Volkswagen Finance China is marketing its third auto loan securitization ever. It's also the first time that the sponsor has tapped this market sice the scandal about its German parent company, Volkswagen AG, rigging diesel vehicles to cheat emissions tests.
The deal, Driver China Three, will offer notes backed by a RMB3 billion ($457 million) portfolio of loans.
The senior, RMB 2.63 billion A tranche will be rated ‘Aa3’ by Moody’s Investors Service and a RMB 157 million B tranche will be rated ‘Baa1’. A subordinate RMB 196.1 million tranche will not be rated.
All of the notes are structured with a legal final maturity date of July 2022 and benefit from credit enhancement of 13.47% and 8.24% respectively for the class A and B notes.
CITIC Securities Co and Bank of China are the lead underwriters.
Nearly half of the loans in the collateral pool (58.42%) finance purchases of VW autos manufactured in China; 27.8% of finance Audis; 8.37% finance imported VW vehicles; 2.84% finance Skoda and the remaining loans finance Porsches.
Nearly all (99.5%) of the loans were used to purchase new vehicles and have fully amortizing repayment terms. By comparison, VW’s European Driver securitizations typically include a greater percentage of used car loans, which tend to perform worse than loans on new cars.
Loans in the Driver China pool have down payment of at least 20% and the weighted average down payment rate is more than twice that, at 42.9%. Borrowers are more likely to keep making payments when they have significant levels of equity built into the vehicles securing their loans, according to Moody’s.
Driver three, similar to the two previous deals issued from the trust, also benefits from the short remaining life of the bonds. The loans in the pool have a WA remaining terms of 20.54 months.
Moody’s, as well as Standard & Poor’s, have downgraded the Volkswagen AG’s credit rating; S&P now has it at ‘BBB+,’ down from ‘A-‘, and Moody’s at ‘A3’, down from ‘A2’. Both rating agencies have stated that the downgrades would not impact the ratings on bonds issued by VW.
In its presale report, Moody’s said that its ratings on VW’s China deals reflect an assumption that the local VW subsidiary issuing the ABS would benefit from support from its parent. “Such support would be important because of the limited number of companies in China to which servicing could be transferred in the event of a servicer failure,” the report states.
While a bankruptcy of the servicer would trap cash collected on behalf of ABS trusts (commingling risk), Moody’s believes that this risk is mitigated by rating-based triggers, where the corporate downgrades lead to faster remittances.
“In China, the servicer will advance scheduled loan payments to the issuer prior to their actual collection to mitigate commingling risk after the rating assigned to the servicer by local rating agencies falls below a certain level,” the presale report states. “In addition, if the servicer fails to transfer collections to the issuer, the issuer can use reserve funds to pay coupons on the ABS notes”.
