OREANDA-NEWS. March 01, 2016. Fitch Ratings has assigned a final rating to Driver Japan five's trust beneficial interests of the second trust (BIs 2) and asset-backed loans of the second trust (ABL 2). The transaction is ultimately backed by a pool of auto loan receivables originated by Volkswagen Financial Services Japan Ltd. (VWFSJ), a wholly owned subsidiary of Volkswagen Financial Services AG, which is wholly owned by Volkswagen AG (VW, BBB+/Negative/F2), with a legal final maturity date of June 2024. The final rating is as follows:

JPY60bn* BIs 2 and ABL 2 (initial credit enhancement: 6.5%**): 'AAAsf'; Outlook Stable
*The issue amount was increased to JPY60bn (BIs 2: JPY31bn, ABL2: JPY29bn) from JPY30bn when the expected rating was assigned on 7 January 2016 (8 January 2016 Japan time).
**calculated as the subordinated BIs (excluding the portion corresponding to the cash reserve) divided by the total discounted principal balance of the underlying auto loan receivables

KEY RATING DRIVERS

Low Default Expectations: Fitch assumes a low base case cumulative gross loss rate of 0.8% for this transaction before taking into account the balloon payment risk. This figure is based on very stable historical default performance over the past 13 years, which includes two recessionary periods.

Balloon Payment Risk: The balloon portion accounts for 41% of the initial underlying portfolio for this transaction. Obligors will be required to make such payments if the balloon payments are not covered by refinancing of loans or repurchase of vehicles. Fitch accounted for the risk arising from obligors' potential inability to cover balloon payments at loan maturity dates under severe economic stress by increasing cumulative gross loss assumptions.

Revolving Period Risk: The transaction features a one-year revolving period. Fitch modelled some adverse migration of the underlying asset pool. However, Fitch does not expect any material change in the credit quality of the portfolio. This is partly because the underlying auto loans are guaranteed by JACCS Co., Ltd. (JACCS) and Cedyna Financial Corporation (Cedyna), who also act as sub-servicers in this transaction. As such, there is little incentive for both companies to relax their underwriting standards.

Managed Servicing Continuity Risk: VWFSJ, as the servicer, will delegate its function to Cedyna or JACCS, as sub-servicers in this transaction. No back-up servicer is appointed at closing; however, if a servicer replacement event occurs, Shinsei Trust & Banking Co., Ltd. as Trustee 1 will assume the servicing responsibilities or may appoint a third party as a successor servicer. The cash reserve, to be posted at closing, is expected to cover interest and expense payment for four months, to mitigate payment interruption risk.

RATING SENSITIVITIES
Unexpected increase in the gross loss and decrease in the asset yield could produce loss levels higher than Fitch's base case, which could in turn result in negative rating actions on BIs 2 and ABL 2. Fitch has evaluated the sensitivity of the rating assigned to Driver Japan five to increased gross loss levels, and decreased asset yield.

Its analysis found that the rating was susceptible to downgrades under Fitch's moderate (25% increase: 'AA+sf') and severe (50% increase: 'AAsf') gross loss scenarios.

Asset yield scenarios, whereby weighted average asset yield assumptions are decreased, showed that the rating of the BIs 2 and ABL 2 was impacted under moderate (25% decrease: 'AA+sf') and severe (50% decrease: 'AA-sf') stress scenarios.

The rating of BIs 2 and ABL 2 was adversely impacted under the combined stress scenarios of 25% increase in gross loss and 25% decrease in yield ('AA+sf') as well as the combined stress scenarios of 50% increase in gross loss and 50% decrease in yield ('A+sf').

Fitch's key rating drivers and rating sensitivity analysis are discussed further in the corresponding new issue report entitled "Driver Japan five", published today. Included as an appendix to the report are a description of the representations, warranties and enforcement mechanisms.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
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. Fitch reviewed the results of the agreed-upon procedures (AUP) conducted on the portfolio. The AUP reported no material errors that would impact Fitch's rating analysis.

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 this rating action commentary and the new issue report available at www.fitchratings.com. In addition refer to the special report "Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions" dated 21 January 2016 available on the Fitch website.