CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on four U.S. auto loan and one U.S. auto lease ABS transaction sponsored by Volkswagen Credit Inc. (VCI), a subsidiary of Volkswagen AG (VW) (currently rated 'BBB+'; Outlook Negative) following a review of the transactions under various stress scenarios.
The Outlooks on the four auto loan ABS transactions were affirmed at Stable. The Rating Outlooks for the one lease ABS transaction have been revised to Negative from Stable, as the result of the exposure to residual risk and potential for increase in residual losses under Fitch's assumed stressed scenarios.
A full list of rating actions follows at the end of this commentary.
Fitch's stress scenarios assume potential increases in defaults and declines in recovery rates or residual values as a result of the ongoing VW emissions scandal, and its potential future impact on the performance of the outstanding ABS transactions.
The transactions include four retail loan ABS issued from the Volkswagen Auto Loan Enhanced Trust (VALET) platform in 2013-2014, and one retail lease ABS issued from the Volkswagen Auto Lease Trust (VALT) platform in 2015.
The four auto loan ABS transactions are performing within Fitch's initial credit loss expectations. The VALT 2015-A lease transaction is also performing within expectations from both credit and residual loss expectations. As of the November 2015 reporting period (the reporting period), Fitch has not yet witnessed any notable decline in the asset performance of any of the transactions since the scandal arose in mid-September.
The full extent of the required repairs of the affected vehicles, timing thereof, and legal implications are currently unknown in the U.S. and the situation continues to evolve.
Fitch continues to monitor the situation closely. The receipt of updated data or new information could change Fitch's assumptions and stress scenarios and lead to further rating actions.
VW DIESEL EMISSIONS SCANDAL BACKGROUND
On Sept. 18, 2015, the U.S. Environmental Protection Agency (EPA) issued a notification of violation of the Clean Air Act to VW, alleging that certain VW diesel cars included software (a defeat device) that circumvents EPA emission standards for nitrogen oxides (NOx). On Sept. 22, 2015, VW announced that approximately 11 million diesel vehicles with engines of type EA 189 had been affected worldwide (eight million in Europe) to date.
Since the manipulation of diesel emissions was first reported, two further allegations were directed at VW. On November 2, the EPA alleged that VW used a defeat device in additional engine types, including larger diesel-powered vehicles and Audi and Porsche models.
VW publicly denied the claims relating to the larger engines. On November 3rd, VW admitted that engines in up to 800,000 cars worldwide were emitting carbon dioxide (CO2) at levels beyond those stated by VW, and that such vehicles included some petrol engines previously unaffected by the external investigation. The figure was significantly reduced downwards to just 37,000 VW vehicles on December 9 following further investigation. The situation continues to evolve.
VW has submitted its plan to recall and repair the affected vehicles in the U.S. to the EPA and the California Air Resources Board. The details of the plan are not yet public. The regulators have until December 21 to review the proposal and respond. VW, along with their outside counsels, continue to conduct an extensive investigation into the emissions scandal on how and what occurred, and who is responsible for it internally.
VEHICLES IMPACTED IN AUTO ABS TRANSACTIONS
There are over 550,000 vehicles in the U.S. from 16 VW, Audi and Porsche brands from 2009 - 2016 models currently impacted by the emissions scandal. Fitch received updated performance and pool composition data for all outstanding transactions from VCI, including the number of vehicles impacted in all pools. The models are listed below.
2.0 Liter Diesel Models: VW Jetta and Jetta Sportwagen, Beetle and Beetle Convertible, Audi A3, Golf and Golf Sportwagen, and Passat.
3.0 Liter Diesel Models: VW Touareg; Porsche Cayenne; Audi A6, A7, A8, A8L, Q5 and Q7.
ARE VW U.S. VEHICLE VALUES DECLINING DUE TO THE SCANDAL?
There is currently a stop-sale in place for VW diesel vehicles. VW is not selling new diesel vehicles and is holding all vehicles coming off lease and being returned. It appears this will continue until VW has determined and issued a formal resolution and 'fix' to the impacted vehicles.
Since the emissions scandal broke in mid-September, Fitch has witnessed softer used vehicle values in most of the models impacted and mentioned above. The agency has been reviewing wholesale vehicle auction pricing data on the respective VW vehicle models impacted.
Initial data indicates that used vehicle values have declined by approximately 10 - 20% over the past few months, on Passat, Golf and Jetta diesel models. Additionally, values of respective gasoline models have also experienced weakened auction values, albeit to a lesser extent, with declines of
5-15% to date.
It is important to note that these value declines were observed over a short period and may not be indicative of longer-term trends. In addition, vehicle volumes sold at wholesale auctions are very low as VW has been holding off-lease returned vehicles and not selling them until an official fix is announced. With such low volumes sold at auction, vehicle values can be skewed.
