Volkswagen AG’s latest auto lease securitization in Europe appears to show the automaker is making progress to repair nearly 11 million vehicles – and maintain its past solid quality securitization performance – in the wake of its diesel-engine emissions testing scandal that broke last September.

The VCL Multi-Compartment S.A., Compartment VLC 23 trust is only the second German lease securitization that Volkswagen Leasing GmbH has issued since last September when the U.S. Environmental Protection Agency alleged the German automaker has installed software in certain diesel engines in Volkswagen and Audi designed to cheat emissions standards around the globe.

The software would detect whether a vehicle was undergoing emissions testing, and accordingly manipulate emissions operations so that levels of nitrous oxide were only contained while in the testing mode. Volkswagen admitted to the deception and set up a nearly €7 billion remediation program to repair and modify existing vehicles affected by the improper software.

The VLC 23 consists of €750 million in German-based auto leases of new Volkswagen vehicles, and will be supporting a €750 million notes issuance divided between a Class A and Class B structure.

Standard & Poor’s has issued preliminary ‘AAA’ ratings on €702 million in Class A notes, which have 7.5% of available credit enhancement supported by 5.4% subordination, a 1% overcollateralization cushion and a cash reserve equal to 1.2% of the pool balance. S&P also gave an early ‘AA-’ rating to €18.7 million in Class B notes. A third €21.8 million subordinated tranche is unrated.

The transaction is being arranged by Volkswagen Financial Services AG and HSBC Bank. The deal is expected to close April 25.

The capital structure is similar to Volkswagen’s earlier rated lease securitization predecessor, VCL 22, but shows lower credit enhancement for the Class A and B notes.

S&P gave its initial ratings on the transaction under the belief Volkswagen’s remediation program will result in most of the scandal-affected vehicles (11.5% of the 73,400 lease contracts in the pool) will be adequately repaired and remain roadworthy after the recall.

The remediation plans “will not result in a change to the fuel economy figures, performance figures, or C02 or noise emissions,” a presale report issued Wednesday stated. In addition, S&P feels “that the vehicles will remain roadworthy until and after the recall,” mitigating the risk of potential dilution of the lease receives due to vehicle owner claims against Volkswagen.

That also was a concern last November when Volkswagen announced that internal investigations had found that CO2 levels were also understated in certain models, and fuel consumption levels in about 800,000 cars globally (mostly diesel, but also some using standard unleaded fuel). But Volkswagen has since announced an investigation found “significantly fewer vehicles,” or only about 36,000, could still be affected by fuel consumptions levels that are slightly higher than originally determined. “As a result, we believe CO2 related risks have significantly diminished.”  

About 11.5% of the pool of 73,400 leas contracts in VCL 23 relate to vehicles equipped with diesel engines that are the subject of the NOx exhaust emissions manipulations.

The U.S. Federal Trade Commission filed suit against Volkswagen on March 25, seeking $15 billion in damages.

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