Fitch Affirms VALT 2015-A; Revises Outlook to Stable Amid VW Diesel Scandal & Takata Airbag Recall
The rating actions reflect the deposit of approximately $72 million into the 2015-A reserve account on Sept. 20, 2016. The deposit of cash into the reserve account was initiated and conducted as a result of the potential impact on residual value losses on vehicles in the pool (affected vehicles) from the Volkswagen AG (VW; rated 'BBB+'/Outlook Negative) Diesel Emissions Scandal (related to 2.0- and 3.0-litre (L) vehicles) and Takata Airbag Recall (together, the events).
A full list of rating actions follows at the end of this release.
These events continue to impact transaction residual lease cash flows principally due to the ongoing 'stop-sale' notification by VW. This has resulted in returned leased vehicles being held by VW and not sold. Thus cash flows from potential residual sales are not flowing to the trust, resulting in higher residual losses in recent months. Given the large exposure of affected vehicles, Fitch expects the pace of residual losses to increase as lease maturities come due over the remaining life of the transaction.
The 2015-A trust is sponsored and serviced by VW Credit, Inc. (VCI), a subsidiary of VW.
On Dec. 11, 2015, Fitch affirmed the outstanding ratings and revised the Rating Outlooks to Negative as the result of the exposure to residual risk and potential for increase in residual losses relating to the Diesel Emissions scandal.
For more information on this prior action please see Fitch's release 'VW Diesel Scandal: Fitch Affirms VW Loan/Lease ABS Ratings; Lease Outlook Revised to Negative', available on Fitch's web site at www. fitchratings. com.
The current stress scenarios assume potential increases in defaults and declines in recovery rates or residual values as a result of the ongoing events, and potential future impact on the performance of the transaction.
Fitch applied a credit loss proxy of 1.11%, which assumed 50% recoveries on the non-affected collateral and 0% on the affected. Further, Fitch assumed a total residual loss of the returned affected vehicles in the pool, totalling 23.35% of the remaining base residual value, as of the September 2016 reporting period. This includes 2.0L diesel vehicles in the pool totalling 4.19%, 3.71% 3.0L diesel vehicles and 15.45% impacted by the Takata airbag recall. No credit was applied to residual proceeds thereof.
These amounts were defaulted at 100% severity and then 0% assumed residual proceeds. Despite these stresses, due to the cash injection, hard credit enhancement (CE) has increased approximately 8%, resulting in adequate loss coverage for the outstanding notes commensurate with 'AAAsf' ratings. While residual losses are expected to increase, Fitch's analysis has already appropriately accounted for the expected weaker performance. As such, the Outlook has been revised to Stable from Negative.
Further, 2015-A continues to perform within Fitch's credit loss expectations to date. As of the reporting period, Fitch has not witnessed any notable decline in credit loss performance. Cumulative net losses (CNL) were at 0.30% as of the September reporting period, and continue to project comfortably within Fitch's current loss proxy of 1.11%.
However, residual losses have started to increase in recent months. This is primarily due to no cash flows coming into the trust from returned vehicles related to the 2.0L TDI, 3.0L TDI, and Takata airbag recall.
Cumulative residual value losses were $10.3 million or 10.6% as of the September reporting period. Fitch's current residual value (RV) loss proxy is 14.30%, and residual losses are expected to rise above this level, but not impact the loss coverage of ratings due to the addition of CE and ongoing performance of collateral not related to diesel or the Takata airbag recall (the unaffected collateral).
VW has proposed a solution for the 2.0L diesel vehicles, which was approved by regulators and is expected to be declared final in late October by the U. S. courts.
The full extent of the required repairs of the diesel vehicles, timing thereof, and legal implications are currently unknown in the U. S. for the 3.0L diesel vehicles, and the situation continues to evolve.
The Takata airbag recall is ongoing and VW continues to fix vehicles when parts are available. However, given the timing of VW specific Takata recalls, VW has not been able to obtain parts in a timely manner, which has delayed the fixing of the recalled vehicles. Therefore any returned Takata affected vehicles have been 'stop-saled', awaiting available parts. The timeline for when these parts are expected to become available is unknown.
Fitch continues to monitor the situation closely. The receipt of updated data or new information could change Fitch's assumptions and stress scenarios and lead to further rating actions.
