STRUCTURED FINANCE VOLKSWAGEN FINANCE (CHINA) CO., LTD 1 Volkswagen Finance (China) Co., LTD DRIVER CHINA ONE AUTO LOAN ABS (Red Pool) Credit Rating Report Final Ratings Amount (RMB10K) % of Asset Interest Rate Type Rating A 69,900.00 87.41 Fixed AAA B 4,400.00 5.50 Fixed A + Sub-Notes 5,272.39 6.59 Fixed NR OC 399.86 0.50 NR——Not rated NB: Notes are calculated based on Aggregate Cutoff Date Discounted Principal Balance. Transaction Summary Cutoff Date:March 31, 2014 Final Maturity Date:August 26, 2020 Transaction Type:Static Cash Flow ABS Vehicle Type:Special Purpose Trust Trust Asset (Red Pool):RMB798.26Million auto loan portfolio originated by Volkswagen Finance (China) Co., LTD (Aggregate discounted principal balance equals to RMB799.72Million discounted at 8.47%) Credit Enhancement Mechanism: Senior/Junior Structure, Overcollateralization, Targeted Overcollateralisation Amount, Cash Collateral Account, Trigger Events, Monthly Collateral Account Originator/Servicer:Volkswagen Finance (China) Co., LTD Trust Company/Issuer:CITIC Trust Co., LTD Financial Advisor:The Hongkong and Shanghai Banking Corporation Limited Lead Underwriter:China International Capital Corporation Limited Report Date [ ] [ ] 2014 Analyst Song Zheng Lv Zhenyang Tel:010-85679696 Fax:010-85679228 Email:[email protected]Address:17/F, PICC Building, 2 Jianguomenwai Avenue, Chaoyang District, Beijing PRC, 100022 Website:http://www.lhratings.com Opinion Having considered factors such as quality of the underlying asset pool, transaction structure, legal factors, operational risk and conducted cash flow analysis, China Lianhe Credit Rating Co.,Ltd confirms that Volkswagen Finance (China) Co., LTD DRIVER CHINA ONE AUTO LOAN ABS (RED POOL) Class A Notes and Class B Notes (together the “Senior Notes”) are rated at AAA and A + respectively. The Subordinated Notes are not rated. The rating for the Class A Notes indicates that the Class A Notes have extremely strong ability to meet their financial commitment and have very low probability of default. The rating for the Class B Notes indicates that the Class B Notes have a strong ability to meet their financial commitment and have a low probability of default. Strengths 1. The initial weighted average loan to value (“LTV”) ratio was relatively low at 64.70%. As of the Cutoff Date, the weighted average seasoning was 19.28 months, which is relatively long, indicating a decreased default probability of the whole pool in later periods. 2. There is no interest mismatch between the underlying assets and the Senior Notes (both are fixed rate). 3. As of Cutoff Date, the highest outstanding principal amount for any single borrower was 0.21% of the total principal balance and the highest outstanding principal amount for any province was 13.29% of the total principal balance. The asset pool was well diversified. 4. Overcollateralization and the Cash Collateral
22
Embed
Volkswagen Finance (China) Co., LTD DRIVER CHINA … · VOLKSWAGEN FINANCE (CHINA) CO., LTD 1 Volkswagen Finance (China) Co., LTD DRIVER CHINA ONE ... in our analysis by raising the
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 1
Volkswagen Finance (China) Co., LTD
DRIVER CHINA ONE AUTO LOAN ABS (Red Pool)
Credit Rating Report Final Ratings
Amount
(RMB10K)
% of
Asset
Interest
Rate Type Rating
A 69,900.00 87.41 Fixed AAA
B 4,400.00 5.50 Fixed A+
Sub-Notes 5,272.39 6.59 Fixed NR
OC 399.86 0.50
NR——Not rated
NB:Notes are calculated based on Aggregate Cutoff Date Discounted
Principal Balance.
Transaction Summary
Cutoff Date:March 31, 2014
Final Maturity Date:August 26, 2020
Transaction Type:Static Cash Flow ABS
Vehicle Type:Special Purpose Trust
Trust Asset (Red Pool):RMB798.26Million auto loan
portfolio originated by Volkswagen Finance (China) Co.,
LTD (Aggregate discounted principal balance equals to
1 Targeted Class A Note Balance means (a) except in the case of (b)
below, an amount equal to the excess of the Aggregate Discounted Principal Balance as at the end of the preceding Monthly Period over the Class A Targeted Overcollateralisation Amount, or (b) zero, if the Aggregate Discounted Principal Balance as at the end of the preceding Monthly Period is less than 10 per cent. of the Aggregate
Interest and PrincipalRepayment
Interest andPrincipal Repayment
Trust Agreement
Servicing Agreement
Account Agreement
Underwriting Agreement
Underwriting Syndicate Agreement
Note Interest and Principal
Note Interest and Principal
Conditions andAgency Agreement
Underwriting
VW Finance (Originator)
CITIC Trust (Originator/Trust)
Borrowers
VW Finance (Servicer)
ICBC (Account Bank)
CCDC (Registry/Agent)
CICC (Lead underwriter)
Underwriting Syndicate
Investors
Loan Contract
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 5
gets paid subsequently. Once the Class B Notes
principal reaches the Targeted Class B Note
Balance2, interest and principal on Subordinated
Notes will get paid subsequently. The interest
rates on the Class A Notes, Class B Notes and
Subordinated Notes are fixed. Class A Notes and
Class B Notes will be issued via an auction
system and the Subordinated Notes will be issued
via private placement. Coupon interest rates will
be determined by the result of the auction.
