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Oct 23 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Driver UK Master S.A. - Compartment 2 series expected ratings as follows:
Class A Series 2013-1: ‘AAA(EXP)sf’; Outlook Stable
Class A Series 2013-2: ‘AAA(EXP)sf’; Outlook Stable
Class A Series 2013-3: ‘AAA(EXP)sf’; Outlook Stable
Class A Series 2013-4: ‘AAA(EXP)sf’; Outlook Stable
Class A Series 2013-5: ‘AAA(EXP)sf’; Outlook Stable
Class A Series 2013-6: ‘AAA(EXP)sf’; Outlook Stable
Class A Series 2013-7: ‘AAA(EXP)sf’; Outlook Stable
Class A Series 2013-8: ‘AAA(EXP)sf’; Outlook Stable
Class A Series 2013-9: ‘AAA(EXP)sf’; Outlook Stable
Class A Series 2013-10: ‘AAA(EXP)sf’; Outlook Stable
Class B Series 2013-1: ‘A+(EXP)sf’; Outlook Stable
Class B Series 2013-2: ‘A+(EXP)sf’; Outlook Stable
Class B Series 2013-3: ‘A+(EXP)sf’; Outlook Stable
Class B Series 2013-4: ‘A+(EXP)sf’; Outlook Stable
Subordinated loan: not rated
The final ratings are contingent upon the receipt of final documents conforming to the information already received and on a satisfactory review of final legal opinions to support the agency’s analytical approach.
The notes are backed by a pool of auto loan receivables originated by Volkswagen Financial Services (UK) Ltd. (VWFS UK). The transaction will have an initial one-year revolving period. Fitch has a stable outlook for UK auto ABS transactions.
Expected Portfolio Performance
Based on the performance differences in the historical data provided by VWFS UK, Fitch has assigned base cases to four different sub-categories through the combination of personal contract purchase (PCP) loans that bear residual value (RV) risk and fully amortising hire purchase (HP) loans with new or used cars.
As a result, the agency determined a weighted average (WA) default base case of 1.7% and a WA recovery base case of 68.1%, assuming a deterioration of the composition during the revolving period.
In line with its criteria, Fitch has applied a default stress multiple of 6.0x and 4.0x at ‘AAAsf’ and ‘A+sf’ respectively to account for the low absolute level of the default base case. The assumed ‘AAAsf’ and ‘A+sf’ recovery haircuts are 45% and 35%, which take into account the historically stable characteristics of the loan products but also the significant growth in PCP origination.
Exposure To Used Car Prices
The issuer is exposed to lower used car prices from both RV and voluntary termination (VT) risk. This is because the vast majority of loans are PCP loans (77% initially) and are regulated under the UK Credit Consumer Act. Under a PCP loan, borrowers face a balloon payment at maturity, but have the option to return the vehicle in lieu of paying the balloon. Loans regulated by the Consumer Credit Act entitle the borrowers to terminate their contracts without further repayment obligations once 50% of the total amount due is paid. Fitch has assumed a combined RV and VT loss of 19.2% and 12.5% in ‘AAAsf’ and ‘A+sf’ respectively.
Revolving Period Additional Risk
The transaction envisages a one-year revolving period until November 2014, during which further receivables will be transferred to the issuer each month.
In Fitch’s view, the early amortisation triggers in place, along with eligibility criteria, portfolio limits and available credit enhancement, sufficiently address the risk of a significant deterioration of the underlying asset quality. However, the agency views PCP contracts as the most risky ones as these further expose the issuer to both VT and direct used car residual value risk. Fitch has assumed in its analysis that the portfolio composition will shift towards more PCP contracts (to 85.0% by the end of the revolving period from currently 77.4%).
After the revolving period the notes and subordinated loan will start amortising on a sequential basis until further over-collateralisation (OC )is built up (target OC for the amortisation period is 33.9% and 20.9% respectively). As soon as the target OC levels are reached, the transaction will switch to pro-rata amortisation. Provided the target OC levels are maintained, amortisation will be pro-rata until either an early amortisation trigger is breached or the subordinated loan has reached a floor of GBP 150m which causes the structure to switch back to sequential amortisation. In Fitch’s view, this mechanism sufficiently protects the structure against back-loaded losses incurred through high RV risk concentration in the tail period of the amortisation.
