VW Marketing Its 3rd U.K. Lease ABS in Eight Months

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Volkswagen’s U.K. finance arm is marketing £750 million ($884 million) of bonds backed by auto leases.

The collateral consists of 43,487 leases, primarily to consumers, for new and used Audi, Volkswagen and Skoda vehicles, according to a presale report published by Moody’s Investors Service.

The transaction, Compartment Driver UK five, is VW’s third in the U.K. in the past eight months totaling £4.6 billion ($5.73 billion).

Volkswagen has become increasingly reliant on securitization for funding since 2015, when tampering of emissions testing equipment on its vehicles came to light. The scandal has made it more expensive for the automaker to issue unsecured corporate debt. 

The eruption of its 2015 “diesel-gate” emissions-tampering scandal as traditional financing costs increased due to corporate rating downgrades, fines and remediation program expenses for car owners of affected vehicles.

Both Moody’s and DBRS have assigned preliminary triple-A ratings to the senior Class A notes, which benefit from  23.6% credit enhancement, including 22.4% subordination of the Class B notes, a subordinate loan (equal to 14.4% of the portfolio size) and an overcollateralization tranche (1.5% of the portfolio). The transaction includes a 1.2% reserve fund that will pay interest and senior fees only, covering for principal windfall

The Class B notes are rated A1 by Moody’s and A (high) by DBRS.

Both note tranches have eight-year terms and pay a floating rate of interest pegged to one-month Libor.

The transaction features a six-month revolving period, during which the securitization trust can purchase additional collateral.

VBS and BNP Paribas are co-arrangers on the transaction. BNP and SMBC Nikki Capital Markets are co-lead managers.

According to Moody’s, 6.75% of the leases in the collateral pool are tied to older vehicles subject to the recall related to emissions tampering scandal. That adds some risk due to consumer rights to terminate the contract under U.K. consumer protection law.

The scandal erupted in late 2015 when the U.S. Environmental Protection Agency announced it had discovered the German automaker had programmed software for its 2.0-liter turbocharged diesel engines to limit the output of nitrogen oxide during emissions-testing conditions, but disable the controls during real-world driving conditions.

The automaker was forced to implement a remediation program that would repair any of the 11 million 2009-2015 model-year vehicles sold with 2.0-liter diesel engines outfitted with the software cheat, and has ended up costing the firm more than $17 billion in consumer settlements – as well as bills more in civil and criminal fines from U.S. and other government authorities.According to reports, more than 1.2 million vehicles in the UK were impacted by the recall action by VW’s UK division.

More than 92% of the leases in the pool are structured with balloon payments (known as personal contract purchases), which allow for buyers to return vehicles in lieu of the final payment.

The average discounted lease balance of accounts in the pool is £17,247 (US$20,439), with nearly 70% of the loans being originated within the last six months.

Moody’s expects cumulative net losses to reach 1.35%, similar to other recent VFS transactions on the Driver UK platform, but lower than that of peer group comparisons of the European/Middle East/Asian auto ABS market.

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