Cutoff Date Discounted Principal Balance or if a Servicer Replacement Event occurs. Class A Targeted Overcollateralisation Amount means, on each Payment Date, the greater of (a) the Class A Overcollateralisation Percentage multiplied by the Aggregate Discounted Principal Balance as of the end of the preceding Monthly Period, and (b) the lesser of (i) RMB37.59Million(i.e.,4.7 per cent. of the Aggregate Cutoff Date Discounted Principal Balance), and (ii) the aggregate outstanding principal amount of the Class A Notes on such Payment Date. Class A Overcollateralisation Percentage will be explained later. 2 Targeted Class B Note Balance means (a) except in the case of (b),
the excess of the Aggregate Discounted Principal Balance as at the end of the preceding Monthly Period over the aggregate outstanding principal amount of the Class A Notes (after giving effect to all payments and distributions on such date) and the Class B Targeted Overcollateralisation Amount or (b) zero, if the Aggregate Discounted Principal Balance as at the end of the preceding Monthly Period is less than 10 per cent. of the Aggregate Cutoff Date Discounted Principal Balance or if a Servicer Replacement Event occurs. Class B Targeted Overcollateralisation Amount means, on each Payment Date, the greater of (a) the Class B Overcollateralisation Percentage multiplied by the Aggregate Discounted Principal Balance as of the end of the preceding Monthly Period, and (b) the lesser of (i) RMB8.80Million (i.e., 1.1 per cent. of the Aggregate Cutoff Date Discounted Principal Balance), and (ii) the aggregate outstanding principal amount of the Class B Notes on such Payment Date. Class B Overcollateralisation Percentage will be explained later.
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 6
Table 2 Asset Backed Notes Summary
Amount (RMB 10K)
% Interest Rate Type
Expected IR(%)
Rating Interest Payment
Frequency
Principal Repayment
Expected Weighted Average
Life
Scheduled Maturity Date
A 69,900.00 87.41 Fixed [ ] AAA Monthly Pass through 0.59 ys August 26, 2018
B 4,400.00 5.50 Fixed [ ] A+ Monthly Pass through 1.38 ys August 26, 2018
Sub Notes 5,272.39 6.59 Fixed [ ] NR Monthly Pass through 1.12 ys August 26, 2018
OC 399.86 0.50
II Transaction Structure
Available Credit Enhancement mechanism for this
transaction includes a Senior/Junior Structure,
Overcollateralization,Targeted
Overcollateralisation Amount, Cash Collateral
Account, Monthly Collateral Account and Trigger
Events.
1.Accounts
On or before the Closing Date, CITIC Trust shall
open Cash Collateral Account, Monthly Collateral
Account, and Distribution Account with ICBC
Beijing branch.
Amount in Cash Collateral Account is used as
collateral to mitigate the risks associated with any
Servicer Utilization Event.3. The Issuer shall on
the Issue Date deposit a sum equal to one point
two per cent (1.2%) of the Aggregate Cutoff Date
Discounted Principal Balance into the Cash
Collateral Account, which serves as the Initial
Cash Collateral Amount. After that the amount in
Cash Collateral Account will gradually decrease
to a level equal to one per cent (1%) of the
Aggregate Cutoff Date Discounted Principal
Balance. So long as no Servicer Utilization Event
remains outstanding, on each Payment Date, the
Issuer shall transfer the excess of (a) the credit
balance of the Cash Collateral Account on such
Payment Date over (b) the then applicable
Specified Cash Collateral Account Balance4 to the
3 Servicer Utilization Event:Any Servicer Replacement Event or
the higher of (a) one per cent. (1%) of the Aggregate Cutoff Date
Originator. If the Servicer Utilization Event has
been triggered and the Cash Collateral Amount
has been utilized, the Servicer shall, on the
Deposit Date immediately after the date falling
thirty (30) days from the date of the remedy,
transfer and deposit all or part of the Collections
during the previous Collections Period or the
relevant Monthly Collections to the Cash
Collateral Account so that the credit balance of
the Cash Collateral Account is replenished and
maintained at a level equal to the Specified Cash
Collateral Account Balance. After the Cash
Collateral Account has been closed, the
Originator is entitled to any Loan Receivables
still to be collected.
