OREANDA-NEWS. Fitch Ratings has upgraded class B and affirmed class A of Driver China two Trust's asset-backed fixed-rate notes. The transaction is a securitisation of Chinese automotive loan receivables originated by Volkswagen Finance (China) Co., Ltd. (VWFC), a wholly owned subsidiary of Volkswagen Financial Services AG.

The rating actions are listed below:

CNY699.4m Class A affirmed at 'AAsf'; Outlook Stable
CNY104.0m Class B upgraded to 'AA-sf' from 'A-sf'; Outlook Stable

The outstanding amounts reflect the note balance after the note payment date on 26 April 2016.

KEY RATING DRIVERS

Increased Credit Enhancement: Reported credit enhancement (CE) in the form of overcollaterisation (OC) has increased to 26.0% from 12.5% for the class A notes and to 15.0% from 7.1% for the class B notes. There is substantial buffer available in the transaction to absorb losses before CE for the rated notes is depleted beyond the original levels.

Low Gross Default Rate: As of April 2016, the cumulative gross default rate stood at 0.35%; this is below Fitch's base case level for this stage in the life of the transaction.

Class B Upgrade: At CE of 15.0%, the class B notes are able to withstand a 'AA-sf' stress scenario. The rating differential between the class A and class B notes reflects the class B notes lower ranking in the capital structure and greater exposure to tail risks.

Performance within Expectations: Performance has been well within Fitch's expectations since closing. This is based on Fitch's historical static analysis of VWFC's portfolio, the 19 months from the cut-off date of this securitised portfolio and the performance to date.

Sector Outlook, Sovereign Cap: Fitch views the asset outlook of this portfolio as stable. The agency forecasts China's unemployment and GDP growth rates at 4.1% and 6.2%, respectively, in 2016; 4.0% and 6.0%, respectively, in 2017. We cap the rating on Chinese structured finance transactions at 'AAsf' due to the early stage of development of securitisation markets in China. The cap also reflects China's sovereign IDR of 'A+' and Country Ceiling of 'A+'.

RATING SENSITIVITIES

Unexpected increases in the frequency of foreclosures and unexpected decreases in the recovery rate on defaulted loans could produce loss levels higher than Fitch's base case, which could result in negative rating actions on the notes. Fitch has evaluated the sensitivity of the ratings assigned to Driver China two to increased gross default levels and decreased recovery rates over the life of the transaction.

The analysis found that the class B rating is susceptible to downgrade under Fitch's severe (100% increase of base case default rate) default scenarios. The analysis found the class B notes would be lowered to 'Asf' in the severe stress case, while the rating on the class A notes would remain unchanged, assuming all other factors remain constant. The ratings on both class A and B notes are not sensitive to a reduction of recovery rates even when it has been reduced to zero, assuming all other factors remain constant.

We cap the rating on Chinese structured finance transactions at 'AAsf' to reflect the early stage of development of China's securitisation markets, and the country's sovereign IDR of 'A+' and Country Ceiling of 'A+'. Hence the likelihood of a rating upgrade for the class A notes is low.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY

Fitch conducted a file review of 20 sample loan files focusing on the underwriting procedures conducted by VWFC compared to VWFC's credit policy at the time of underwriting. Fitch has checked the consistency and plausibility of the information and no material discrepancies were noted that would impact Fitch's rating analysis.

Initial Key Rating Drivers and Rating Sensitivity are described further in the New Issue report dated 22 July 2015