Volkswagen has obtained ratings from both Fitch Ratings and Moody’s Investors Service on its $800 million renminbi ($128 million) securitization of Chinese auto loans.
The international ratings mark another big step for the burgeoning asset class because it opens the door to a wider investor base.
The notes, due August 2020, are backed by automotive loan receivables originated by Volkswagen Financial (China) Co., a unit of Volkswagen Financial Services AG. The sale’s lead manager is China International Capital Corp, according to the Moody’s presale report.
Moody's has assigned rating of Aa3’ to the class A notes and Baa2’ ratings to the class B notes. Fitch assigned an expected 'AA' rating to the class A notes, an expected 'A-' rating to the class B notes. A subordinate tranche will not be rated.
A significantly higher proportion of loans are for new vehicles purchases by individuals and have fully amortizing repayment terms, compared to other recent VW auto-loan ABS transactions in Europe, said Moody’s. Loans for new car purchases with amortizing repayment terms tend to perform better that used car loans, with interest-only terms.
All loans in the pool have a minimum down payment of 20%, and the weighted average down-payment rate of the pool is about 35%.
The transaction has a short remaining term as the pool comprises mostly fully amortizing loans and has a weighted average remaining tenor of about 19 months, and loan repayments will be applied to repay the rated notes from the first monthly payment date until they reach their respective target notes balance.
Volkswagen’s securitization follows last week's transaction by a subsidiary of Ford Motor Credit.
That deal, Fuyuan 2014-1 Retail Auto Mortgage Loan Securitization Trust, issued 800 million renminbi of notes that were rated triple-A and single A plus by local ratings agencies, China Credit Rating Co (CCRC) and China ChengXin International Credit Rating (CCXI).
In March, the China Banking Regulatory Commission released its amended "Administrative Measures for Financial Leasing Companies." The new rules aim to encourage new entrants into financial leasing, including domestic and overseas commercial banks, large domestic manufacturers, and overseas financial leasing companies, and to enable them to draw on a wider range of sources of capital, including securitization.
The ABS structures have to comply with Chinese laws and regulations but incorporate the more familiar protections structured in securitizations issued from developed markets, like Europe, according to a securitization report Moody's published last week.
Auto loan ABS issued to date in China have senior subordinated notes backed by static pools, much like the VW structure. Some existing transactions have cash reserves to cover three months of interest and transaction fees and expenses in the event that a local rating agency downgrades the rating of the servicer. The reserves, explained Moody’s are funded by “trapping excess spread following a servicer rating downgrade”.
Moody’s expects that new deals will have “fully sequential payment priority or feature pro rata payment priority as long as the transactions maintain a target level of credit support,” said Moody’s. “Credit support will consist of subordination of more junior securities, over-collateralization and excess spread.”
However the more conservative structuring hasn’t allayed Moody’s concerns regarding risks related to potential servicer default and the ability to repossess vehicles. China’s auto loan securitization market sets no precedent for how servicing transfers would be handled in the event of a default.
In the VW deal for example, a back-up servicing arrangement won’t be set up at closing, which Moody's said could lead to servicing disruptions if the originator/servicer fails to perform when needed. “Any disruptions can result in a material impact because the transaction has over 10,000 obligors located in various parts of China, and there are limited viable replacement servicers or collection agents in China capable of covering the geographical spread and the sheer number of loans should the originator default,” noted Moody’s in the presale.
China’s CBRC Financial Leasing rules go some way to address this concern. The rules attempt to limit servicer default risk by requiring “shareholders to provide liquidity support to the company if necessary, and that if operating losses eroded capital, the shareholders would make up the shortfall, also in timely fashion,” explained Fitch analysts in an April report .
“We think this would reduce originator/servicer default risk if the shareholders had higher ratings than the leasing company and injected capital in line with the rules (which require at least one eligible commercial bank, large domestic manufacturer or overseas financial leasing company to own no less than 30% of the leasing company),” said analysts.
For VW, Moody’s explained that while the parent company, VWFS AG in Germany, does not provide an explicit guarantee, the servicer of the Chinese securitization will still benefit from the experience of the parent company, which has sponsored numerous securitizations in the past 17 years across regions worldwide. “The servicer, as the captive company of Volkswagen in China, is strategically important to the Volkswagen’s auto business,” explained Moody’s analysts in the presale report. “Sales in China contributed to 30% of Volkswagen’s global sales in 2013."