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Rating Action:

Moody's assigns definitive ratings to BMW-sponsored auto loan ABS in China: Bavarian Sky China 2018-1 Trust

20 Sep 2018

RMB4,055 million of securities rated

Hong Kong, September 20, 2018 -- Moody's Investors Service has assigned definitive ratings to two classes of notes issued by Bavarian Sky China 2018-1 Trust, the ninth domestic securitization transaction backed by a pool of auto loans originated by BMW Automotive Finance (China) Co., Ltd. (BMW AFC, unrated) in China.

The complete rating action is as follows:

Issuer: Bavarian Sky China 2018-1 Trust

.... RMB3,500,000,000 Class A Asset Backed Notes, Definitive Rating Assigned Aa3 (sf)

.... RMB555,000,000 Class B Asset Backed Notes, Definitive Rating Assigned Aa3 (sf)

The RMB444,999,404.53 Subordinated Notes are not rated by Moody's.

The ratings address 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 transaction is a static securitization of auto loans extended to individuals in China by BMW AFC.

The ratings assigned to the 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.

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

(1) Characteristics of the securitized pool;

(2) The macroeconomic environment in China;

(3) The lack of historical performance data during economically distressed period;

(4) The parental support available to the servicer to be provided by the A1-rated parent company of the servicer;

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

(6) The full turbo payment mechanism to allocate cash flow to each class of notes;

(7) The protection provided by the credit enhancement available to each class of notes against defaults and arrears in the securitized pool; and

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

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

(1) Diversified collateral pool composition: The cut-off portfolio consists of over 17,000 borrowers with a good level of geographic diversification across China.

(2) Favorable pool characteristics: The pool only includes loans to purchase new BMW and MINI vehicles, payment made by direct debit from the borrowers' bank accounts, and a minimum 20% down-payment. The pool's weighted average down-payment rate is 34.89% at origination, slightly higher than the 34.24% in the last transaction, Bavarian Sky China 2017-3 Trust.

(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 closing pool, which has a weighted average remaining term of 28.5 months, longer than the 18.7 months in the last transaction. Furthermore, the issuer will apply loan repayments to repay the rated notes from the first monthly payment date until they are repaid in full.

(4) Strong credit enhancement and interest alignment: The transaction benefits from several sources of credit enhancement, namely (a) the subordination of the notes; (b) the presence of a cash reserve, which was fully funded at closing, to be topped up by excess spread (if any) during the transaction period to maintain the account balance equal to 1% of the initial pool balance as of the cut-off date; and (c) the full turbo payment mechanism, that means the issuer will use all excess amounts collected after payment of the rated notes' interest in each period to repayment of the rated notes in a sequential manner, until each class of notes is fully repaid prior to an event of default of the notes (thus increasing overcollateralization with respect to each class of rated notes over time). The pool had a weighted average yield of 6.15% per annum as of the cut-off date, higher than the 5.8% in the last transaction.

(5) Strong interest alignment: The originator has a strong alignment of interest with the noteholders, given the originator retains the subordinated notes and does not receive interest on them.

(6) Strong pool performance: The cumulative default rates of the earlier five securitizations sponsored by the originator, namely Bavarian Sky China 2017-3 Trust, Bavarian Sky China 2017-2 Trust, Bavarian Sky China 2017-1 Trust, Bavarian Sky China 2016-2 Trust, and Bavarian Sky China 2016-1 Trust, rated by Moody's in December, August and April 2017, December and June 2016, were approximately 0.04%, 0.04%, 0.08%, 0.13%, and 0.04% as of 31 March 2018. Based on historical data provided by the originator from December 2010 to May 2018, the highest 91-120-day delinquency rate was less than 10bps across the monthly dynamic data.

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

(1) Balloon loan inclusion: The portfolio consists of 22.81% balloon loans. In Moody's view, loans with a balloon payment are subject to higher refinancing and, consequently, default risk. Moody's has considered this in its quantitative analysis.

(2) 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 over 17,000 obligors 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 number of loans should the originator default. There has thus far been no precedence of actual servicing transfers. Moody's considers the high likelihood of parental support for the servicer from its major shareholding parent Bayerische Motoren Werke Aktiengesellschaft (BMW, A1/P-1, stable) and the short weighted average life of the rated notes as key mitigants to this concern. Although the BMW does not provide an explicit guarantee, the servicer and the jurisdiction are strategically important to BMW's global auto business.

(3) Limited liquidity buffer: The trust has a non-amortizing cash reserve account fully funded at closing to an amount equal to 1.00% of the initial portfolio principal amount, covering approximately 2.9 months of senior fees and rated notes' interest, calculated according to the closing note balance amount. This amount of liquidity coverage appears weak in the unlikely scenario of both the servicer and issuer failing to service the portfolio for a prolonged time. Moody's considered the following mitigants in determining the operational risks in this transaction: (a) the parental support available to the servicer; (b) the increasing level of liquidity coverage over time, based on expected collections from the portfolio since the target reserve amount remains unchanged, while the notes amortize overtime; (c) the short tenor of this transaction; and (d) perfection of the trust's right over the assigned loans through notification to the underlying borrowers soon after a servicer termination event.

(4) Commingling risk with servicer's fund: The servicer will auto-debit the borrowers' bank accounts on each of the loans' monthly instalment dates, and deposit such collections with its own funds. This amount will be subject to commingling risk until the servicer transfers such collections to the issuer's trust account nine business days after the end of the last calendar month. Moody's has considered the credit quality of the servicer and the payment mechanism in this transaction, and modeled a commingling exposure to the transaction equal to one and a half month of collections and a 45% recovery rate on such exposure.

(5) The lack of historical performance data during economically distressed period: the originator has given Moody's its historical retail loan performance data up to May 2018. Most of the data period coincided with strong economic growth in China. Accordingly, Moody's has increased its default rate assumptions and reduced its recovery rate assumptions -- compared to the historical pool performance data -- to reflect the prospects of a slowdown in the economic growth of, and the rising credit concerns in China.

MAIN MODEL ASSUMPTIONS:

Moody's assumed a mean default rate of 1.8% and a coefficient of variation of default of 67% for the securitized pool. A recovery rate of 5% is used as the other main input for Moody's cash flow model ABSROM. These assumptions have taken into account the credit quality and composition of the underlying loans, historical performance trends of similar securitization transactions and that of the originator's managed portfolio, and the current expectations for future economic conditions in China.

RATINGS METHODOLOGY:

The principal methodology used in these ratings 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 RATINGS:

Factors that may cause an upgrade of the ratings include a raising of the LCC of China.

Factors that may cause a downgrade of the ratings 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.

The Company

BMW AFC is a licensed auto finance company, and was incorporated in Beijing in September 2010. It provides auto loans to buyers of cars -- which include all BMW automotive brands -- sold through BMW dealers in various provinces of China. It is under the supervision of the China Banking and Insurance Regulatory Commission (CBIRC).

BMW AFC is 58% owned by Bayerische Motoren Werke Aktiengesellschaft (BMW, A1/P-1, stable) and its 100% owned subsidiaries, and 42% owned by BMW Brilliance Automotive Ltd. (unrated). The latter company is a 50/50 joint venture formed by BMW and a China incorporated car manufacturing company, Brilliance China Automotive Holdings Limited. (unrated).

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 took 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 and used the Due Diligence Assessment(s) in preparing the ratings. This had a neutral impact on the ratings.

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 quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.

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.

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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.
© 2019 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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