VEHICLES IMPACTED IN THE TRANSACTION
Diesel Emissions Scandal:
There are over 550,000 vehicles in the U. S. from 16 VW, Audi and Porsche brands from 2009 - 2016 models currently impacted by the diesel emissions scandal. Fitch received updated performance and pool composition data for all outstanding transactions from VCI, including the number of vehicles impacted in the pool. The models are listed below:
--2.0 Liter Diesel Models: VW Jetta and Jetta Sportwagen, Beetle and Beetle Convertible, Audi A3, Golf and Golf Sportwagen, and Passat.
--3.0 Liter Diesel Models: VW Touareg; Porsche Cayenne; Audi A6, A7, A8L, Q5 and Q7.
--Takata Airbag Recall:
VW CC, EOS, Golf, GTI, Jetta, Jetta Sportwagon, Passat and Passat Sportswagon; Audi A3, A4 Cabriolet, A6, A5, A5 Cabrio, and Q5.
While vehicles affected by this recall and the related stop-sale make up 15.2% of 2015-A's remaining securitization value, Fitch expects these vehicles will mature over the life of the transaction, thereby limiting any one-month's risk of cash flow decline.
ARE VW U. S. VEHICLE VALUES DECLINING DUE TO THE EVENTS?
There is currently a stop-sale in place for VW diesel vehicles. VW is not selling new diesel vehicles and is holding all diesel off-lease returns that have not been purchased by lessees. It appears this will continue until VW has determined and issued a formal resolution and 'fix' for the vehicles.
Since the emissions scandal broke in mid-September, Fitch has witnessed softer used vehicle values in most of the models mentioned above. The agency has been reviewing wholesale vehicle auction pricing data on the respective VW vehicle models impacted.
Initial data indicates that used vehicle values have declined by approximately 10 - 20% over the past 12 months, on Passat, Golf and Jetta diesel models. Additionally, values of respective gasoline models have also experienced weakened auction values, albeit to a lesser extent, with declines of
5%-15% to date.
Fitch has not witnessed any material decline in vehicle values from the Takata airbag recall to date.
KEY RATING DRIVERS AND ANALYSIS
Increasing Residual Losses
Since the announcement of the scandal and Takata airbag recall, the transaction has not exhibited an increase in delinquency or default frequency. However, residual losses have increased due to the stop-sale of the returned affected vehicles. In particular, the recent increase in residual losses has been driven almost entirely by Takata affected vehicles.
Given the expected increase in residual losses on the affected vehicles, Fitch assumed 0% residual realizations on all such vehicles and a 10% stress on unaffected vehicles, which equates to a 'BBsf' RV proxy of 14.3%.
Further rating action may be considered if legal risks materialize.
MODELLED STRESS SCENARIO RESULTS
For VALT 2015-A, in addition to the aforementioned stresses, Fitch continued to utilize a stressed qualitative RV haircut of 23%, consistent with the December analysis. The haircuts address factors that could lead to price declines and further potential impact on asset performance, including a deterioration of the economic environment and further manufacture weakness.
Furthermore, the RV maturities are fairly diversified over the remaining life of the transaction.
While CE has increased, the current stop-sale on returned vehicles does not allow for the trust to benefit from any residual proceeds. Therefore, Fitch's analysis assumed a credit loss proxy of 1.11%, which assumed 50% recoveries on the non-affected collateral and 0% on the affected. Currently, excess spread and gains on gas vehicle residuals have off-set these lease residual holdback amounts.
The pool factor was 54% as of the September reporting period. Credit losses are currently tracking at approximately 0.70%, below Fitch's current loss proxy of 1.11%. The transaction is recording losses on returned residuals of 10.6% to date. Fitch's current residual loss proxy was 14.30%.
The scenarios contemplated and discussed herein are essentially rating sensitivities under the assumed stressed scenarios. As additional information becomes available, Fitch may apply additive stresses to its analysis.
Unanticipated increases in the frequency of defaults or deterioration in vehicle values could produce loss levels higher than the current expectations and impact available loss coverage. Lower loss coverage could impact ratings and Rating Outlooks, depending on the extent of the decline in coverage.
To date, the transaction has exhibited strong credit loss experience. However, residual losses have increased over the past several months. Due to the growing CE levels and increased loss coverage afforded to the notes, a substantial deterioration in used vehicle values would have to occur to have a negative impact on the updated ratings.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
List of Rating Actions:
Fitch has affirmed the following ratings and revised Outlooks as indicated:
--Class A-2a at 'AAAsf'; Outlook to Stable from Negative;
--Class A-2b at 'AAAsf'; Outlook to Stable from Negative;
--Class A-3 at 'AAAsf'; Outlook to Stable from Negative;
--Class A-4 at 'AAAsf'; Outlook to Stable from Negative.