OREANDA-NEWS. Fitch Ratings has assigned final 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 ratings are as follows:

CNY1,662m Class A notes due May 2022: 'AAsf'; Stable Outlook;
CNY104m Class B notes due May 2022: 'A-sf'; Stable Outlook; and
CNY124.5m subordinated notes due May 2022: 'NRsf'

The ratings address the timely payment of interest and the ultimate principal payment by the legal final maturity in May 2022.

At the cut-off date, the total collateral pool consisted of the static portfolio which had 32,787 loans with an aggregate discounted principal balance of CNY1.9bn. There are various car brands being securitised as collateral in this pool, including: VW; Audi; Porsche; SKODA; and SEAT. The vast majority (99.4%) of the loans are fully amortising over the life of the loans with the remainder having a balloon amount at maturity. The weighted average effective interest rate of the securitised portfolio is 4.32%.

A key change from the expected ratings is VWFC is no longer permitted to include any references to international rating agencies - including Fitch - in the transaction documents of Driver China two Trust. As a result, all references including any obligations related to Fitch as a rating agency and Fitch's rating thresholds for eligible account bank and permitted investments have been removed.

Fitch has received additional documentation from VWFC confirming its intention to take actions consistent with Fitch's counterparty criteria for the purposes of the transaction. Fitch has also received legal confirmation that VWFC is legally obligated to take such actions.

KEY RATING DRIVERS
Steady Loan Performance: Fitch expects lifetime default rates 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 limited history of car finance in China and Fitch's expectation that emerging-market securitised assets are more prone to higher levels of stress than those in developed markets for the same rating category.

Prepayment and Default Losses: The portfolio was purchased by the trust at a discount rate of 5.76%; approximately 37% 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 assumes 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, as 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 development stage of China's securitisation markets, and the country'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 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 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 Rating Sensitivities are further discussed in the corresponding new issue 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.