RPT-Fitch Revises VCL Multi-Compartment S.A. - Compartment 16's Class B Outlook to Positive
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Oct 8 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings-London/Frankfurt-08 October 2013: Fitch Ratings has revised the Outlook on VCL Multi-Compartment S.A. - Compartment 16's (VCL 16) class B notes to Positive from Stable. The ratings of the notes have been affirmed.
EUR608m class A notes (ISIN: XS0821742144), due July 2018: affirmed at 'AAAsf'; Outlook Stable
EUR30.1m class B notes (ISIN: XS0821743977), due July 2018: affirmed at 'A+sf'; Outlook revised to Positive from Stable
VCL 16 is a static true-sale securitisation of leases granted to German clients. The originator, VW Leasing GmbH is a subsidiary of VW Financial Services AG , itself a subsidiary of Volkswagen Group (A-/Positive/F2).
KEY RATING DRIVERS
The Positive Outlook reflects an increase in credit enhancement as a result of rapid portfolio amortisation and the portfolio's solid performance since issue in October 2012. However, the limited performance history of this transaction prevented an immediate upgrade of the class B notes.
In the agency's view, the stable economic outlook for Germany does not suggest a significant increase in defaults, while corporate insolvencies are expected to increase slightly. Furthermore, the transaction has been reporting low 30 days+ delinquencies of 0.52%, often an indicator of future defaults.
As of end-August 2013 the portfolio had amortised down to EUR684m from the original amount of EUR1,075m in October 2012. The portfolio's composition has remained largely unchanged since closing with the majority of securitised leases granted to commercial customers.
The proceeds from pool amortisation have been applied to redeem the senior class A notes, which has led to an increase in credit enhancement for the class A notes to 12.7% from 8.2% as at issue and to 8.3% from 5.4% for the class B notes. The transaction will switch to a pro-rata amortisation when respective triggers are met. The agency expects the change in the amortisation profile in late 2013.
Reported defaults and losses have been lower than Fitch's expectations. Yet, given the short performance history of this transaction, Fitch is maintaining its original default assumption of 2% as well as the original recovery assumption of 60%.
Around 6.7% of the current portfolio (by balance) are made up of mileage settlement contracts. A ruling by the higher regional court of Dusseldorf that became final in May 2013 held that consumer protection legislation is applicable to consumer lease contracts with mileage settlement. As a consequence, these lessees could, among others, have an extended right to withdraw from the contract. If a lessee were to withdraw, they could reclaim paid instalments net of a fee for the usage of the vehicle from the lessor and stop paying future lease instalments.
However, due to the low balance of the mileage settlement contracts, Fitch deems this set-off risk to be fairly small.
The portfolio's performance would be sensitive to a sharp increase in corporate insolvencies causing significantly higher default rates. However, the transaction has built up credit enhancement through deleveraging, which would reduce downward pressure on the rated notes following an unlikely sharp increase in insolvencies and thus defaults.
The ratings would also be sensitive to significantly lower-than-expected recoveries from defaulted loans, due to, for example, , a severe downturn of the German used car market.
Unremedied counterparty risk, for example, in the case of unhedged interest rate risk following the swap counterparty's default or lost funds following a default of the account bank, can also create downward pressure on the ratings.
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