Fitch Assigns VCL 22 Expected Ratings
EUR floating-rate, asset-backed class A notes, due August 2021: 'AAA(EXP)sf'; Outlook Stable
EUR floating-rate, asset-backed class B notes, due August 2021: 'A+(EXP)sf'; Outlook Stable
EUR subordinated loan, due August 2021: not rated
The final ratings are contingent upon the receipt of final documents conforming to the information already received, a satisfactory review of final legal opinions to support the agency's analytical approach and the selection of swap counterparties.
The transaction is a securitisation of auto lease receivables originated to German companies and individuals by Volkswagen Leasing GmbH (VWL), a subsidiary of Volkswagen Financial Services AG, itself a subsidiary of Volkswagen AG (A/F1/RWN).
KEY RATING DRIVERS
We determined default and recovery base cases of 1.85% and 67.5%. At 'AAAsf' we applied a high default stress multiple of 6.0x and a recovery haircut of 45%. All assumptions remain unchanged from previous VCL transactions.
In the preliminary pool, 20.8% of leased vehicles (by volume) have been reported as affected by VW's emission test manipulation. To assess the impact of the expected negative effect on used car prices, Fitch has stress tested its recovery rate assumptions for affected vehicles in the relevant rating scenarios.
According to transaction counsel, if the affected cars cannot be fully repaired, this could result in a legally permissible reduction of lease instalments or the termination of lease contracts by lessees. Fitch understands from transaction counsel that such instances would be considered as a breach of representation and warranties made to the issuer by the seller if they materially and adversely affect the interests of the noteholders. This could increase credit exposure to the seller and, ultimately, VW.
No formal back-up servicing arrangements are made to replace VWL as a servicer. Servicer continuity risk is reduced by a comfortable liquidity position, covering at least eight monthly payments. Moreover, given the close integration of the seller into VW group and its size, we believe that a disorderly servicing interruption is highly unlikely.
A non-amortising cash reserve is available to cover certain seller-related risks, such as commingling and tax risks. During the first periods of the transaction, Fitch deems the size of the reserve as just adequate to cover potential commingling and tax risks. As the aggregate exposure of commingling and tax risks decreases over time, in later periods there will be excess amounts that could be used for other seller-related risks.
Fitch tested the rating sensitivity of the notes to various scenarios, including an increase in the base case default rate and/or a decrease in the base case recovery rate for the portfolio. The model-implied sensitivities indicate that an increase in the base case default rate by 50%, together with a decrease in the base case recovery rate by 50%, may result in a downgrade of the class A notes to 'Asf' and the class B notes to 'BBB-sf'.
Additionally, scenarios reducing recovery rates further were analysed, thus simulating a permanent damage to VW's brand image. For example, a decrease of the already stressed recovery rates for affected vehicles by 50% and a simultaneous decrease of the stressed recovery rates for unaffected vehicles of 20% would lead to a downgrade of class A notes to 'AA+sf'.
The transaction characteristics are largely comparable to the existing term securitisations under the VCL brand. VCL 22 differs from previous VCL transactions with respect to the cash reserve available to cover seller-related risks (commingling, tax risks and breaches of the seller's representations) - while previous VCL transactions benefit from residual values covering such risks.
The class A and B notes pay floating interest based on one-month Euribor. Since the receivables pay fixed interest, the issuer will enter into swap agreements at closing to hedge the resulting interest rate mismatch.
The transaction is static and will start amortising from closing. Repayment of note principal switches between sequential and pro-rata allocation, based on transaction performance. Unchanged loss triggers inducing sequential note amortisation are not keeping pace with the lower observed losses; their effectiveness has therefore diminished. However, the fairly long period until the target overcollateralisation levels are reached protects the structure from a rapid switch to a pro-rata amortisation.
The EUR750m preliminary portfolio consists of 71,875 lease contracts granted to 48,342 lessees. It is granular with the top 20 lessees accounting for 0.68% of the initial outstanding pool balance. The share of vehicles affected by the emission manipulations is 20.8% of the total pool balance.
VWL acts as a servicer. The risk of cash flow and servicing interruptions is reduced by a cash reserve, providing liquidity of 8x monthly senior cost and swap payments (equal to note interest).
DUE DILIGENCE USAGE
Fitch expects to receive a third party assessment conducted on the asset portfolio information prior to closing.
Fitch conducted a review of a small targeted sample of VWL's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Fitch was also provided with the number and volume of vehicles in the pool affected by VW's alleged emission manipulation. This allowed the agency to perform a detailed analysis of the initial pool.
Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis:
-Static loss data (number and amount) since January 2002 until June 2015.
-Dynamic delinquency from January 2010 data until June 2015.
-Preliminary pool stratification data provided by VWL as of 30 August 2015.
-Surveillance data for existing VCL transactions.
-Number / amount of vehicles affected by the emission manipulation, as provided by originator.
REPRESENTATIONS AND WARRANTIES
A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms to those typical for the asset class is available by accessing the appendix that accompanies the presale report, dated 19 October 2015 at www.fitchratings.com. In addition, please refer to the special report "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions" dated 12 June 2015 available on the Fitch website.