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Rating Action:

Moody's assigns definitive rating to Dongfeng Nissan Auto Finance auto loan ABS in China: VINZ 2017-2 Retail Auto Loan Securitization Trust

08 Aug 2017

RMB2,520 million of securities rated

Hong Kong, August 08, 2017 -- Moody's Investors Service has assigned definitive Aa3 (sf) rating to the senior notes issued by VINZ 2017-2 Retail Auto Loan Securitization Trust, the second cash securitization of a static pool of auto loans originated by Dongfeng Nissan Auto Finance Co., Ltd. (DNAF, unrated) to individual obligors in China in 2017.

The complete rating action is as follows:

Issuer: VINZ 2017-2 Retail Auto Loan Securitization Trust

....RMB2,520,000,000.00 Senior Notes, Assigned Aa3 (sf)

The RMB479,998,399.88 Subordinated Notes are not rated by Moody's.

The rating addresses the expected loss posed to investors by the legal final maturity. The structure allows for timely payment of interest and ultimate repayment of principal of the rated notes by the legal maturity date.

Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant impact on yield to investors.

RATINGS RATIONALE

The rated senior notes are supported by the subordination provided by the subordinated notes, and certain excess spread received during the life of the transaction. Excess spread refers to the amount of interest collection from the portfolio that is in excess of the sum of the senior notes' interest and fees and expenses payable by the issuer in each month. There is no overcollateralization or liquidity reserve in this transaction at closing.

The rating assigned to the senior notes are constrained by China's local currency country ceiling (LCC, Aa3), which captures the systemic risks associated with the political, institutional, legal and economic factors prevalent in China.

The rating of the notes are linked to the credit quality of the servicer and its parents due to the operational and liquidity risks in this transaction at closing. Operational and liquidity risks refer to operational disruptions, including non-payment or non-timely payments on the notes due to non-performance by the transaction parties.

When assigning the rating, Moody's analysis focused, among other factors, on

(1) The characteristics of the securitized pool;

(2) The macroeconomic environment;

(3) The limited historical performance information;

(4) The parental support available to the servicer;

(5) The potential for disruption of the issuer's cash flow in case of a servicer termination event, and the adequacy of structural mechanisms to support timely payments on the rated notes;

(6) The protection provided by the credit enhancement against defaults and arrears in the securitized pool; and

(7) The legal and structural integrity of the transaction.

Moody's considered, among other things, the transaction's key strengths:

(1) Diversified collateral pool composition: The cut-off portfolio consists of 47,313 loans with a good level of geographic diversification across China. Approximately 25.48% of the pool are loans to borrowers located in Guangdong Province.

(2) Favorable pool characteristics: The pool only includes loans to purchase new passenger vehicles; with fully amortizing terms; payment made by direct debit from the borrowers' bank accounts; and over 99.9% of the loans have minimum 20% down-payment. The pool has a weighted average down-payment rate of about 32.99%.

(3) Static structure with fast amortization: This is a static deal with no revolving period. As a result, the transaction is only exposed to the default risk of the loans in the cut-off pool, which have a weighted average remaining tenor of about 27.77 months from the pool's cut-off date. Furthermore, the issuer will apply the loan principal repayments in accordance with its priority of payment, repaying the senior notes first until fully repaid. The remaining collection will then be used to repay the subordinated notes.

(4) Excess spread and principal deficiency ledger: Interest collections can be used to cover the principal outstanding amounts of any loans that default over time.

(5) Performance trigger to accelerate principal repayment: The transaction has a cumulative default and rolling delinquency trigger to enable all excess collection -- after paying the rated notes' interest and any reserve to its required amount -- to repay the principal balance of the senior notes.

(6) Experienced originator and strong pool performance: DNAF has approximately ten years of experience operating in China, and has sponsored five auto ABS transactions prior to this proposed transaction. These five transactions have been performing well. Based on DNAF's data, loans delinquent for more than 90 days only account for 0.02% of its total retail auto loan portfolio as of end-April 2017.

Moody's has also considered the following weaknesses and mitigants:

(1) Untested back-up servicing arrangement: No back-up servicing arrangement was set up at closing. Servicing of the transaction may be subject to disruption if the originator/servicer fails to perform when needed. Any disruption can result in a material impact because the transaction has 47,313 borrowers located in various parts of China, and there are limited viable replacement servicers or collection agents in China capable of covering such a geographic spread and the sheer number of loans should the originator default. So far in China, there has been no precedent of actual servicing transfers. Moody's considers the high likelihood of parental support for the servicer and the short weighted average life of the senior notes as key mitigants to this concern.

(2) Limited liquidity buffer: The transaction has no liquidity reserve fully funded upfront. Moody's considered the following mitigants in determining the operational risk in this transaction: (a) the strong parental support available to the servicer; (b) the short tenor of this transaction; and (c) perfection of the trust's right over the assigned loans through notification to the underlying borrowers five days after a servicer termination event.

(3) Commingling risk with servicer's fund: The servicer will auto-debit the borrowers' bank accounts on each of the loans' monthly installment dates, and commingle such collections with its own funds. This amount is subject to commingling risk until the servicer transfers such collections to the issuer's trust account six business days after the end of the last calendar month. Moody's has considered (1) the credit quality of the servicer and its parent companies, and (2) the payment mechanism in this transaction, and modeled for a commingling exposure equal to 1.5 month of collections and a 45% recovery rate on such exposure.

