S&P: OSCAR US 2016-2 Japanese Auto Loan ABS Assigned Ratings
The US$362.9 million notes are backed by ?37.3 billion class A-1 to A-4 fixed-rate bonds issued by Oscar Japan 5, a limited liability company incorporated in Japan. The bonds, in turn, are backed by the class A-1 to A-4 asset-backed loans (ABLs) extended to Mizuho Trust & Banking Co. Ltd. The pool of auto loan receivables that Orico originated backs the ABLs.
The ratings reflect our views primarily on the below factors. We assume a cumulative default rate on the initial receivables balance of 1.2% under our base-case scenario based on the characteristics of and historical data on the underlying auto loan assets as well as our overall outlook for the future performance of Japanese auto loan assets. We also assume a cumulative default rate of 6.0% under our 'AAA' stress scenario. Credit support, provided through overcollateralization, mitigates the credit risk of the underlying assets. In addition, excess spread also serves as credit support for the notes. Timely interest payments and the ultimate repayment of principal on the notes by the legal final maturity dates were made under stressed cash flow modeling scenarios that we believe are appropriate for the assigned ratings. Overcollateralization of the securitized receivables mitigates commingling risk. Cash reserves funded on the transaction's closing date will provide liquidity support to the transaction if the servicer is replaced. We consider that Orico has sufficient experience and ability to fulfill its duties as the initial servicer in the transaction. The transaction's payment structure and cash flow mechanisms include a default trap and the establishment of early amortization triggers that will convert principal payments to a monthly pass-through turbo structure under certain adverse circumstances. Our review of the transaction relied in part on our interpretation of our criteria, "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published Aug. 8, 2016, as appropriate for our assessment of the impact on our ratings from our transfer and convertibility (T&C) assessment for Japan. Our T&C assessment reflects our view of the likelihood of a sovereign restricting a securitization's access to foreign exchange needed to satisfy the securitization's debt service obligations. We base our assessment on paragraph 46 of the criteria, which states that a foreign-currency obligation backed by local-currency assets in a single jurisdiction will be capped at the T&C for that jurisdiction, unless there are structural mitigants for T&C risk. Despite the currency mismatch between the assets underlying this transaction and the payments to investors, we believe the transaction can be rated above 'AA+', our T&C assessment for Japan. This is because payment transfers outside Japan occur in yen, and the currency swap counterparty, which is a non-Japanese entity, will swap yen received outside Japan for U. S. dollars with an adequate replacement commitment in line with our counterparty criteria. We believe these structural features of the transaction, including the definition of a termination event in the currency swap agreement, sufficiently mitigate its T&C risk. Based on our above criteria for single-jurisdiction structured finance ratings above the sovereign, we consider the maximum potential rating on the notes in this transaction to be 'AAA'. This is because the securitization has no direct exposure to sovereign obligations and has sufficient credit support to withstand our sovereign default stress test, and the sensitivity of the underlying asset type to country risk is moderate. The transaction's legal structure establishes that the entrustment of the underlying assets will not be considered as security interest and thus the underlying assets will not be considered as part of the originator's property in the event of the originator's bankruptcy.