OREANDA-NEWS. April 27, 2015. Fitch Ratings has today upgraded one class and affirmed another class of Driver China One 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 as listed below.

CNY175.9m Class A affirmed at 'AAsf'; Outlook Stable
CNY44m Class B upgraded to 'A+sf' from 'A-sf'; Outlook Stable

Note that the outstanding amounts reflect the note balance after the upcoming note payment date on 27 April 2015.

KEY RATING DRIVERS

The two-notch upgrade of the Class B note and the affirmation of the Class A note reflect both the substantial build-up in credit enhancement (CE) as asset performance has been within Fitch's expectations, and the sequential pay-down of the notes. The gross cumulative default ratio stood at 0.61% as at end-March 2015. This breached the transaction's level 1 CE increase condition, which was set at 0.50% for the relevant period. Fitch believes this breach has no impact on the rating as the portfolio is performing within expectations.

The consequence of this breach is that the Class A overcollateralisation (OC) percentage has to reach 49%, up from 47%, before the transaction can pay on a pro-rata basis. Since the transaction is still paying on a sequential basis, the breach has no impact on the payment structure. As at 31 March 2015, the OC percentage for Class A and B stood at 37.5% and 21.8%, respectively.

Fitch's historical static analysis of VWFC's portfolio and the 28 months seasoning of the pool as at 31 March 2015 indicate that the default ratio should be at or close to its peak. Fitch expects defaults to taper off unless the Chinese economy weakens drastically, which is not Fitch's base case.

The portfolio was purchased by the trust at a discount rate of 7.12%; as of the cut-off date, 57.3% of the portfolio was purchased at a premium. Should loans prepay or default, the trust will not be able to recoup the premium through the higher coupons. In its initial analysis Fitch assumed that the highest-earning receivables would default first. Fitch had assumed a high prepayment rate stress scenario of 20%. The average annualised prepayment rate since closing was 6.65% as at 31 March 2015. Not all loans that have prepaid had a higher interest rate than the discount rate; according to investor reports the average effective interest rate since closing is 8.84%. This is in line with the 8.81% weighted average interest rate at cut-off. Additionally, the default base case assumption is 2.1% and in a 'AAsf' and 'A-sf' stress scenario it is 12.6% and 7.56% respectively, compared with the reported 0.61% as at 31 March 2015.

RATING SENSITIVITIES

Fitch believes the prospects of a rating downgrade for the notes are remote given the level of credit enhancement available for both classes. There is substantial buffer available in the transaction to absorb losses before the rated notes start to deplete the original level of credit enhancement.

At the modelled 'AAsf' rating scenario at closing, the Class A notes can withstand 27% of additional defaults before the original CE would be breached. The Class B notes can withstand a 'AAsf' rating scenario, with buffer of 10% additional defaults. However, given Class B's lower target OC percentage and its lower ranking compared to Class A, Fitch believes a rating differential between class A and B notes is warranted.

We cap the rating on Chinese structured finance transactions at 'AAsf' due to the early stage of development of the securitisation market in China, which also reflects China's sovereign IDR of 'A+' and Country Ceiling of 'A+'. Hence the likelihood of a rating upgrade for Class A is low. The possibility of upgrade of the Class B notes is also low given the agency's view that there should be a rating differential between the Class A and B notes.

Initial Key Rating Drivers and Rating Sensitivities are described further in the New Issue report dated 4 August 2014.

A comparison of the transaction's representations, warranties and enforcement mechanisms (RW&Es) to those of typical RW&Es for this asset class is available by accessing the reports and/or links given under Related Research below.