Volkswagen Finance China, a unit of Volkswagen Financial Services AG, has priced its second static cash securitization of Chinese auto loan receivables, according to a company press release.
The RMB1.89 billion ($304.7 million) Driver China two Trust is rated by two international rating agencies, Moody’s Investor Service and Fitch Ratings.
CITIC Securities Co. and China Merchants Securities are joint leads on the transaction. The Hongkong and Shanghai Banking Corp. acted as the deal’s financial advisor.
The RMB1.66 billion ($267.6 million) of class A notes are rated A’ by Moody’s and AA’ by Fitch; they pay a fixed rate of 3.8%.
The RMB104 million ($16.8 million) of class B notes are rated Baa1’/’A- and pay 5.2%.
The class A and B notes benefit from 13.73% and 8.25% credit enhancement, respectively.
The latest deal also has an unrated tranche of RMB124.5 million ($20.1 million) subordinated notes that were retained by the deal’s sponsor.
All of the notes are expected to mature April 26, 2017; final maturity is set for February 26, 2022.
The collateral consists of 31,432 auto loan contracts made through Volkswagen dealers in various provinces in China. These loans have a weighted average seasoning of 9.61 months. New car loans make up 99.85% of the pool.
All of loans in the pool have a down-payment of at least 25%, but the weighted average down-payment is 42.7%.The loans have an average principal value of RMB62,000 ($9,990).
In its presale report, Moody’s cited the geographic diversification of the pool as a key strength of the deal. Both Fitch and Moody’s look favorably on the strengths the strength of China’s economy, the experience of the originator, and the fact that the originator is retaining the subordinated notes in the deal, therefore assuming the first losses. Fitch anticipates a lifetime default rate of 1.7%.
However, Moody’s cites the lack of a back-up servicing arrangement at closing as a key weakness of the deal. Due to the geographical spread of the 30,000 obligors, there are limited viable replacement servicers or collection agents in China that can cover the vast area in which the obligors are located.
The latest deal come 12 months after Volkswagen Finance China completed its inaugural deal, Driver China one; the notes issued by that deal have longer tenors of approximately four years. The class A and B notes pay fixed rates of 4.8% and 8.09%, respectively.
Volkswagen is using securitization to help boost its sales in China, which is becoming “more and more important” to the company, according to a statement by CFO Frank Fiedler published in today’s press release.
He said the company’s loan portfolio is “growing steadily.” It has around 580,000 financing contracts on its book. During the last fiscal year, Volkswagen increased the number of vehicles it financed in China to a record 406,000 from 228,000 in the previous year.
