Volkswagen Financial Services AG is marketin its latest static securitization of German vehicle leases originated by its VW Leasing subsidiary in a €1.25 billion transaction.

VCL MULTI-COMPARTMENT S.A., Compartment VCL 25 will issue a senior €1.18 million of senior Class A notes with credit enhancement of 7.2% and preliminary triple A ratings from Moody's Investors Service and S&P Global Ratings. There is also €27 billion tranche of subordinate Class B notes. Both will pay a floating-rate of interest tied to the one-month Euribor.

The deal, which will have a 0.9% over-collateralization feature totaling €11.25 million, will also issue an unrated €36.75 million tranche.

The collateral pool includes 125,339 contracts (95.15% for new vehicles) that include both consumer (72%) and corporate (28%) lessees. The contracts are seasoned an average of 8.32 months (nearly 90% are under 12 months), with remaining terms of 2.57 years. All of the notes are current as of the portfolio’s cut-off date.

Bloomberg

Moody’s has assigned a 1.25% cumulative net loss expectation for the deal, in line with peer auto ABS leasing transactions in Eruope. Volkswagen’s whole book cumulative average vintage default rate since 2007 is just 1.09%.

The impact of Volkswagen’s 2015 global emissions-cheating scandal continues to dissipate. Only a small percentage of the vehicle in the pool – 0.17% – are equipped with engines that were included in a 2015 recall in which the automaker admitted to installing software designed to evade emissions-testing standards. That’s down from 1.7% in Volkswagen’s most recent VLC 24 lease securitization.

The deal includes a heavy exposure to leasing contracts for diesel-engine vehicles (80.2% of the pool). Moody’s states the debate over the “future of diesel engines has heated up in recent months” due to proposed restrictions on their use in metro areas of Europe, including Germany, the UK and France. The cash flows in the VCL 25 transaction could be impacted since a ban on diesel cars in urban centers would hinder the vehicles’ secondary-market demand, thus harming residual values and recovery rates for the issuer.

Consumer lessors might also challenge and attempt to cancel financing contracts if diesel car bans take effect, the report noted. Moody’s views this risk as “marginal, as long as there is no evidence that manufacturers have illegally manipulated emission levels.”

Unicredit Bank AG is serving as the arranger on the deal, and is joint lead manager with ING Bank N.V. Banco Santander S.A., the London branch of BNP Paribas and Skandinaviska Enskilda Banken AB are co-managers.

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