The Monthly Collateral Account is used to
mitigate commingling risk. The Servicer deposits
a certain amount into Monthly Collateral Account.
If the Servicer’s credit rating reach Servicer
Required Rating ((a) in relation to the CCXI
rating system, the A class; (b) in relation to the
China Ratings rating system, the A- class; or (c)
in relation to the Lianhe rating system, the A class)
or above, the amount deposited is zero (0). If the
credit rating of the Servicer is below Servicer
Required Rating, the Servicer should deposit its
own funds into the Monthly Collateral Account
every half a month as a guarantee for monthly
collection.
Discounted Principal Balance and (b) one point two per cent. (1.2%) of the outstanding Aggregate Discounted Principal Balance as of the immediately preceding Calculation Date.
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 7
Cash inflows into the Distribution Account come
from monthly collections. If the Servicer’s credit
rating is ‘A’ or above, it shall make a deposit of
such monthly collections into the Distribution
Account once a month. If its credit rating falls
below ‘A’, the Servicer should transfer collections
to the Distribution Account every half a month
according to relevant arrangements.
2.Order of Priority
The order of priority differs depending on
whether there is a Foreclosure Event.
Foreclosure event means any of the following
events: (i) with respect to the Issuer, an
Insolvency Event occurs; or (ii) the Issuer
defaults on the payment of any interest on the
Controlling Notes then outstanding when the
same becomes due and payable, and such default
continues for a period of ten (10) Business Days
(or such longer period as approved at a
Controlling Noteholders’ Meeting); (iii) the Issuer
defaults in the payment of principal of any Note
for a period of ten (10) Business Days from the
Final Maturity Date (or such longer period as
approved at a Controlling Noteholders’ Meeting),
provided that it shall not be a Foreclosure Event
until after a decision has been made by
unanimous consent at the relevant Controlling
Noteholders’ Meeting that the replacement of the
Issuer with another Trust Company which meets
the Trust Company Qualified Standard is not
viable.
(1) Prior to the occurrence of a Foreclosure
Event
In accordance with transaction clauses, the
amount in Distribution Account should be
distributed in such order: amounts payable by the
Issuer in respect of taxes, fees and expenses
payable to transaction parties, Servicer fee
payable to the Servicer, interest accrued and
interest shortfalls (if any) on the Class A Notes,
interest accrued and interest shortfalls (if any) on
the Class B Notes, principal payment to the Class
A Notes until the outstanding principal amount of
the Class A Notes equal to the Targeted Class A
Note Balance, principal payment to the Class B
Notes until the outstanding principal amount of
the Class B Notes equal to the Targeted Class B
Note Balance, accrued and unpaid interest on the
Subordinated Notes, principal amounts until the
aggregate principal amount of the Subordinated
Notes is reduced to zero, any residual to the
Originator. The order of priority prior to a
Foreclosure Event is presented in Appendix Chart
1.
(2) Following the occurrence of a Foreclosure
Event
Upon occurrence of a Foreclosure Event, the
distribution order will be changed to such order:
amounts payable by the Issuer in respect of taxes,
fees and expenses payable to transaction parties,
the Servicer fee payable to the Servicer, interest
accrued and interest shortfalls (if any) on the
Class A Notes, principal payment to the Class A
Notes until the Class A Notes are repaid in full,
interest accrued and interest shortfalls (if any) on
the Class B Notes, principal payment to the
Class B Notes until the Class B Notes are repaid
in full, accrued and unpaid interest on the
Subordinated Notes, principal amounts until the
aggregate principal amount of the Subordinated
Notes is reduced to zero (0), any residual to the
Originator. The order of priority following a
Foreclosure Event is presented in Appendix Chart
2.
3.Credit Enhancement Arrangement
The available credit enhancement mechanism for
this transaction includes the Senior/Suboridnated
Structure , Overcollateralization, Targeted
Overcollateralisation Amount, Cash Collateral
Account, Monthly Collateral Account and Trigger
Events.
(1) Senior/Subordination Structure
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 8
Backed by the same asset pool, the notes are
divided to 3 tranches, Class A Notes, Class B
Notes and Subordinated Notes. Collection and
return on reinvestment are distributed in
accordance with the order of priority. Junior
classes serve as loss protection for senior classes.
