While Volkswagen continues its international efforts to remedy its 2015 diesel-engine emissions scandal, the German automaker also carries on with its ramped-up efforts since last fall to raise more capital through securitizations.
The latest transaction is a €750 million (US$837.5 million) static pool of German vehicle lease receivables backing the issuance of two classes of notes totaling €720.5 million, as well as a €22 million subordinated loan that will be issued after the transaction’s expected Nov. 25 closing.
The leases in the transaction, called VCL Multi-Compartment S.A., Compartment VCL 24, were issued to Volkswagen Leasing GmbH’s commercial and retail customer base. The collateral does not include the residual values of the estimated 66,045 contracts (from 43,992 lessees) for primarily corporate-leased cars, trucks and SUVs, sheltering investors from exposure to post-lease valuation risk.
The notes being issued include €703.5 million in Class A notes that have a preliminary ‘AAA’ structured finance rating from Standard & Poor’s and from bond rating agency DBRS. The Class B notes totaling €17 million are rated ‘AA-’ by S&P, 'A(high)' from DBRS. The floating rates on the notes as well as the loan, each pegged to the one-month Euribor benchmark, are to be determined.
The A notes will have 7.4% available credit enhancement, including 5.2% subordination, overcollateralization of 1% and a 1.2% cash reserve account. The B notes will have 5.1% C.E. The Class A note subordination is slightly under the 7.6% it needed to achieve a triple-A rating for the previous VCL 23 securitization in March.
The underlying collateral has an average remaining lease principal balance of €11,356, and weighted-average remaining terms of 33.3 months, after 6.8 months of average seasoning. Over 71% of the leases are to retail customers, and the remaining 28.2% to corporate lessees. Audi-branded vehicles comprise 36.5% of the pool, compared to 34.2% for Volkswagen autos and 16.8% of Volkswagen light commercial vehicles. Another 10.1% involve leases of Czech-manufactured vehicles from Skoda, a Volkswagen Group subsidiary.
Co-arrangers on the deal include Volkswagen Financial Services AG and Credit Agricole; Credit Agricole was joint lead manager with ING Bank, as well.
S&P stated it does not believe the 2015 emissions manipulation scandal has materially affected VW Leasing’s operations, nor has it led to increased levels of losses or customers falling behind on payments.
But like other Volkswagen securitizations since September 2015, the admission last year by Volkswagen AG that it installed software designed to manipulate emissions testing of its diesel engines will continue to be a high risk factor for investors in the transactions. The recall and repairs to 11 million passenger cars and commercial vehicles affected by the software does not stave off potential losses from vehicle owner claims against VW or increased operational risk associated with VW, according to Standard & Poor’s.
Under the remediation plans, if VW does not successfully repair the affected vehicles or if engine/emissions performance is negatively impacted, according to S&P, borrowers would have the right to reduce payments, cancel contracts or purchase the vehicle at a reduced price.
About 1.4% of the discounted pool balance in VCL 24 (or 3.1% of the contracts) is related to diesel-engine vehicles affected by the emissions manipulation efforts. That is a steep reduction from the previous VCL 23 leasing securitization when the 11.5% of the pool involved such vehicles, S&P notes.
In the wake of the scandal, Volkswagen increasingly turned to securitization as a financing tool as its equity tanked in the world’s stock market. In May, Moody’s Investors Service reported that the company had “stepped up” its ABS issuance to €6 billion after the scandal to keep funds flowing to finance its captive arms’ funding.