August 30, 2017 / 6:30 AM / a year ago

Fitch Assigns Expected Ratings to Volkswagen Finance (China)'s Driver China seven Trust

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Driver China seven Trust here HONG KONG/SHANGHAI, August 30 (Fitch) Fitch Ratings has assigned expected ratings to Driver China seven Trust's (Driver China seven) auto loan-backed fixed-rate notes. The issuance consists of notes backed by Chinese automotive loan receivables originated by Volkswagen Finance (China) Co., Ltd. (VWFC), a wholly owned subsidiary of Volkswagen Financial Services AG. The ratings are as follows: CNY3,512 million class A notes: 'AA(EXP)sf'; Outlook Stable CNY150 million class B notes: 'A-(EXP)sf'; Outlook Stable CNY316.5 million subordinated notes: 'NR(EXP)sf' CNY20.0 million overcollateralisation: 'NR(EXP)sf' The notes will be issued by CITIC Trust Co., Ltd. in its capacity as trustee of Driver China seven. At the cut-off date of 31 May 2017, the total collateral pool consisted of 73,989 auto loan receivables with an aggregated discounted receivables balance of CNY3,999 million. KEY RATING DRIVERS Stresses Commensurate with Rating: Fitch expects a lifetime default rate for the VWFC portfolio of 1.4%. We applied a stress multiple of 6.0x at 'AAsf' (3.6x at A-sf) on defaults to take into account the limited history of car finance in China, particularly through an economic cycle, and Fitch's expectation that emerging-market securitised assets are prone to higher levels of stress than those in developed markets for the same rating category. Fitch's recovery expectation was limited to 10%, subject to a further haircut of 50% at 'AAsf' and 30% at 'A-sf'. Strong Portfolio Characteristics: The initial weighted-average (WA) loan-to-value (LTV) ratio is 56.1% as of the cut-off date. This portfolio has a WA original term of 29.9 months, and has been seasoned for 8.2 months. The pool is well-diversified - the maximum single-obligor concentration was 0.04% of the outstanding discounted receivables balance as of the cut-off date. The portfolio has only 0.96% of loans subject to refinancing risk for repaying their balloon payments. Of the vehicles in the portfolio, 99.0% are new. Experienced Sponsor: The originator, VWFC, is part of the Volkswagen (VW) Group, an active global originator of auto-finance securitisation transactions. VWFC uses a similar structure modelled on its global Driver programme and uses policies and procedures based on those adopted globally by VW group. Fitch believes VWFC is a capable originator and servicer, which is evident from its historical portfolio delinquency and loss experience. Sector Outlook and Sovereign Cap: We see the asset outlook of this portfolio as stable based on its characteristics. Fitch forecasts China's unemployment rate and GDP growth at 4.0% and 6.7% in 2017, respectively and 4.0% and 6.3% in 2018. The 'AAsf' rating is the cap on Chinese structured finance transactions due to the early stages of development of securitisation markets in China, and the Local-Currency Issuer Default Rating of 'A+' EXPECTED RATING SENSITIVITIES Unexpected increases in default rates and unexpected decreases in recovery rates on defaulted loans could produce loss levels higher than Fitch's base case, which could lead to negative rating action on the notes. Fitch has evaluated the sensitivity of the ratings to increased gross default levels and decreased recovery rates over the life of the transaction. The analysis found that the notes' ratings are susceptible to downgrade under Fitch's moderate (50% increase of base-case default rate) and severe (100% increase of base-case default rate) default scenarios. The analysis found the class A and class B notes may be downgraded to 'Asf' and 'BBB-sf' respectively in the moderate stress case and to 'BBB+sf' and 'BBsf' respectively in a severe default scenario, assuming all other factors remain constant. The ratings on both class A and class B notes are sensitive to Fitch's severe (100% reduction of base-case recovery rate) recovery stresses. The class A and class B notes may be downgraded to 'AA-sf' and 'BBB+sf' respectively under severe stresses. Only the class B notes' rating may be downgraded to 'BBB+sf' under moderate stresses (50% reduction of base-case recovery rate), which the class A notes' rating is not sensitive to, assuming all other factors remain constant. USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS A description of the transaction's representations, warranties and enforcement mechanisms ("RW&Es") that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated 31 May 2016. DATA ADEQUACY Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis. Fitch conducted a review of a small targeted sample of VWFC'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. Key rating drivers and expected rating sensitivities are further discussed in the corresponding presale report entitled "Driver China seven Trust", published today. SOURCES OF INFORMATION The information below was used in the analysis: -Pool stratification data provided by VWFC as of 31 May 2017 -Loan performance data provided by VWFC as at May 2017 -Capital structure and structural features information provided by VWFC in July 2017 -Transaction documentation provided by King & Wood Mallesons, the issuer's counsel in July 2017 -Legal opinion and letter of undertaking provided by VWFC in July 2017 The issuer has informed Fitch that all relevant underlying information used in the analysis of the rated notes is public. Contacts: Primary Analyst Anthony Liu Analyst +852 2263 9968 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Kan Zhou Associate Director +86 21 5097 3051 Committee Chairperson Hilary Tan Senior Director +852 2263 9904 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here Global Consumer ABS Rating Criteria (pub. 25 May 2017) here Global Structured Finance Rating Criteria (pub. 03 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Related Research Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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