Volkswagen Leasing GmgH is preparing its first auto leases since a German court ruled last week that cities can ban recent-vintage diesel cars from their roads.
While 78.2% of vehicles backing the €1 billion Compartment VCL 26 pool have diesel engines, only 0.5% of are impacted ruling by a federal administrative court in Leipzig, which applies to vehicles manufactured prior to 2016 under older European Union emissions standards.
As a result, Moody’s Investors Service believes that the risk of early terminations of leases in the pool is only “marginal,” according to its presale report on the deal.
Moody's expects to assign the same Aaa rating to the €940 million senior tranche of notes to be issued that it assigned to prior VCL transactions. The rating agency expects a loss of 1.25% over the life of the deal.
S&P Global Ratings also issued a triple-A rating on the notes.
“We view, at this time, the risk of customer set-off rights and/or early termination rights in case diesel cars are banned to be marginal, as long as there is no evidence that manufacturers have illegally manipulated emission levels,” the presale report stated, recalling the 2015 Volkswagen scandal in which Volkswagen admitted to installing “defeat-device” software on certain diesel models to cheat U.S. emission-standards testing.
“Even in this case, the risk would only materialize for investors if not remedied by the seller under the transaction's representations and warranties,” it stated.
The court ruling could affect an estimated 10 million of the 15 million registered diesel vehicles in Germany. In 2016, Dusseldorf and Stuttgart – the respective corporate homes of Daimler-Benz AG and Porsche – enacted bans. Other European cities, including London, Paris and Volkswagen’s corporate home in Stuttgart, Germany, have proposed similar limits on the use of diesel-engine cars in urban centers.
Of the 101,653 vehicle lease contracts in the Compartment 26 pool, over 95% are for new vehicles, and have remaining terms averaging 2.6 years. The weighted average life of the portfolio is just 1.37 years.
Moody’s acknowledges in its presale report that “public and political debate about the future of diesel engines has heated up in recent months,” resulting in declining diesel-car purchases and registrations. In addition, “the residual value premium of diesel over petrol cars is declining, which puts pressure on residual values” in securitizations.
Consumers whose cars are banned from certain residential areas or from daily commuting could try to challenge the financial contracts, according to Moody’s.