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VW bulks up on used vehicles in next U.S. auto-loan ABS

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VW Credit is including a greater share of used cars and SUVs, as well as Audi-brand vehicles, in its second U.S. prime loan securitization this year.

According to presale reports, the U.S. captive finance arm of Volkswagen Group of America Inc. is increasing the share of used cars to 33% of its proposed $1 billion or $1.4 billion (if upsized) pool for the Volkswagen Auto Loan Enhanced Trust 2018-2. That is an increase from 28% from VALET 2018-1 issued in June.

In addition, the share of Audi vehicles in the pool rose to 45.2% of the collateral of either proposed pool, compared to the prior deal’s 38.9% level.

VALEY 2018-2 is only the second ABS offering by VW Credit since the captive finance lender for U.S. Volkswagen and Audi dealers kick-started an ABS shelf that had been dormant since 2014 due to the 2015 diesel engine emissions-cheating scandal that disrupted sales and forced the recall of 11 million vehicles worldwide.

The transaction features three classes of term notes with preliminary triple-A ratings from Moody’s Investors Service and S&P Global Ratings.

The $1 billion pool has a $325 million Class A-2 fixed/floating rate tranches, each with a legal final maturity of August 2021; a $337 million Class A-3 variable-rate tranche due 2023 and a Class A-4 tranche of $100 million notes due 2025. A $238 million Class A-1 money-market tranche is sized at $238 million, and is rated P-1 by Moody’s and A-1+ by S&P.

For the upsized pool, the capital stack has Class A-1 short-term notes totaling $309.4 million; $422.5 million of class A-2-A/A-2-B bonds; $438.1 million in Class A-3 notes and $130 million of Class A-4 notes.

All of the notes are supported by 3.25% credit enhancement.

Both ratings agencies report that the portfolio’s weighted average FICO of 774 is the highest among all prior 16 VALET transactions, dating to 2002. The loans have weighted average original terms of 65 months, with 10 months of seasoning that is down from 12 months in VALET 2018-1.

The expected cumulative net losses remain unchanged at 1% from Moody’s and a range of 0.8%-0.9% from S&P. Moody’s stated that the lack of recent securitizations from 2015-2017 “creates more uncertainty for VALET 2018-2.”

The smaller pool contains 50,798 contracts, while the $1.42 billion portfolio has 66,302 loans. The weighted average APR in both pools is 3.77%.

VW Credit’s managed portfolio has grown 20% since 2017 to $10.08 billion through the first nine months of 2018, with 559,151 outstanding contracts. Net losses are at 0.68%, which has been increasing since 2015 (0.37%).

The percentage of loans with terms greater than 60 months increased to 52.25% from 46.72%.

The transaction will have either $65.1 million or $84.7 million (6.32%) in yield supplement overcollateralization, to cover for contracts with APRs below the 6.5% transaction discount rate. That’s reduced from 7.81% in VALET 2018-1.

“From an overall pool composition perspective, in our view, series 2018-2 compares slightly more favorably to these recently paid off [VALET] transactions,” S&P’s report stated. “We do however incorporate slightly lower recovery rates and slightly higher default rates in our forward looking views compared to those experienced for 2014-2.”

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