Fitch Assigns VCL Master Residual Value S.A., Compartment 2 Expected Ratings
OREANDA-NEWS. Fitch Ratings has assigned VCL Master Residual Value S.A., Compartment 2's notes expected ratings as follows:
EUR floating-rate, asset-backed class A notes, due September 2022: 'AAA(EXP)sf'; Outlook Stable
EUR floating-rate, asset-backed class B notes, due September 2022: 'A+(EXP)sf'; Outlook Stable
EUR subordinated loan, due September 2022: not rated
VCL Master Residual Value S.A. is a securitisation vehicle incorporated in Luxembourg. The originator, Volkswagen Leasing GmbH (VWL), is a wholly-owned subsidiary of Volkswagen Financial Services AG, which in turn is 100%-owned by Volkswagen AG (BBB+/Negative/F2). The transaction is a platform for VWL to securitise the residual value (RV) portion of auto leasing contracts with German lessees. The transaction will revolve until September 2016 unless terminated earlier for performance reasons.
The expected ratings are based on Fitch's assessment of VWL's origination and servicing procedures, our expectations of asset performance, the available minimum credit enhancement (CE), and the transaction's legal structure. Fitch will regularly monitor the activity of the platform during the revolving period and perform a full rating analysis if the latter is extended.
KEY RATING DRIVERS
This transaction solely securitises the RV component of a lease contract. Investors are exposed to the market value risk of the underlying leased vehicles, which is the focus of Fitch's analysis.
In the preliminary pool, 17.5% of the leased vehicles (by volume) have been reported as being affected as a consequence of VW's manipulation of emissions tests. Fitch expects, at least temporarily, an impact on the used car prices for these vehicles. The agency therefore reduced its base case recovery expectations for affected vehicles by 10%. It reduced its assumptions on RV sale proceeds by the same percentage prior to applying a 'AAA' market value haircut of 35%.
According to transaction counsel, failure to fully repair the affected cars could result in a legally permissible reduction in 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 the representations and warranties made to the issuer by the seller, if they materially and adversely affect the interests of the noteholders. This could potentially increase credit exposure to the seller and ultimately VW.
A reserve of EUR45m adequately protects the transaction from lower used car values related to vehicles where irregularities regarding purported CO2 emissions were detected by VW. The approximate number of affected vehicles is below 10%.
RV payments are the issuer's main source of cash. As the amortisation profile of the portfolio is concentrated relative to a purely amortising portfolio, liquidity coverage is crucial. The cash reserve, covering at least 20 months of senior expenses and swap payments (and thereby note interest), provides sufficient liquidity support.
Credit enhancement (CE) covers the market value risk of the underlying vehicles and the credit risk of the underlying lease receivables. In its analysis, Fitch relies on the minimum CE of 46.65% for the class A and 34.65% for the class B notes. Failure to comply with the minimum CE requirement will trigger an early amortisation event.
The assets are purchased at net present value, with a discount rate of 4.3%. The excess of this rate over the swap payments, senior fees and servicing fees can be used for note redemption in the amortisation phase and also for asset replenishment during the revolving period.
Fitch renewed its rating on VCL Master RV Compartment 1 in September 2015. The new compartment largely mirrors the structure of Compartment 1.
Fitch tested the rating sensitivity of the notes to various scenarios, including an increase in the market value decline (MVD) assumption for the portfolio. The model-implied sensitivities indicate that an increase in the MVD assumption by 25% may result in a downgrade of the class A notes to 'AA-sf' and the class B notes to 'BBB-sf'. The notes' ratings are fairly insensitive to increased defaults as the credit risk is of smaller magnitude than the RV risk.
The issuer has a repurchase agreement with VWL, according to which it can sell the leased vehicles at the contractual RV. However, in its analysis, Fitch assumed that the seller has defaulted and cannot honour this repurchase agreement.
As with other VCL Master transactions, there is a possibility for term take-outs from the issuer. The documents foresee that Fitch will be informed before execution of the onward transfer. At this date, the agency will analyse the pool composition after take-out, in particular with regard to asset concentrations and maturity clustering. Given the bullet-nature of expectancy rights, Fitch considers these variables crucial to the ability of the portfolio to generate sufficient cash flows for the timely payment of interest and ultimate payment of principal on the notes.
Investors will be able to choose if they want to extend the revolving period of their series, provided VWL has not defaulted at the end of the revolving period. Certain series of notes may therefore start amortising, while others continue to revolve. If the revolving period is prolonged, Fitch will fully review the transaction and publish corresponding rating actions.
Further to the RV risk, the transaction is exposed to some credit risk, as customers can default ahead of contract maturity. The credit risk dampens the RV risk as a defaulted contract cannot reach the contract maturity - at which point in time the RV risk materialises. Fitch applied a default base case of 2.5% and recovery base case of 66.3%, resulting in a loss base case from defaulted contracts of 0.84%. The recovery assumption is lower than the assumption determined for VCL Master RV C1 as of September 2015.
DUE DILIGENCE USAGE
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.
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:
-Comparison of VWL RV forecast (available semi-annually) with Deutsche Automobil Treuhand GmbH (DAT) forecast since July 2007 for major vehicle types
-VWL RV forecasts compared with VWL contractual RVs
-Static write-off information on VWL's lease portfolio until September 2015 (amount) and until March 2015 (number)
-Dynamic delinquency data since the end of January 2009 on VWL's lease portfolio
-Pool stratification data provided by VWL as at 30 September 2015
-Market data on used car prices