Weaker Collateral in Volkswagen's Latest US Auto ABS

Volkswagen’s latest U.S. auto loan securitization features more longer-term loans and weaker borrowers, according to Fitch Ratings.

The $1 billion Volkswagen Auto Loan Enhanced Trust (VALET) 2014-2 is backed by loans secured by new and used Volkswagen and Audi cars and light-duty trucks. The loans have a weighted average FICO score of 762, in line with the issuer’s prior securitization, 2014-1, issued in April. However the percentage of borrowers with FICO scores that are still prime, but have FICO scores below 700, has risen, to 19.1%. That compares with just 17.72% in the previous transaction.

Among other risk factors, Fitch noted that the latest transaction has increased the percentage of extended-term loans, at 57.44% of the pool. That is up from 55.31% in the 2014-1 transaction and is higher than for all previous VALET transactions, except 2013-2.  

"Longer terms are often offered to allow customers to afford higher-ticketed vehicles by lowering monthly payments," the presale report states.  "However, because long-term loan amortization trails vehicle depreciation, these loans expose the transaction to higher loss severity if the obligor defaults." 

Despite the slight deterioration in the collateral, the notes are structured with initial credit enhancement at 3.10%, similar to Volkswagen’s previous deals.    

Citigroup is lead manager on the deal. Fitch has assigned the class A2, A3 and A4 notes, preliminary ‘AAA' ratings. The A1 notes are due July 20, 2017; the A3 notes are due April 22, 2019 and the A4 notes are due May 20, 2021.