Fitch reviewed past vehicle recall events and their impact on wholesale vehicle values, including recall data from Ford, General Motors and Toyota. Fitch utilized this data along with the VW vehicle data from the past few months as a starting point for its stresses. Stresses were increased further to reflect the continued uncertainty around the long-term impact of the current scandal.
KEY RATING DRIVERS AND ANALYSIS
FREQUENCY OF DEFAULTS MAY INCREASE
Since the announcement of the scandal, VW US ABS transactions have not exhibited an increase in delinquency or default frequency. However, legal uncertainty continues and any potential legal ramifications are still evolving. No legal opinion has been provided by VW or related legal experts in the U.S. stating that there is no basis for borrowers to walk away from their loan or lease.
Further rating action may be considered if legal risks materialize.
Declining VW brand auto sales suggest slight degradation in brand perception since mid-September. Therefore, Fitch conducted stress scenarios to test the potential impact on the performance of the transactions if loss frequency levels were to rise.
Specifically, Fitch's stress scenarios include 10% and 30% increases to the base case default proxy for gas and diesel vehicles, respectively.
The 30% frequency stress assumption for diesel vehicles is considered conservative given that the assumption is applied over the remaining life of the transactions. Assuming a 'fix' is announced, a sustained lifetime increase appears unlikely.
The 10% stress to gas models accounts for potential increased defaults as the result of overall brand degradation.
DIESEL SCANDAL MORE LIKELY TO AFFECT VEHICLE PRICES
Auto ABS transactions are exposed to used car values either directly through lease return residual value, or indirectly via recovery proceeds from the sale of the car when a borrower or lessee defaults. As recovery and residual values are softening, Fitch applied an incremental stress in its analysis on top of recently observed declines.
The asset or vehicle value decline stresses were derived utilizing current market data on VW vehicle values, as well as vehicle value data from prior vehicle recall events. Current value declines that have occurred are expected to continue in the near term, particularly until a solution is provided by VW on the impacted models.
Further, given potential for further declines in vehicle values, Fitch conducted additional stress scenarios to assess the impact on performance of the transactions from weaker wholesale vehicle values related to VW vehicles.
Specifically, base case recoveries were stressed by 20% and 50% for gas and diesel vehicles, respectively. The 50% severity stress is considered conservative relative to recent observations. Additionally, the affected vehicles in the ABS pools are currently safe to drive and Fitch expects the negative impacts to subside in the long term, similar to that of other manufacturer recalls.
VALET LOAN ABS TRANSACTIONS - MODELLED STRESS SCENARIO RESULTS
Based on Fitch's stressed cash flow assumptions that incorporate the aforementioned stressed cumulative net loss (CNL) proxies and recovery rates, the loss coverage available to VALET 2013-1, 2013-2, 2014-1, and 2014-2 continues to support 'AAAsf' ratings.
Since transaction closing, CE has increased for all transactions due to the deleveraging structures and CNLs have been low to date and within expectations. Therefore, Fitch's stress tests did not have a material impact on loss coverage. While the 2014-1 and 2014-2 transactions are less seasoned, these transactions are currently not showing material increases in either delinquencies or losses.
VALT 2015-A ABS LEASE TRANSACTION - MODELLED STRESS SCENARIO RESULTS
For VALT 2015-A, in addition to the aforementioned stresses, Fitch also revised the qualitative residual value haircut to 23% from 19% used at closing. The haircuts address factors that could lead to price declines and further potential impact on asset performance, including a deterioration of the economic environment and further manufacture weakness.
Furthermore, the residual value maturities are fairly diversified over the remaining life of the transaction, with total exposure of only 6.80% of remaining base residual due.
Credit enhancement (CE) has increased since close and the transaction has experienced low credit losses and residual gains. Loss coverage available under the stressed scenario continues to support 'AAAsf' ratings.
While CE has increased, the current stop-sale on returned vehicles does not allow for the trust to benefit from these residual proceeds. Currently, excess spread and gains on gas vehicle residuals have off-set these lease residual holdback amounts.
The revision of the Outlook to Negative reflects the greater exposure of the lease transaction to residual value uncertainly over the next six-to-twelve months. The current diesel model stop-sale could potentially create a vehicle over supply in the long-term and depress values further.
U.S. vs. EUROPE
The aforementioned stress scenarios are more severe than those applied to EMEA VW auto ABS transactions rated by Fitch (please refer to the special report "VW Emissions Scandal: Impact on VW-originated Auto ABS Transactions" issued on November 18, 2015).
In the EMEA VW ABS analysis, Fitch incorporated a base 0% and 10% severity stress to NOx-affected diesel models. The additionally stresses on frequency and higher severity applied on the U.S. ABS pools reflects the evolving nature of the scandal, current VW stop-sale in the U.S. on diesel vehicles, higher uncertainties in the U.S. regarding remediation and legal recourse, and greater observed value wholesale value declines in the U.S. versus those seen to date across Europe.
