Fitch Assigns Final Ratings to VW's Driver Australia Three
OREANDA-NEWS. Fitch Ratings has assigned final ratings to the Driver Australia Three Trust's automotive-backed floating-rate notes. The transaction is the third term securitisation backed by Australian automotive receivables originated by Volkswagen Financial Services Australia Pty Ltd (VWFSA), a wholly owned subsidiary of Volkswagen Financial Services AG, itself wholly owned by Volkswagen AG (VW, BBB+/Negative/F2). The transaction has a legal final maturity date of May 2024. The ratings are as follows:
- AUD500m Class A notes: 'AAAsf'; Outlook Stable
- AUD31m Class B notes: 'AA-sf'; Outlook Stable
- AUD36.7m Subordinated Loan: not rated
- AUD5.7m Collateral Loan: not rated.
The notes were issued by Perpetual Corporate Trust Limited in its capacity as trustee of Driver Australia Three Trust.
VWFSA is a provider of auto financing for retail and corporate clients, predominantly through a preferred dealership network in Australia. VWFSA finances a wide range of vehicle models along with its own branded vehicles, primarily Volkswagen, Audi and Skoda.
The collateral backing the Driver Australia Three transaction is of similar credit quality to prior pools securitised under the Driver Australia programme. At the cut-off date, the total collateral pool consisted of loan receivables, backed by new motor vehicles (88.9%) and used motor vehicles (11.1%), with a weighted average seasoning of 11.0 months and a weighted average remaining term of 44.6 months.
KEY RATING DRIVERS
Credit Support: The Class A and B notes benefit from credit enhancement (CE) of 14.0% and 8.6%, respectively, provided by the subordinated loan and overcollateralisation via the Collateral Loan. A cash collateral account will be fully funded at closing to cover any potential interest shortfalls on the rated notes. Any amounts outstanding in the account at final maturity are available to cover any principal shortfalls on the notes.
Discounted Assets: The aggregate nominal amount of the notes, plus the Subordinated Loan and overcollateralisation via the collateral loan, equals the present value of the purchased receivables discounted at issuance using the discount rate. The transaction, therefore, yields no excess income to cover losses, or to reimburse losses.
VWFSA Risk: There is no back-up servicer, and the transaction is dependent on VWFSA's operational and credit assessment capabilities. VWFSA is an unrated entity; and, as such, an advance mechanism is in place so that collections are prepaid and segregated from VWFSA's own funds. The transaction is reliant on VWFSA making compensation payments to cover interest shortfalls if borrowers on interest rates higher than that of the discount rate prepay. This risk has been included within Fitch's cash-flow analysis under various stressed scenarios.
Balloon Loans within Portfolio: Obligors that are subject to balloon payments are required to make such payments if the balloon payments cannot be refinanced. The pool, by balance, contains 56.8% that are subject to balloon payments, which is higher than peer transactions. Fitch expects higher default risk if limited refinancing options exist within the market. This could be the case under more severe economic stress. Fitch has incorporated this risk in its analysis.
Impact of Emissions Allegation: In accordance with the transaction documents, any legally permissible reduction of instalments or termination of contracts by obligors would be a breach of warranty made to the issuer by the seller. Fitch has also considered higher price declines for 7.4% of the discounted portfolio balance that are affected vehicles.
Unexpected increases in the frequency of foreclosures, and the loss severity on defaulted loans, could produce loss levels higher than Fitch's base case, which could in turn result in negative rating actions on the notes. Fitch has evaluated the sensitivity of the ratings assigned to Driver Australia Three Trust to increased gross default levels and decreased recovery rates over the life of the transaction.
Its analysis found that collectively, the class A and B notes' ratings were susceptible to downgrades under Fitch's mild (10%), moderate (25% increase) and severe default (50% increase) scenarios. Recovery scenarios, whereby recovery rate assumptions are decreased, showed that the ratings of the class A notes were impacted under moderate (25% decrease) and severe (50% decrease) scenarios, while the class B notes were impacted under mild (10% decrease), moderate (25% decrease) and severe (50% decrease) scenarios. The ratings of both the class A and B notes were adversely impacted under all combined stress scenarios of 10% increase in defaults and 10% decrease in recoveries, 25% increase in defaults and 25% decrease in recoveries, and 50% increase in defaults and 50% decrease in recoveries.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch conducted a file review of 10 sample loan files focusing on the underwriting procedures of VWFSA compared to its credit policy. Fitch has checked the consistency and plausibility of the information and no material discrepancies were noted that would impact Fitch's rating analysis.
Fitch reviewed the results of the agreed-upon procedures conducted on the portfolio. The agreed-upon procedures reported no material errors that would impact Fitch's rating analysis.
Key Rating Drivers and Rating Sensitivities are further discussed in the corresponding new issue report entitled, "Driver Australia Three Trust", published today. Included as an appendix to the report are a description of the representations, warranties and enforcement mechanisms.