Fitch Affirms Four VALET Transactions; Outlook Stable Amid VW Diesel Scandal & Takata Airbag Recall

NEW YORK--()--Fitch Ratings has affirmed the outstanding ratings of Volkswagen Auto Loan Enhanced Trust (VALET) series 2014-2, 2014-1, 2013-2, and 2013-1, and maintained the Stable Outlooks.

A full list of rating actions follows at the end of this release.

Fitch has continued to monitor the ongoing Volkswagen AG (VW; rated 'BBB+'/Outlook Negative) Diesel Emissions Scandal (related to 2.0- and 3.0-litre (L) vehicles) and Takata Airbag Recall (together, the events) that could negatively impact vehicles backing each transaction (affected vehicles) and cash flows, since the agencies' last rating action issued in December 2015.

The rating actions reflect Fitch's assumptions and stresses and resultant impacts on defaults and vehicle recoveries in each of the ABS pools.

The transactions are sponsored and serviced by VW Credit, Inc. (VCI), a subsidiary of VW.

Due to the ongoing vehicle 'stop-sale' action employed by VW on the affected vehicles related to the events, defaulted vehicles that are repossessed are currently being held by VW and not sold. Thus, cash flows from potential recoveries on the affected vehicles are not flowing back to the trusts.

Of note, since the diesel scandal came to light in the fall of 2015, the outstanding retail loan transactions have not experienced any notable increases in defaults.

Despite stable transaction performance to date, there are large exposures to the affected vehicles in each pool, which could have a significant negative impact on recovery rates and thus cash flows, as each transaction amortizes.

On Dec. 11, 2015, Fitch affirmed the outstanding ratings as the notes were expected to remain sufficiently enhanced to cover stressed loss levels relating to the Diesel Emissions scandal. For more information on this prior action please see Fitch's release 'VW Diesel Scandal: Fitch Affirms VW Loan/Lease ABS Ratings; Lease Outlook Revised to Negative', available on Fitch's web site at www.fitchratings.com.

The current stress scenarios assume increases in defaults and declines in recovery rates, as a result of the ongoing events and potential future impact on the performance of each transaction.

In this analysis, Fitch utilized cumulative net loss (CNL) proxies of 0.84%, 1.20%, 1.46%, and 1.81% for 2013-1, 2013-2, 2014-1, and 2014-2 transactions, respectively. Recoveries on non-affected collateral were assumed at 30%, and 0% on affected vehicles.

The affected vehicles include 2.0 liter (L) and 3.0L diesel vehicles, and vehicles impacted by the Takata airbag recall. The total affected vehicles as of Aug. 31, 2016 comprise 40.68%, 40.59%, 46.15%, and 45.05%, respectively, of the 2013-1, 2013-2, 2014-1, and 2014-2 collateral pools.

These affected vehicle percentages were defaulted at 100% severity. Despite this stress, hard credit enhancement (CE) has increased significantly over the life of each transaction to date, resulting in adequate loss coverage for the outstanding notes commensurate with 'AAAsf' ratings for all notes under this assumed scenario.

While recovery rates are expected to remain low, Fitch's analysis appropriately accounted for weaker future transaction performance. Thus, the Outlook has been maintained at Stable.

Further, the transactions continue to perform within Fitch's CNL expectations to date. As of the September reporting period (reporting period), Fitch has not witnessed any notable decline in credit loss performance in each transaction.

Cumulative net losses (CNL) are at 0.54%, 0.60%, 0.58%, and 0.63% for the 2013-1, 2013-2, 2014-1, and 2014-2 transactions, respectively, as of the September reporting period. These loss rates continue to project comfortably within Fitch's current and original loss proxy assumptions. Original base case loss proxies were 1.25%, 1.20%, 1.20%, and 1.25% for the 2013-1, 2013-2, 2014-1, 2014-2 transactions, respectively.

VW has proposed a solution for the 2.0L diesel vehicles, which was approved by regulators and is expected to be declared final in late October by the U.S. courts.

The full extent of the required 3.0L diesel vehicle repairs and timing thereof, and legal implications are currently unknown in the U.S., and the situation continues to evolve.

The Takata airbag recall is ongoing and VW continues to fix vehicles when parts are available. However, given the timing of VW specific Takata recalls, VW has not been able to obtain parts in a timely manner for many vehicles which has delayed the recalled vehicle fixes.

Therefore, any defaulted and repossessed Takata affected vehicles are not being sold by VCI, and are waiting to be fixed once parts become available. The timeline for when these parts are expected to become available is unknown.

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.

Further rating actions may be considered if legal risks materialize in the future.

For more information on the vehicles impacted please see Fitch's Sept. 20, 2016 release 'Fitch Affirms VALT 2015-A; Revises Outlook to Stable Amid VW Diesel Scandal & Takata Airbag Recall', available on Fitch's web site at www.fitchratings.com.

KEY RATING DRIVERS AND ANALYSIS

CREDIT LOSSES WITHIN FITCH EXPECTATIONS

Since the announcement of the scandal and Takata airbag recall, the transactions have not exhibited an increase in delinquency or default frequency relative to Fitch's base case expectations.

CURRENT PERFORMANCE

The pool factors are approximately 12%, 22%, 32%, and 45%, respectively, for the 2013-1, 2013-2, 2014-1, and 2014-2 transactions as of the September reporting period. Credit losses are currently tracking below Fitch's current assumed credit loss proxies.

MODELLED STRESS SCENARIO RESULTS

While CE has increased, the current stop-sale on returned vehicles does not allow for the trust to benefit from any recovery proceeds. Therefore, Fitch's analysis assumed credit loss proxies of 0.84%, 1.20%, 1.46%, and 1.81% for the 2013-1, 2013-2, 2014-1, and 2014-2 transactions, respectively, and then assumed 30% recoveries on the non-affected and 0% on affected collateral.

RATING SENSITIVITIES

The scenarios contemplated and discussed herein are essentially rating sensitivities under the assumed stressed scenarios. As additional information becomes available, Fitch may apply additive stresses to its analysis.

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 loss experience. 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 current ratings.

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.

List of Rating Actions:

Fitch has affirmed the following ratings as indicated:

VALET 2014-2:

--Class A-3 at 'AAAsf'; Outlook Stable;

--Class A-4 at 'AAAsf'; Outlook Stable.

VALET 2014-1:

--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 2013-1:

--Class A-4 at 'AAAsf'; Outlook Stable.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)

https://www.fitchratings.com/site/re/886006

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Rating Criteria for U.S. Auto Loan ABS (pub. 21 Mar 2016)

https://www.fitchratings.com/site/re/878723

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012770

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012770

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
John Alberici
Associate Director
+1-212-908-0370
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10028
or
Secondary Analyst
Du Trieu
Senior Director
+1-312-368-2091
or
Committee Chairperson
Hylton Heard
Senior Director
+1-212-908-0370
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
John Alberici
Associate Director
+1-212-908-0370
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10028
or
Secondary Analyst
Du Trieu
Senior Director
+1-312-368-2091
or
Committee Chairperson
Hylton Heard
Senior Director
+1-212-908-0370
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com