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Rating Action:

Moody's assigns definitive ratings to Dongfeng Nissan Auto Finance auto loan ABS in China: VINZ 2018-1 Retail Auto Loan Securitization Trust

13 Mar 2018

RMB3,766 million of securities rated

Hong Kong, March 13, 2018 -- Moody's Investors Service has assigned definitive Aa3 (sf) ratings to the two senior classes of notes issued by VINZ 2018-1 Retail Auto Loan Securitization Trust, the first cash securitization of a static pool of auto loans originated by Dongfeng Nissan Auto Finance Co., Ltd. (DNAF) to individual obligors in China in 2018.

The complete rating action is as follows:

Issuer: VINZ 2018-1 Retail Auto Loan Securitization Trust

....RMB1,000,000,000.00 Senior Class A1 Notes, Assigned Aa3 (sf)

....RMB2,766,000,000.00 Senior Class A2 Notes, Assigned Aa3 (sf)

The RMB733,990,195.06 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 rated 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 Classes A1 and A2 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 ratings assigned to the Senior Class A1 Notes and Senior Class A2 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 ratings 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) Lack of historical performance information during an economically distressed period;

(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 the cash reserve and effectiveness of other structural mechanisms to support timely payments on the rated notes;

(6) The principal payment schedule of the Class A1 Notes;

(7) The protection provided by the credit enhancement 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 key strengths:

(1) Diversified collateral pool composition: The cut-off portfolio consists of 60,354 loans with a good level of geographic diversification across China. Approximately 23.17% 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 around 92.45% of the loans have minimum 20% down-payment. The pool has a weighted average down-payment rate of about 29.41%.

(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 30 months from the pool's cut-off date. Furthermore, the issuer will apply the loan principal repayments in accordance with its priority of payment, including repaying the Class A1 Notes up to its scheduled principal payment on each note's payment date, and then the remaining collection will be used to repay the Class A2 Notes until they are repaid in full.

(4) Strong credit enhancement: The transaction benefits from several sources of credit enhancement, including (a) the subordination available to the senior notes; and (b) excess spread to cover pool loss and to accelerate repayment of the rated notes if the cumulative default rate exceeds predefined thresholds.

(5) Experienced originator and strong pool performance: DNAF has around ten years of experience operating in China, and has sponsored seven auto ABS transactions prior to this proposed transaction. These seven 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-December 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 60,354 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) Lack of historical performance information during an economically distressed period: Performance data of dynamic pool from January 2008 to December 2017 and static pool by vintage from January 2008 to December 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 class A1 notes is fixed and the class A2 notes is linked to one-year benchmark lending rates of the People's Bank of China's (PBOC), while the interest rates on the loans are linked to one- to five-year benchmark lending rates of PBOC, depending on the 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 such 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 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 of the Classes A1 and A2 Notes include a decrease in non-diversifiable country risk in China and reduced operational and liquidity risks.

Factors that may cause a downgrade of the ratings include an increase in non-diversifiable country risk in China; increased operational and liquidity risks; 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), 2.0% (base case +0.5%), and 2.5% (base case + 1.0%), and coefficient of variation of default: 65% (base case), 70% (base case + 5%), and 75% (base case + 10%).

At the time the rating was assigned, the model output indicated that both the rated notes would have achieved Aa3 if (1) the mean default rate assumption becomes 2.5% (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:

DNAF 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 outlook). 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 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 relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the 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.

Cecilia Chen
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.
© 2018 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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