(2) Overcollateralisation
Discounted at 8.47%, the total value of Class A
Notes, Class B Notes and Subordinated Notes
accounts for 99.5% of Aggregate Discounted
Principal Balance as of the Cutoff Date. The
remaining 0.5% overcollateralisation provides
additional credit enhancement to the Class A,
Class B and Subordinated Notes
(3) Targeted Overcollateralisation Amount
Depending on the performance of the asset pool,
different Targeted Overcollateralization
Percentages will be in effect. Until the
overcollateralization level reaches this Targeted
level for the Senior Notes, Subordinated Notes
will not get paid. Specifically, (i) if the
Cumulative Gross Loss Ratio5 exceeds (a) 0.5 per
cent for any Payment Date prior to or during
March 2015; or (b) 1.15 per cent for any Payment
Date from April 2015 but prior to or during
November 2015, the Class A Overcollateralisation
Percentage will be 49%, Class B
Overcollateralisation Percentage will be 15%; (ii)
if the Cumulative Gross Loss Ratio exceeds 1.6
per cent. for any Payment Date, Class A and Class
B Overcollateralisation Percentage will be 100%;
(iii) for other conditions except condition (i) and
condition (ii), the Class A Overcollateralisation
Percentage will be 47% and the Class B
Overcollateralisation Percentage will be 11%.
Higher Overcollateralisation Percentages provide
solid credit enhancement and better protection for
5 Cumulative Gross Loss Ratio = the sum of the discounted principal
balances of all Loan Receivables (including Loan Receivables which were not received on time or remain to be paid in the future) that were terminated by the Servicer in accordance with its customary practice from time to time from the Cutoff Date through the end of the preceding Monthly Period/ the Aggregate Cutoff Date Discounted Principal Balance
Senior Notes.
(4) Cash Collateral Account
The Cash Collateral Account provides liquidity
support and credit enhancement for Senior Notes
if a Servicer Utilization Event occurs.
(5) Monthly Collateral Account
If the Servicer’s credit rating reach Servicer
Required Rating or above, the amount deposited
in Monthly Collateral Account is zero (0). If the
credit rating of the Servicer is below Servicer
Required Rating, the Servicer should deposit its
own funds into the Monthly Collateral Account
every half a month as a guarantee for monthly
collection. Monthly Collateral Account services
for mitigating commingling risk.
(6) Trigger events
If a Foreclosure Event occurs, the order of
priority will be rearranged as presented in
Appendix Chart 2. This trigger mechanism
mitigates event risk and provides credit
enhancement for the Senior Notes.
(7) Clean-up Call
The Originator shall have the right, at its option,
to exercise a Clean-up Call and to repurchase the
loan receivables pursuant to a Clean-up Call
repurchase agreement so long as the Aggregate
Discounted Principal Balance is less than ten per
cent. of the Aggregate Cutoff Date Discounted
Principal Balance.
The Clean-up Call is at Originator’s option, and
hence it does not constitue a credit enhancement
for the Senior Notes.
4.Risk Analysis
(1) Set-off risk & Commingling risk
When borrowers have deposits within VWFC,
they may set-off their obligations using deposited
amounts if VWFC goes bankrupt. The execution
of set-off rights will decrease the monthly
collections available for the transaction.
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 9
Whilst VWFC is not a deposit-taking entity, in
order to further address any potential set-off risk,
the Originator sets a specific critierion for
Purchased Loan Receivables. i.e. the Purchased
Loan Receivables are free of defences, whether
peremptory or otherwise, for the agreed term of
the Loan Contracts as well as free of rights of
third parties and that the Borrowers in particular
have no set-off claim thereto or thereunder and
the status and enforceability of the Purchased
Loan Receivables is not impaired by set-off rights.
Therefore, no set-off risk exists in this transaction.
When the Servicer becomes insolvent, collections
may be commingled with VWFC’s other funds,
leading to a decrease in the available monthly
collections.
The Monthly Collateral Account is set up to
mitigate such commingling risk. If the credit
rating of the Servicer is below Servicer Required
Rating, the Servicer should deposit from its own
funds an amount which equals the expected
collection into the Monthly Collateral Account
twice a month as a guarantee for actual monthly
collection.
Considering that the Originator and Servicer
maintain a high credit rating and the creation of a
Monthly Collateral Account upon downgrade,
Lianhe believes that set-off risk and commingling
risk for this transaction is limited.
(2) Prepayment and delinquency
Notes issuing amount is calculated by Discount
Rate, which consists of senior expenses and
weighted average coupon rates. If coupon rates
are relatively low, leading to a relatively low
Discount Rate, it is probable that the Aggregate
Cutoff Date Discounted Principal Balance is
higher than outstanding principal balance of total
loans. In this case, an extremely high prepayment
rate may cause the insolvency of the Senior Notes.
Addtionally, a relatively high prepayment rate
will allow collections to be used to redeem junior
notes and pay the Originator after having paid to
Senior Notes a target amount as provided for
under the structural arrangement in this
transaction. This may result in an adverse effect to
the ability to redeem Senior Notes during later
periods. In addition, delinquency will lead to
liquidity risk.
Lianhe used different prepayment and
delinquency scenarios to perform cash flow tests.
The results show that Senior Notes can be
redeemed in full under various stress scenarios.
(3) Liquidity Risk
Liquidity risk results from the mismatch between
cash flow from asset pool and interest due on the
Senior Notes.
Monthly collections consist of interest collections
and principal collections which, along with cash
collateral account, mitigate liquidity risk.
