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March 5 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned SC Germany Auto 2014-1 UG (haftungsbeschraenkt)’s EUR553.5m class A notes an expected rating as follows:
EUR553.5m class A notes, assigned ‘AAA(EXP)sf’; Outlook Stable
EUR46.5m class B notes, ‘NR(EXP)sf’
EUR6m Subordinated loan, ‘NR(EXP)sf’
The final rating will be contingent upon the receipt of final transaction documents conforming to the information already received to support the agency’s analytical approach.
The transaction is a repeat securitisation of auto loans originated by Santander Consumer Bank AG (SCB), an indirectly wholly-owned subsidiary of Santander Consumer Finance S.A. (SCF, BBB+/Stable/F2). SC Germany Auto 2014-1 UG (haftungsbeschraenkt) is a special purpose company incorporated with limited liability under German law.
The expected rating is based on Fitch’s assessment of SCB’s origination and servicing procedures, the agency’s expectations of future asset performance, the available credit enhancement and the transaction’s legal structure.
Fitch applied a default base case of 1.75% for the transaction compared with 1.85% for the previous SC Germany Auto 2013-2. Furthermore, the agency determined a base case recovery rate of 40%. The lower default base case is due to the continuing strong performance of the latest vintages, the economic environment and the performance of existing transactions. Fitch applied a higher ‘AAA’ rating default multiple of 7.15x, reflecting the stable macroeconomic outlook applied in deriving the default base case, which does not incorporate any significant stress.
The originator, SCB, is an experienced auto loan underwriter in Germany, with a good servicing track record. Previous SC Germany Auto transactions continue to perform within or better than Fitch’s initial expectations.
SCB is the servicer for the transaction. Cash reserves will be funded at closing to cover the potential risks stemming from: (i) commingling; and (ii) set-off (arising from customer deposits, handling fee claims and insurance-related set-off claims).
Fitch expects the performance of German auto loans to remain stable over the next two years. The unemployment rate - an important risk factor for German auto transactions - has reached historically low levels and Fitch expects it to remain stable over the next two years.
The issuance proceeds will be used to purchase a portfolio of auto loan receivables originated by SCB. The receivables are secured by the financed vehicles and are granted exclusively to German residents. The transaction is static and will start amortising from closing.
The provisional portfolio consists of 77,993 loan contracts, with an outstanding aggregate principal balance of EUR600m and a weighted average remaining term of 43.8 months. The loans have been granted by SCB to buyers of new (40%) and used (60%) vehicles. The portfolio is highly granular in terms of regional distribution within Germany and debtor concentration, with the top 25 obligors accounting for 0.20% of the portfolio notional.
The notes will amortise on a sequential basis. At closing, credit enhancement for the class A notes will be equal to 8.75%; made up of overcollateralisation (7.75%) and the fully-funded reserve fund (1.0%). While the reserve fund will be available at closing, it will initially only provide liquidity coverage to the transaction. Once the notes have amortised by 50%, the reserve will then also be available to cover any losses in the respective period. Additionally, the transaction is expected to generate excess spread that provides a first layer of default protection.
The issuer will enter into an interest rate swap to hedge the mismatch between fixed interest received from the receivables and variable payments on the class A notes. The swap notional will be based on the lower of the outstanding class A notes’ balance and a fixed notional schedule based on a 0% prepayment and default assumption. Fitch notes that this structure could leave the class A notes with partially unhedged interest rate risk but gained comfort from the available credit enhancement to mitigate this risk.
Expected impact upon the note rating of increased defaults (Class A):
Original Rating: ‘AAAsf’
Increase base case defaults by 10%: ‘AA+sf’
Increase base case defaults by 25%: ‘AAsf’
Increase base case defaults by 50%: ‘A+sf’
Expected impact upon the note rating of decreased recoveries (Class A):
Original Rating: ‘AAAsf’
Reduce base case recovery by 10%: ‘AA+sf’
Reduce base case recovery by 25%: ‘AA+sf’
Reduce base case recovery by 50%: ‘AA+sf’
Expected impact upon the note rating of increased defaults and decreased recoveries (Class A):
Original Rating: ‘AAAsf’
Increase default base case by 10%; reduce recovery base case by 10%: ‘AA+sf’
Increase default base case by 25%; reduce recovery base case by 25%: ‘AA-sf’
Increase default base case by 50%; reduce recovery base case by 50%: ‘Asf’
Key Rating Drivers and Rating Sensitivities are further described in the accompanying Presale report available at www.fitchratings.com.
Link to Fitch Ratings’ Report: SC Germany Auto 2014-1 UG (haftungsbeschrÃ_rnkt)