OREANDA-NEWS. Fitch Ratings has assigned final ratings to Driver China three Trust (Driver China three). The issuance consists of fixed-rate notes 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:

CNY2,632m Class A notes: 'AAsf'; Outlook Stable
CNY157m Class B notes: 'A-sf'; Outlook Stable
CNY196.1m subordinated notes: not rated

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

The notes are issued by CITIC Trust Co., Ltd. in its capacity as trustee of Driver China three Trust. At the cut-off date on 31 December 2015, the static portfolio consisted of 53,106 loans with an aggregated discounted receivables balance of CNY3.0bn.

KEY RATING DRIVERS
Stable Loan Performance: Fitch expects lifetime default rates for the VWFC portfolio of 1.7%. We applied a stress multiple of 6.0x at 'AAsf' (3.6x at 'A-sf') on defaults to take into account China's limited history in car finance, and our view that emerging-market securitised assets are subject to higher levels of stress than those in developed markets in the same rating category.

Prepayment, Default Losses: The portfolio was purchased by the trust at a discount rate of 5.26%; approximately 37% of the portfolio was purchased at a premium. Should the loans prepay or default, the trust will not be able to recoup the premium through the higher coupons. Fitch has assumed that the higher-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, 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. We forecast China's unemployment and GDP growth rates at 4.1% and 6.3%, respectively, in 2016, and at 4.0% and 6.0% in 2017. 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+'.

RATING SENSITIVITIES
Unexpected increases in the default rates 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 three to increased gross default levels and decreased recovery rates over the life of the transaction.

The analysis found that the notes' ratings are susceptible 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 'BBBsf' respectively in the moderate stress case and to 'A-sf' and 'BB+sf' respectively in a severe stress case, assuming all other factors remain constant. The ratings on the Class A and Class 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.

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.

Fitch reviewed the results of the agreed-upon procedures (AUP) conducted on the portfolio. The AUP 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 titled "Driver China three Trust", published today. Included as an appendix to the report are a description of the representations, warranties, and enforcement mechanisms.