Satisfied by the results from cash flow analysis
under different scenarios, Lianhe believes that the
transaction structure mitigates liquidity risk
effectively.
(4) Reinvestment Risk
During each payment period, monthly collections
can be used to invest, which introduces
reinvestment risk.
Trust Agreement sets criteria for permitted
investment. Investment should be denominated
and payable in RMB; such investment may only
be made in deposits with Permitted Entities, in
national bonds or in interbank policy-driven
financial bonds at least with AAA rating of the
Rating Agencies and (if available) an international
long-term issuer default rating of at least "A-" by
Fitch and an international short-term issuer
default rating of at least "F2" by Fitch; the Issuer
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 10
shall not purchase any of the Notes. Strict
permitted investment criteria will reduce
reinvestment risk. Lianhe declares that
reinvestment risk is limited.
III Asset Pool
1.Asset pool summary
The asset pool contains 13,696 auto loans. As of
the Cutoff Date of March 31 2014, the
outstanding principal balance of the pool was
RMB798.26 Million, and the aggregate
discounted principal balance was RMB799.72
Million. The asset pool summary is presented in
Table 3:
Table 3 Asset pool statistic data summary on Cutoff
Date
Outstanding principal balance (RMB10K) 79,826.32 Aggregate discounted principal balance (RMB10K) 79,972.25 Discount rate (%) 8.47 Number of loans 13,696 Weighted average age of borrowers 37.69 Weighted average seasoning (Month) 19.28 Weighted average initial LTV (%) 64.70 Weighted average current LTV (%) 36.45 Max.single loan balance (RMB10K) 171.00 Max single borrower loan balance (RMB 10K) 171.00 Av. Loan balance (RMB10K) 5.83 Av. Contract amount (RMB10K) 13.30 WA. Loan interest rate (%) 8.57 WA. Original term (Month) 35.70 WA. Remaining term (Month) 16.42 NB:1、Weight used in the table is the principal balance as of the
Cutoff Date.
2、WA. Current LTV = Outstanding principal balance/Current
value of the auto. Current value of the auto = Initial value of the auto
× (1 - depreciation ratio).
2.Purchased Loan Receivables
In accordance with Trust Agreement, the criteria
for loan receivables, as Cutoff Date, are as
follows:
The first set of criteria is in relation to borrowers:
none of the Borrowers are an affiliate of
Volkswagen AG or an employee of the Originator;
the Loan Contracts have been entered into
exclusively with the Borrowers which, if they are
corporate entities have their registered office in
China or, if they are individuals have their place
of residence in China; the total outstanding
amount of Purchased Loan Receivables entrusted
hereunder pursuant to the Loan Contracts with
one and the same Borrower does not exceed RMB
4,000,000 in respect of any single Borrower; and
so on.
The second set of criteria is in relation to loans:
the Purchased Loan Receivables are “normal”
loans according to CBRC’s “5-category” loan
classification method; no Purchased Loan
Receivable is overdue; the status and
enforceability of the Purchased Loan Receivables
is not impaired due to warranty claims or any
other rights of the Borrower; all Financed Objects
are insured with the Originator named as the sole
loss payee during the first year of the term of the
relevant loan; each Loan Contract under which
the relevant Loan Receivable arises provides for a
mortgage of the relevant Financed Object; on the
Cutoff Date, at least two contractual instalments
(which include interest payments) have been paid
in respect of each of the Purchased Loan
Receivables and that each Purchased Loan
Receivable requires substantially equal monthly
payments to be made within sixty months of the
date of origination of each Loan Contract and
may also provide for a final balloon payment;
each of the Purchased Loan Receivables will
mature no earlier than six months and no later
than sixty months after the Cutoff Date; and so
on.
The third set of criteria is in relation to loan
contracts: the Loan Contracts shall be governed
by the laws of China and have not been concluded
prior to January 2008; according to the
Originator’s records, no termination of any Loan
Contract has occurred or is pending; no
insolvency proceedings have been initiated
against any of the Borrowers during the term of
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 11
the relevant Loan Contract up to the Cutoff Date;
and so on.
Legal advisors have performed due diligence on a
sample portfolio. Sampled loans meet the
eligibility criteria specified in the Trust
Agreement. Relevant Loan Contracts and legal
documents related to asset pool are also in
compliance.
3.Asset Analysis
The probability of default and the recovery rate of
asset are affected by various characteristics of
underlying assets, including the credit quality of
loans, borrowers’ credit record, car prices and the
experiencing a boom. In addition, a defaulted loan
is able to be moved back to the normal loan
category under the current CBRC’s “5-category”
loan classification regime. (Note: under the
current CBRC “5-category” loan classification
regime, if all outstanding principal and interest of
a defaulted loan is repaid, the loan may be moved
back to “normal” loan category). Therefore,
Lianhe adjusts benchmark of default probability
upwards.