Furthermore, VW, in co-operation with regulators in Europe, recently announced a potential resolution to the emissions issues for vehicles in the region relating to recent CO2 and NOx developments on the affected vehicle models. Fitch also reviewed legal memos from transaction counsel for European jurisdictions and believes that the legal risks there are lower. Therefore, there is more clarity and certainty as to future developments in this region and the potential for negative impacts on vehicle values is lower than in the U.S., especially given minimal value declines observed in Europe since September.
In both Europe and the US, stresses applied are conservative relative to current performance.
VALET AND VALT ABS - CURRENT PERFORMANCE
As mentioned previously, all transactions have performed in line with Fitch's expectations to date. As of the reporting period CNL of 0.49%, 0.49%, 0.39% and 0.33% for 2013-1, 2013-2, 2014-1 and 2014-2 VALET transactions, respectively, all tracking below Fitch's initial loss proxies of between 1.20%-1.25%
As the reporting period, the concentrations of diesel vehicles in the outstanding pools were 15.8%, 20.3%, 27.9%, and 27.4%, respectively. The current pool factors for each transaction were 24.5%, 38.6%, 49.7% and 65.6%, respectively. In aggregate, this concentration represents only 6.7% of the total affected diesel vehicles in the U.S.
For the VALT 2015-A lease transaction, the pool factor was 79.2% for the same reporting period. Credit losses are currently tracking at 0.09% below Fitch's initial loss proxy of 0.90%. The transaction is recording gains on returned residuals of (6.96%) to date, while Fitch's initial residual loss proxy was 13.0%. Diesel models were 6.86% of the remaining pool balance or only 0.67% of the total affected diesel vehicles in the U.S.
RATING SENSITIVITIES
The scenarios contemplated herein and discussed in this rating agency commentary are essentially rating sensitivities under the assumed stressed scenarios. As additional information becomes available, Fitch may apply additive stresses to its analysis.
VALET TRANSACTIONS
Unanticipated increases in the frequency of defaults and loss severity could produce loss levels higher than the current projected base case loss proxy and impact available loss coverage and multiples levels for the transaction. Lower loss coverage could impact the ratings and Rating Outlooks, depending on the extent of the decline in coverage. To date, the transactions have exhibited strong performance with losses well within Fitch's initial expectations with rising loss coverage and multiple levels. As such, a material deterioration in performance would have to occur within the asset pool to have potential negative impact on the outstanding ratings.
VALT TRANSACTION
Unanticipated increases in the frequency of defaults or deterioration in vehicle values could produce loss levels higher than the current expectations and impact available loss coverage. Lower loss coverage could impact ratings and Rating Outlooks, depending on the extent of the decline in coverage.
To date, the transaction has exhibited strong credit and residual performance, inside Fitch's initial expectations with rising loss coverage. Due to the growing CE levels and increased loss coverage afforded to the notes, a substantial deterioration in used vehicle values would have to occur to have a negative impact on the updated ratings.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch's analysis of the Representation and Warranties (R&W) of these transactions in this review can be found in the respective appendices to each presale report. These R&W are compared to those of typical R&W for the asset class as detailed in the special report 'Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions' dated June 12, 2015.
List of Rating Actions:
Fitch has affirmed the following:
VALET 2013-1:
--Class A-3 at 'AAAsf'; Outlook Stable;
--Class A-4 at 'AAAsf'; Outlook Stable.
VALET 2013-2:
--Class A-3 at 'AAAsf'; Outlook Stable;
--Class A-4 at 'AAAsf'; Outlook Stable.
VALET 2014-1:
--Class A-2 at 'AAAsf'; Outlook Stable;
--Class A-3 at 'AAAsf'; Outlook Stable;
--Class A-4 at 'AAAsf'; Outlook Stable.
VALET 2014-2:
--Class A-2 at 'AAAsf'; Outlook Stable;
--Class A-3 at 'AAAsf'; Outlook Stable;
--Class A-4 at 'AAAsf'; Outlook Stable.
VALT 2015-A:
--Class A-2a at 'AAAsf'; Outlook revised to Negative from Stable;
--Class A-2b at 'AAAsf'; Outlook revised to Negative from Stable;
--Class A-3 at 'AAAsf'; Outlook revised to Negative from Stable;
--Class A-4 at 'AAAsf'; Outlook revised to Negative from Stable.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781
Criteria for Rating U.S. Auto Lease ABS (pub. 19 Oct 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=872539
Criteria for Servicing Continuity Risk in Structured Finance (pub. 17 Jul 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752340
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
Rating Criteria for U.S. Auto Loan ABS (pub. 15 Oct 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=872046
Related Research
Volkswagen Auto Lease Trust 2015-A -- Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862551
Volkswagen Auto Loan Enhanced Trust 2013-1 -- Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701838
Volkswagen Auto Loan Enhanced Trust 2013-2 -- Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722717
Volkswagen Auto Loan Enhanced Trust 2014-1 -- Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746857
Volkswagen Auto Loan Enhanced Trust 2014-2 - Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=793848
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996620
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996620
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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