Initial credit enhancement (CE) for the class A and B notes will be 28.3% and 15.3% respectively. CE is provided by OC achieved by the subordinated loan (13.9%) helping to fund asset purchases and a cash collateral account of 1.0% (equalling 1.2% of the initial note balance), as well as by additional OC of initially 1.0% arising from an excess of assets over liabilities.
The initial assets are sold to the SPV at a premium which results from discounting the assets with a lower interest rate than the contractual APR. However, the structure provisions for potential losses from prepayments (due to borrowers only repaying the loans’ outstanding nominal amount). During the revolving period, receivables are purchased at a higher purchase price discount, leading, if asset performance is satisfactory, to additional OC. Target OC during the revolving period is 30.9% and 17.9% for the class A and B notes respectively.
The loans are granted to obligors resident in the UK for the purchase of new (70% of preliminary pool balance) and used cars (30% of preliminary pool balance). As of July 2013, the portfolio consisted of 269,284 loan contracts, with an outstanding aggregate principal balance of GBP2,850m, a WA remaining term of 27 months and a WA RV balloon of 45%.
VWFS UK, the originator and servicer, is a wholly-owned subsidiary of Volkswagen Financial Services AG, which in turn is a wholly-owned subsidiary of Volkswagen Group (A-/Positive/F2). Driver UK Master S.A. - Compartment 2 is a special purpose vehicle incorporated in Luxembourg.
The issuer will enter into fixed-floating interest rate swaps to hedge the interest rate mismatch between the fixed paying assets and the floating-rate notes. The swaps are expected to be entered into with counterparties bearing ratings consistent with Fitch’s counterparty criteria and the swap agreements are expected to contain downgrade provisions.
Fitch was provided with historical loss cohorts split by new and used vehicle financings and PCP and HP loans. Recovery data were provided showing cash recoveries. The agency assumed defaults of 1.5% for new PCP and HP loans, 2.0% for used HP loans and 2.5% for used PCP loans. Fitch applied recovery base cases of 70% for new and 65% for used cars, defaults multiples of 6.0x and 4.0x as well as recovery haircuts of 45% and 30% in ‘AAAsf’ and ‘A+sf’ respectively.
Expected impact upon the note rating of increased defaults (Class A / Class B): Current Ratings: ‘AAAsf’ / ‘A+sf’
Increase base case defaults by 10%: ‘AAAsf’ / ‘A+sf’
Increase base case defaults by 25%: ‘AAAsf’ / ‘Asf’
Increase base case defaults by 50%: ‘AAAsf’ / ‘Asf’
Expected impact upon the note rating of decreased recoveries (Class A / Class B):
Current Ratings: ‘AAAsf’ / ‘A+sf’
Reduce base case recovery by 10%: ‘AAAsf’ / ‘A+sf’
Reduce base case recovery by 25%: ‘AAAsf’ / ‘Asf’
Reduce base case recovery by 50%: ‘AAAsf’ / ‘A+sf’
Expected impact upon the note rating of increased market value stress: Current Ratings: ‘AAAsf’ / ‘A+sf’
Increase market value stress by 10%: ‘AA+sf’ / ‘BBB+sf’
Increase market value stress by 25%: ‘AA-sf’ / ‘BB+sf’
Increase market value stress by 50%: ‘BBB+sf’ / ‘B+sf’
Expected impact upon the note rating of increased defaults, market value stress and decreased recoveries:
Current Ratings: ‘AAAsf’ / ‘A+sf’
Increase default base case and market value stress by 10%; reduce recovery base case by 10%:
‘AA+sf’ / ‘BBB+sf’
Increase default base case and market value stress by 25%; reduce recovery base case by 25%:
‘A+sf’ / ‘BB+sf’
Increase default base case and market value stress by 50%; reduce recovery base case by 50%:
‘BBB+sf’ / ‘B+sf’