(2) Adjustment factors
Borrower’s credit scoring: Close relationship
exists between default probability and credit
scoring. The lower borrower’s credit scoring is,
the higher the default probability.
Seasoning: According to our experience, most of
auto loans default between the 6th month and 18th
month after loan origination. If a borrower has a
normal repayment track record, the borrower is
less likely to default during later periods. Lianhe
made adjustments on default probability in terms
of different seasoning.
Delinquency: Loans that have been delinquent
before are more likely to default than normal
loans.
5-category classification: Loans not in the normal
category are more likely to default than normal
loans.
Borrower’s age: If a borrower is less than 30,
Lianhe thinks his/her income is not stable. So we
adjust the default probability upwards.
Geography: Due to different economic situations,
legal infrastructure and behavioral habits, default
probability differs in different areas. Liahhe
adjusts default probability upwards for areas with
a high non-performing loans ratio.
Loan type: The asset pool includes balloon loans
which require a large repayment in the last period.
Considering borrowers’ pressure on the last
repayment, Liahhe adjusts default probability
upwards for balloon loans.
Systematic risk is increasing due to recent global
economic weaknesses and a slowing domestic
economic environment. Meanwhile, the domestic
auto industry is turning from booming to stable,
and a few local governments are already
implementing policies to limit automobile
purchases. All these factors contribute towards the
auto industry facing excessive output and prone
for structural adjustments. As for the Originator,
VWFC has demonstrated a relatively high level of
standards on loan servicing and risk management.
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 14
Lianhe has considered all these factors in our
analysis on default probability.
2.Loss Rate
Measurement of loss given default focuses on
probable loss due to disposal of pledges. Loss
includes consideration on loan balance, order of
claim, value of autos, and fee in relation to
enforcement and interest accrued during
execution period.
(1) Auto market and auto depreciation ratio
After experiencing high growth rate for several
years, the domestic auto market is entering a
stable period. Considering the macroeconomic
environment and uncertainty within the auto
industry, Lianhe uses 55% as an auto’s
depreciation ratio (auto used for less than one
year) for notes with a targeted rating of AAA, and
42% for notes with a targeted rating of A+.
(2) Cost of disposal and interest during the
period of disposal
After loan default, different Servicers express
different willingness to dispose defaulted assets,
which results in difference in disposal time and
cost. Based on VWFC’s experience and historical
data, Lianhe sets a benchmark for disposal time
and cost.
3.Necessary credit enhancement and Cash
flow analysis
Based on an estimation on default probability and
recovery, Lianhe measured the loss rate for
targeted ratings: 10.53% for a targeted rating of
AAA and 3.32% for a targeted rating of A+.
Following this transaction structure and order of
priority, Lianhe built a cash flow model for this
rating analysis. Using different prepayment
assumptions, default distribution assumptions and
interest rate assumptions, Lianhe tested the
redemption profile of the Senior Notes under
these stressed scenarios. The results show that
Senior Notes perform well under our
stress-testing.
V Originator/Servicer
The Originator/Servicer is VWFC, founded on
August 30 2004, with registered capital of RMB3
billion. Volkswagen Financial Service AG in
Germany is its sole shareholder.
At the end of 2013, VWFC’s total assets
amounted to RMB26.19 billion. Equity was
RMB3.53 billion whilst its non-performing loan
ratio stood at 0.45%. VWFC generated operating
income of RMB1226 million and net profit of
RMB346 million. As of the end of 2013, VWFC’s
capital adequacy ratio was 14.90% and core
capital adequacy was 13.80%. Summary financial
figures from 2011 to 2013 are presented in Table
11:
Table 11 VWFC Financial Indicator
(RMB100 Million/%)
Indicator 2013 2012 2011
Total assets 261.86 193.26 113.20
Net assets 35.32 31.85 10.21
Income 12.26 8.38 4.57
Net profit 3.46 1.64 0.76
Net cash flow from operation activities -9.75 -5.49 0.65
Non-performing loans ratio 0.45 0.93 0.37
Provision coverage ratio 305.00 190.09 343.09
Capital adequacy ratio 14.87 19.46 10.10
Core capital adequacy ratio 13.78 18.23 9.10
Average return on assets 1.52 1.07 0.82
Average return on net assets 10.32 7.82 7.74
Individual auto loan is the key business of VWFC.
Business process includes loan application, loan
approval, loan underwrite and loan management.
As for dealers risk management, VWFC required
that dealers must be authorized ones and they
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 15
accept VWFC’s risk management process.
All in all, VWFC has a strong financial statement,
good asset quality and relatively strong risk
management ability. Lianhe declares that the
probability of Servicer Replacement Event is
relatively low and as the Originator and Servicer,
VWFC can bear their responsibility.
