OREANDA-NEWS. June 17, 2015. Fitch Ratings has assigned expected ratings to Driver China two Trust (Driver China two). The transaction is a securitisation backed by Chinese automotive loan receivables originated by Volkswagen Finance (China) Co., Ltd. (VWFC), a wholly owned subsidiary of Volkswagen Financial Services AG. The expected ratings are as follows:

CNY1,662m Class A notes due February 2022: 'AAsf(EXP)'; Stable Outlook
CNY104m Class B notes due February 2022: 'A-sf(EXP)'; Stable Outlook
CNY124.5m subordinated notes due February 2022: not rated

The ratings address the timely payment of interest and the ultimate principal payment by the legal final maturity in February 2022. The final ratings are contingent on the receipt of final documentation conforming to information already received.

As at the cut-off date on 31 March 2015, the static portfolio had 31,432 loans with an aggregate discounted principal balance of CNY1.9bn. There are various brands of cars being securitised as collateral in this pool including: VW, Audi, Porsche, SKODA, Lamborghini, and SEAT. The vast majority - 99.7% - of the loans are fully amortising over the life of the loans with the remainder having a balloon amount at maturity. The weighted average (WA) effective interest rate of the securitised portfolio is 4.55%.

KEY RATING DRIVERS
Steady Loan Performance: Fitch expects a lifetime default rate for the VWFC portfolio of 1.7%. The agency applied a stress multiple of 6.0x at 'AAsf' (3.6x at 'A-sf') on defaults to take into account the low absolute level of the base case and the limited history of car finance in China.

Prepayment and Default Losses: The portfolio was purchased by the trust at a discount rate of 6.89%; approximately 35% 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. Fitch has assumed that the highest-earning receivables would default or prepay, and has assessed that the ratings could withstand such a scenario.

Experienced Sponsor: The originator, VWFC, is part of the Volkswagen Financial Services (VWFS) Group, which is an active global originator of auto finance securitisation transactions. VWFC uses the same structure modelled on its global Driver programme, and applies policies and procedures in China based on those adopted by the VWFS group around the world.

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 4.2% and 6.8%, respectively, in 2015, and 4.3% and 6.5% in 2016. We cap the rating on Chinese structured finance transactions at 'AAsf' to reflect the early stages of development of China's securitisation markets, and the country's sovereign IDR of 'A+' and Country Ceiling of 'A+'.

EXPECTED 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 in turn 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 notes' ratings are susceptible to downgrades 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 would be lowered to 'Asf' and 'BBB-sf' respectively in the moderate stress case and to 'BBB+sf' and 'BBsf' respectively in a severe stress case, assuming all other factors remain constant. The ratings on the Class A notes would remain unchanged and the Class B notes would be lowered to 'BBB+sf', if the base case recovery rate is zero, assuming all other factors remain constant.

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 10 sample loan files focusing on the underwriting procedures conducted by VWFC compared to VWFC's credit policy at the time of underwriting. No material discrepancies were noted in the underwriting practices of VWFC. The file review reported no material errors that would impact Fitch's rating analysis.

Key Rating Drivers and Expected Rating Sensitivities are further discussed in the corresponding presale report entitled "Driver China two Trust", published today. Included as an appendix to the report are a description of the representations, warranties, and enforcement mechanisms.