OREANDA-NEWS. The international rating assigned by another rating agency to the Rongteng Individual Auto Mortgage Backed Securitization 2015-1 transaction has set a precedent that is not in line with international practices, Fitch Ratings says. The transaction does not have an initial liquidity facility available to protect against any payment disruption (for example, in the event of servicer termination); at the same time, it has no back-up servicing arrangements in place. Liquidity facilities or reserve funds that are available or pre-funded at closing are common features in virtually all global auto ABS transactions.

The transaction, a static cash securitisation of auto loans extended by SAIC-GMAC Automotive Finance Co., Ltd. to obligors in China, is just the third auto finance ABS transaction from China to be rated by an international rating agency and departs from the practice of the previous internationally rated transactions that attempted to follow global best practices.

The transaction structure meets the standards of a domestically rated securitisation in China, but it is unusual for an internationally rated transaction assigned such high ratings to be issued without liquidity support. Fitch believes that international investors expect transactions with international ratings to meet global standards. This is key in ensuring that the Chinese ABS market attracts the broadest and deepest investor base.

To date the Chinese ABS transactions that have obtained international ratings have been conservatively structured and have followed international best practice in this area. Driver China One, originated by Volkswagen Finance (China) Co., Ltd. with the most senior notes rated 'AAsf' by Fitch, included a 1.2% cash collateral account in its structure, while Fuyuan 2015-1 Retail Auto Mortgage Loan Securitization Trust, originated by Ford Automotive Finance (China) Ltd. with the most senior notes rated 'AAsf' by Fitch, included a 1.5% liquidity reserve.

The Rongteng transaction issued by SAIC GMAC, a joint venture between SAIC Finance (45%), GMAC UK (35%), and Shanghai GM (20%), has conservatively underwritten assets that show performance that is equal to or better than comparable transactions around the world. However, the structure is significantly weaker than international benchmarks and weaker than similar transactions issued by GM-related companies in other parts of the world.

The international rating agency that rated the Rongteng transaction indicated that there were mitigants to the operational and liquidity risks including: the support available to the servicer through the joint venture partners; the trapping of excess spread into the reserve account following certain trigger breaches; and the short tenor of this transaction.

Fitch does not believe the factors listed sufficiently mitigate the risks to achieve international ratings in the 'AA' category. For example, there is no explicit guarantee agreement between the originator/servicer and the parent entities even if they were rated sufficiently to support such a high rating. GM is rated 'BB+' by Fitch and similarly by other international rating agencies. SAIC Finance is not rated. In addition, the trapping of excess spread at some future date is based on domestic rating agency triggers and not those of the international agency rating the transaction. As such this transaction structure appears to depart from international best practices and provides a poor benchmark for future transactions to follow.