VI Trust Company/Issuer
The trust company and issuer is CITIC Trust Co.,
LTD (“CITIC Trust” for short). Founded in March
1988, CITIC Trust has registered capital of
RMB1.2 billion (including USD23 million). By
the end of 2013, CITIC Trust’s total assets
reached RMB14.89 billion and equity RMB13.03
billion. During 2013, CITIC Trust generated
operating income of RMB5.49 billion and a net
profit of RMB3.14 billion. CITIC Trust served as
securitization trust in 2005, 2008, 2012 and 2013.
CITIC Trust has solid experience in securitization,
stable financial status and robust internal controls.
Risks associated with CITIC Trust are deemed to
be limited in this transaction.
VII Account Bank
Industrial and Commercial Bank of China
Limited (“ICBC”) serves as account bank for this
transaction. As of the end of 2013, ICBC
possessed total assets of RMB18,917.75 billion,
with a non-performing loans ratio of 0.94%,
provision coverage of 257.19%, capital adequacy
ratio of 13.12% and core tier 1 capital adequacy
ratio of 10.57%. During 2013, ICBC made a net
profit of RMB262.97 billion. With RMB1,395.79
billion under custody within its Beijing branch
until September 2013, ICBC is a leading player
in the domestic market in custody scale, service
and products.
ICBC has a well-developed fund custody process,
a robust risk management and an advanced IT
system. Operational risk rising from the account
bank is limited.
VIII Legal and other factors
A series of laws and regulations have been
published, including Measures for Administration
of Credit Assets Securitization, Pilot Measures
for Supervision and Administration of Credit
Assets Securitization by Financial Institutions, to
rule specific operations in the creation of special
purpose trusts, transfers of credit asset from the
Originator to special purpose trusts, and the
validity of the transfers so as to uphold the same
against borrowers and third parties, etc.
The legal opinion that Lianhe has received states
that the establishment of trust is valid, that assets
under the trust are bankruptcy remote from the
other assets of both of the Originator and the
Issuer, that claims on trust assets can upheld
against borrowers and the third parties effectively.
It should be noted that there has not been a
generally accepted rule of practice for the transfer
of claims on mortgage over automobiles in China.
In this transaction, the mortgage over vehicles
has been transferred from the Originator to the
Issuer but the mortgage update registration has
not been effected, which may result in certain
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 16
legal risk.
The accounting opinion letter indicates that
VWFC should combine the statements of the
“Volkswagen Finance (China) Co., LTD Driver
China One Trust” ,and will continue to confirm
the assets and liabilities based on the degree of its
continued involvement in the trust assets. this
transaction is stamp duty exempted and realizes
tax neutral status.
Due to the pilot period, relevant laws and
regulations related to securitization are in the
process of being improved and may be modified.
Lianhe will keep monitoring related participants’
duties and operational risks involved. With the
successful issuance of several securitization
products, Regulators and key participants have
become more experienced and are continuing to
improve their ability to, prevent and mitigate risk.
IX Final Rating
Having considered the asset pool, transaction
structure, legal factors and participants’
operational risk, based on credit analysis on the
asset pool and cash flow analysis, Lianhe declares
ratings for Volkswagen Finance (China) Co., LTD
DRIVER CHINA ONE TRUST ABS Notes:
Class A Notes rated AAA, Class B Notes rated A+,
Subordinated Loan not rated.
The Class A Notes’ rating indicates that the Notes
have an extremely strong ability to meet their
financial commitment and have very low
probability of default. The Class B Notes’ rating
indicates that the Notes have a strong capacity to
meet its financial commitment and have a low
probability of default.
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 17
Appendix Order of Priority
Chart 1 Order of priority prior the occurrence of a Foreclosure Event
Replenishing the cash collateral account 1. Amounts payable by the Issuer in respect of taxes 2. Fee and expense payable to institutional participants 3. The servicer fee payable 4. Interest accrued and interest shortfalls (if any) on the Class A Notes 5. Interest accrued and interest shortfalls (if any) on the Class B Notes 6. An aggregate amount to the Class A until the outstanding principal amount of the Class A Notes equal to the Targeted Class A Note Balance 7. An aggregate amount to the Class B until the outstanding principal amount of the Class B Notes equal to the Targeted Class B Note Balance 8. Accrued and unpaid interest on the Subordinated Notes 9. Principal amounts until the aggregate principal amount of the Subordinated Notes is reduced to zero 10. Remaining excess to the Originator
Available Distribution Amount Return on reinvestment
Cash Collateral Account
Occurrence of Service Utilization Event, replenishing the payment order from 1- 5
On Scheduled Repayment Date or auto loans are fully paid down, distributing to payment order from 6-10 After all payment due are satisfied and all creditors are reimbursed, residual returns to the Originator
Collection from asset
Initial Cash Collateral Amount form the Originator
Monthly Collateral Account
Monthly Collateral from the Servicer
If the credit rating of the Servicer is below Servicer Required Rating, the Servicer should deposit its own funds into the Monthly Collateral Account
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 18
Chart 2 Order of priority following the occurrence of a Foreclosure Event
Occurrence of a foreclosure event
1. Amounts payable by the Issuer in respect of taxes
2. Fee and expense payable to institutional participants 3. The servicer fee payable 4. Interest accrued and interest shortfalls (if any) on the Class A Notes 5. The Class A Notes in respect of principal until the Class A Notes are redeemed in full 6. Interest accrued and interest shortfalls (if any) on the Class B Notes 7. The Class B Notes in respect of principal until the Class B Notes are redeemed in full 8. Accrued and unpaid interest on the Subordinated Notes 9. Principal amounts until the aggregate principal amount of the Subordinated Notes is reduced to zero 10. Remaining excess to the Originator
Available Distribution AmountCollection from asset pool Return on reinvestment
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 19
Appendix A Definition of Credit Ratings
Lianhe Credit Rating applies a three-grade rating system, which is subdivided into nine ratings to
collateralized debt obligations, specifically, AAA, AA, A, BBB, BB, B, CCC, CC, C. Each grade except
AAA and grades below CCC (included) can be adjusted by a notch with ‘+’ or ‘-’, meaning rating a little
higher or lower. Descriptions of each rating are displayed in the following table.:
Grades and Ratings Definition
Investment
Grade
AAA
The highest rating assigned by Lianhe Credit Rating. The obligor has
extremely strong capacity to meet its financial commitment and has the lowest
probability of default.