(4) Short historical performance information: Performance data of both the dynamic and static pool by vintage from January 2008 to April 2017 were provided to Moody's. Although the historical data trace back to DNAF's establishment, performance data from DNAF's early operations are limited. The period with meaningful performance data is short compared to other mature ABS markets and also coincided with a period of strong economic growth in China. Accordingly, Moody's has increased its default rate assumptions and reduced its recovery rate assumptions -- from those calculated with the historical pool performance data in its base case analysis -- to reflect the prospects of a slowdown in economic growth and rising credit concerns in China.

(5) Interest rate mismatch There are no hedging arrangements in the transaction. The interest rate of the senior notes are linked to 1 year PBOC benchmark lending rate, the loans in the collateral pool are floating rate based on the PBOC benchmark lending rate of different terms of the loans. Moody's assessed the sensitivity of the model result to such an interest rate mismatch to be low.

MAIN MODEL ASSUMPTIONS

Moody's assumed a mean default rate of 1.5% and a coefficient of variation of default of 65% for the securitized pool. A recovery rate of 15% is used as the other main input for Moody's cash flow model ABSROM. These assumptions are made according to Moody's analysis of the characteristics of securitized pools, their historical performance, and the current view of China's social and macroeconomic conditions and risks as reflected in its country ceiling of Aa3.

RATINGS METHODOLOGY

The principal methodology used in this rating was Moody's Global Approach to Rating Auto Loan- and Lease-Backed ABS published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING:

Factors that may cause an upgrade of the rating of the senior notes include a raising of the LCC of China.

Factors that may cause a downgrade of the rating include a lowering of the LCC of China; a decline in the overall performance of the pool; a significant deterioration in the credit profile of the originator, or its parent companies and the absence of the implementation of any mitigating actions for the deal.

The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range may indicate that the collateral's credit quality is stronger or weaker than what Moody's had previously anticipated.

STRESS SCENARIOS:

In rating auto loan ABS, the default rate and coefficient of variation of default are two key inputs that determine the transaction cash flows in the cash flow model. Parameter sensitivities for this transaction have been tested in the following manner: Moody's tested nine scenarios derived from a combination of a mean default rate and a coefficient of variation of default:

Mean default rate: 1.5% (base case), 1.8% (base case +0.3%), and 2.0% (base case + 0.5%), and coefficient of variation of default: 55% (base case - 10%), 65% (base case), and 75% (base case + 10%).

At the time the rating was assigned, the model output indicated that the rated senior notes would be rated Aa3 if (1) the mean default rate assumption becomes 2.0% (instead of the assumed 1.5%) and (2) the coefficient of variation of default assumption becomes 75% (instead of the assumed 65%), all other factors unchanged.

Parameter sensitivities provide a quantitative/model indicated calculation of the number of notches that a Moody's rated structured finance security may vary if certain input parameters used in the initial rating process differed. The analysis assumes that the transaction has not aged. It is not intended to measure how the rating of the security might migrate over time, but rather how the initial model output for the security might have differed as certain key parameters vary.

The Company

Dongfeng Nissan Auto Finance Co., Ltd. (DNAF, unrated) is owned - through direct and indirect ownerships - 58% by Nissan Motor Co., Ltd. (Nissan, A2 stable outlook), and 42% by Dongfeng Motor Group Company Limited (A2 stable). DNAF is an auto finance company established in October 2007 in China and is licensed under the supervision of the China Banking Regulatory Commission (CBRC).

DNAF has both a retail business and an inventory financial services business. The retail business provides auto loans to consumers who purchase vehicles produced or imported by Dongfeng Nissan, Nissan China, Dongfeng Infiniti, Dongfeng Venucia, Zhengzhou Nissan, Dongfeng Renault and Renault (Beijing) through authorized dealers. The vehicles include brands such as Nissan, Infiniti, Venucia, Zhengzhou Nissan, and Renault. The loans are originated through its dealership network across China.

The issuer is a newly established special purpose trust incorporated in China.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's either did not receive or take into account one or more third-party due diligence assessment(s) regarding the underlying assets or financial instruments (the "Due Diligence Assessment(s)") in this credit rating action.

The Due Diligence Assessment(s) referenced herein were prepared and produced solely by parties other than Moody's. While Moody's uses Due Diligence Assessment(s) only to the extent that Moody's believes them to be reliable for purposes of the intended use, Moody's does not independently audit or verify the information or procedures used by third-party due-diligence providers in the preparation of the Due Diligence Assessment(s) and makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of the Due Diligence Assessment(s).

The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.

Moody's describes the stress scenarios it has considered for this rating action in the section "Ratings Rationale" of this press release.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

For PRC only: Neither MCO nor any of its majority-owned affiliates is a qualified credit rating agency within the PRC. Any rating assigned by MCO or any of its majority-owned affiliates: (1) does not constitute a rating as required under any relevant PRC laws or regulations; (2) cannot be included in any registration statement, offering circular, prospectus or any other documents submitted to the PRC regulatory authorities; and (3) cannot be used within the PRC for any regulatory purpose or for any other purpose which is not permitted under relevant PRC laws or regulations. For the purposes of this paragraph, "PRC" refers to the mainland of the People's Republic of China, excluding Hong Kong, Macau and Taiwan.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Joe Wong
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Jerome Cheng
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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