Volkswagen’s U.S. captive finance arm is returning to the prime auto loan securitization space after a four-year absence.

The $1 billion Volkswagen Auto Loan Enhanced Trust (VALET) 2018-1 is the first asset-backed offering since October 2014 of new and used Volkswagen and Audi vehicles loans originated by VW Credit, a subsidiary of the Volkswagen Group of America.

That was, of course, before the outbreak of the 2015 diesel engine emissions-cheating scandal that disrupted global sales, launched a U.S. criminal investigation that has ensnared nine German Volkswagen executives and managers (so far) and forced the recall of 11 million vehicles worldwide.

It also put a halt to Volkswagen’s U.S. securitizations since that time. Besides the four-year hiatus for VALET, Volkswagen’s lease securitization trust has not issued notes since February 2015, and its floorplan vehicle (the Volkswagen Credit Auto Master Owner Trust) has been dormant since August 2014.

But nearly two years after reaching a multibillion-dollar settlement with U.S. authorities and a 33% recovery in U.S. sales in 2017, VW Credit has dusted off its auto-loan shelf to market bonds secured by $1.1 billion of loans in its $8.3 billion managed portfolio – or given the right market conditions, potentially $1.3 billion in an upsizing, according to presale reports.

The capital stack of the VALET 2018-1 offering is made up entirely of senior notes, including a $400 million Class A-2 tranche of three-year fixed and floating rate notes (tied to one-month Libor); $284 million in four-year in Class A-3 notes; and an $80 million Class A-4 tranche due 2024. All the term notes have preliminary triple-A ratings from Fitch Ratings and S&P Global Ratings.

Bloomberg News
Bloomberg News

VW Credit is including a $236 million money-market tranche rated F1+ by Fitch and A-1+ by S&P. The presale reports did not disclose any residual notes being issued for U.S. risk-retention purposes.

Despite the four-year interim, Volkswagen’s new pool is largely consistent with the collateral of its VALET shelf issues between 2010 and 2014 – for example, the 3.1% credit enhancement (targeted for 3.5%); the weighted average FICO (774) and original contract terms (64); and the ratio of new (71.8%) and used (28.2%) vehicles in the pool are all similar to the VALET 2014-2 portfolio.

But the collateral pool has a longer weighted average seasoning of 11.8 months, lower loan-to-value ratios (82.8%) and a higher percentage of Audi-branded vehicles: nearly 39% involve VW’s luxury brand, up from 29.4% in the 2014-2 pool. (Fitch notes that Audi’s growth in the $8.3 billion VW Credit portfolio has exceeded Volkswagen models for the past two years).

Another change reflects the recent shift in consumer demand for SUV and crossover vehicles that has impacted nearly all prime-auto loan ABS issuers. The concentration of passenger cars has fallen from 80.73% in 2014 to 59.91% in the latest deal, while SUV/crossover types are up to 40.02% from 18.66%. The most popular model remains the Jetta sedan, although its share of the pool is only 15.7% compared to 26.5% in 2014.

The Tiguan SUV has overtaken the Passat as the second-highest concentration at 10.1%. The Audi Q7 is third at 9.33%.

VW Credit’s managed portfolio increased to 8.3% to $8.91 billion (518,383 contracts) as of March 31, up from $8.23 billion a year earlier. Delinquencies were stable at 1.1% in the first quarter, compared with 1.07% a year prior, and net losses remained stable at 0.75%.

Possessions increased to 0.92% from 0.78%, which VW Credit attributed that to an increase in 60-plus-month term loans and a rise in a used-vehicle percentage share of the portfolio, according to S&P.

Fitch has reduced its expected net losses in the portfolio to 1.2% from 1.25% from the 2014-2 deal. S&P, however, raised its expected loss range slightly to 0.8%-0.9% based on lower expected future resale values on VW vehicles. That indicates VW’s brand image may carry the taint of the scandal for years to come, despite the absence of any loans attached to cars affected by the emissions scandal in the 2018-1 pool.

The new transaction resurrects a shelf platform that had been active between 2006 and 2014, regularly sponsoring one or two issuances annually of prime-loan asset-backed bonds. The VALET shelf sold $12 billion in prime ABS bonds 2010 and 2014.

Although its U.S. ABS activity was put on hold, Volkswagen maintained regular issuance of its European and U.K. loan and lease securitizations in the aftermath of the scandal – even stepping up activity in 2016 when it was unable to raise funds in the unsecured bond market due to the scandal’s fallout.

The emissions probe is ongoing, with a U.S. grand jury indicting former VW Chief Executive Martin Winterkorn in May, and Audi's board of directors naming a new CEO after the arrest last week of ex-chief Robert Stadler in Germany.

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