AA The obligor has very strong capacity to meet its financial commitment and has
a very low probability of default.
A
An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor has a strong capacity to meet its
financial commitment and has a low probability of default.
BBB
An obligation rated ‘BBB’ exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation. 'BBB' is the lowest rating of investment grade.
Speculative
Grade
BB
An obligation rated ‘BB’ faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation. The probability of default of 'BB' rated obligation is high.
B
An obligation rated ‘B’ is dependent on favorable business, financial, or
economic conditions to meet the obligors’ financial commitment. The
probability of default of 'B' rated obligation is very high.
CCC
An obligation rated ‘CCC’ is highly dependent upon favorable business,
financial, and economic conditions for the obligor to meet its financial
commitment on the obligation. The probability of default is extremely high.
CC An obligation rated ‘CC’ is currently highly vulnerable to nonpayment.
Default C Default is inevitable.
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 20
Lianhe Credit Rating’s Surveillance Arrangement of
Volkswagen Finance (China) Co., LTD
DRIVER CHINA ONE TRUST ABS Notes The period of validity of this rating conclusion is the duration of Volkswagen Finance
(China) Co., LTD DRIVER CHINA ONE TRUST ABS Notes. From the day of
accomplishment of the rating report and during the validity period of Volkswagen Finance
(China) Co., LTD DRIVER CHINA ONE TRUST ABS Notes, the Originator / the Issuer
should timely provide Lianhe Credit Rating with surveillance documents including but not
limit to servicing report, trust company report, annual financial statements, and materials
that may affect the credit status of Volkswagen Finance (China) Co., LTD DRIVER CHINA
ONE TRUST ABS Notes. If there are significant changes of trust property or occurrence of
events that have significant influence to Volkswagen Finance (China) Co., LTD DRIVER
CHINA ONE TRUST ABS Notes, the Originator/the Issuer should inform Lianhe Credit
Rating and provide relative materials to us within 5 business days of the occurrence of the
changes or events.
Lianhe Credit Rating promises that during the validity period, Lianhe Credit Rating will do
surveillance regularly based on the materials provided by the Originator / the Issuer. If there
are significant changes of trust property or occurrence of events that have significant
influence to Volkswagen Finance (China) Co., LTD DRIVER CHINA ONE TRUST ABS
Notes, Lianhe Credit Rating will do surveillance from time to time, adjust and publish the
rating results timely.
If the Originator/the Issuer fail to timely provide Lianhe Credit Rating with regular or
non-regular surveillance documents, Lianhe Credit Rating will adjust and publish the rating
result of Volkswagen Finance (China) Co., LTD DRIVER CHINA ONE TRUST ABS Notes
based on the relevant information. If the Originator/the Issuer fail to timely provide Lianhe
Credit Rating with surveillance materials, which leads to the circumstance that Lianhe
Credit Rating cannot give rating results of Volkswagen Finance (China) Co., LTD DRIVER
CHINA ONE TRUST ABS Notes, Lianhe Credit Rating is entitled to withdraw its credit
rating.
According to relevant regulations, during the validity period of Volkswagen Finance (China)
Co., LTD DRIVER CHINA ONE TRUST ABS Notes, Lianhe Credit Rating will provide the
Originator, the Issuer and the competent department with surveillance report, and publish it
through specified media.
STRUCTURED FINANCE
VOLKSWAGEN FINANCE (CHINA) CO., LTD 21
Lianhe Credit Rating will designate an employee to keep contract with and provide the
relevant rating report to the Originator and the Issuer.