissions scandal in which the company admitted to installing software-based “defeat-devices” to produce artificially low NOx levels on government emissions tests.

While those vehicles are subject to more residual value risk, S&P says it has accounted for any deterioration in collateral value in its stressed recovery rate and market-value decline assumptions.

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