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Rating Action:

Moody's has assigned definitive ratings to German auto lease ABS of VCL 22

25 Nov 2015

Frankfurt am Main, November 25, 2015 -- Moody's Investors Service has assigned the following definitive ratings to notes issued by VCL Multi-Compartment S.A., Compartment VCL 22:

....EUR 800 M Class A Floating Rate Asset Backed Notes due 21 August 2021, Definitive rating Assigned Aaa (sf)

....EUR 20.5 M Class B Floating Rate Asset Backed Notes due 21 August 2021, Definitive rating Assigned Aa3 (sf)

Moody's has not assigned a rating to the EUR 28.1 M Subordinated Loan, which is also issued at closing of the transaction.

RATINGS RATIONALE

The transaction is a static cash securitisation of auto lease receivables extended to obligors in Germany by Volkswagen Leasing GmbH. (VW Leasing), rated A1 backed senior unsecured/Negative Outlook, ultimately owned by Volkswagen Aktiengesellschaft, rated A3/P-2/ Negative Outlook. This public securitisation continues the series of VCL transactions sponsored by VW Leasing. All the previously Moody's rated VCL transactions have been performing in line with or better than initial expectations.

The portfolio of underlying assets consists of auto lease instalment receivables. Underlying lease contracts are distributed through VW Group auto dealers. As of the cut-off date October 2015, the 82,644 non-delinquent lease contracts in the portfolio finance new cars (95.54%) used cars (2.07%) and demo cars (2.39%) to retail (75.24%) and corporate (24.76%) customers. The weighted average seasoning is nine months and the lease contracts have an outstanding discounted lease balance of approx. EUR 857.17 million.

According to Moody's, the transaction benefits from credit strengths such as the granularity of the portfolio, financial strength and securitisation experience of the originator, and good performance of past transactions. However, Moody's notes that the transaction features some credit weaknesses such as a high degree of linkage to VW Leasing.

Various mitigants have been put in place in the transaction structure, such as performance related triggers to switch to sequential amortization, as well as various cash reserves including (i. a fully funded cash reserve held at the account bank sized at 1.2% of the portfolio balance and available for liquidity and repayment of notes at legal final, (ii.) a VWL Risk Reserve sized at approximately 7.7% of the portfolio balance which is available to cover for a number of claims the issuer may have against VW Leasing (e.g. seller risks), including at least one month commingling risk and certain tax risks, but excluding credit risk arising from the leasing portfolio; and (iii.) a fully funded Market Risk Reserve equal to 6.6% of the portfolio balance, sized to fully cover exposure to lease receivables affected by CO2 emissions misrepresentations.

True sale risk may materialise in the securitisation of German lease receivables in case of an originator insolvency due to non-compliance with criteria of Sec. 108 of the German insolvency code. In Moody's opinion this risk is mitigated through, amongst other things, portfolio eligibility criteria which reflect that the conditions of Sec. 108 of the German insolvency code are met, which provides an exception to the application of Sec. 103 of the German insolvency code. Potential lessee set-off and contract termination risks related to service components in lease contracts are mitigated by the strong incentive to continue services also in a servicer insolvency due to a post German insolvency restructuring scenario. In addition, enforcement of such lessee rights is uncertain. Moody's analysis focused, amongst other factors, on (i) an evaluation of the underlying portfolio of leases; (ii) historical performance information of the total book and past ABS transactions; (iii) the credit enhancement provided by subordination and reserve fund; (iv) the liquidity support available in the transaction by way of principal to pay interest and the reserve fund; and the (v) structural and legal integrity of the transaction.

Emissions irregularities: On 18 September 2015, the US Environmental Protection Agency (EPA) issued findings that Volkswagen Aktiengesellschaft (VW) rated A3/P-2 (Negative Outlook) had used engine management software in its diesel cars to evade emissions standards under the Clean Air Act. Subsequently, on 22 September 2015, VW Group made a public announcement stating that circa 11 million diesel engines of the type EA 189 may be affected worldwide. On 15 October 2015 the Federal Motor Transport Authority (Kraftfahrt-Bundesamt or KBA), announced a mandatory recall programme by VW of circa 2.4 million affected vehicles registered in Germany (the EA189 affected vehicles).

In addition, on 3 November 2015 VW Group announced that approximately 800,000 vehicles world-wide are affected by unexplained inconsistencies regarding type approval CO2 (the "CO2" issue).

Furthermore, according to a VW Group statement on 23 November 2015, auxiliary emission control devices for certain US vehicles equipped with a 3.0L diesel engine are to be revised, documented and submitted for approval by US authorities. However, Moody's notes that this announcement was not related to European vehicles.

EA189 affected vehicles: The seller has confirmed that 16.63% of the outstanding discounted principal balance in the VCL22 portfolio are EA189 affected vehicles as a percentage of total pool volume for a total of 16,208 contracts. However, any set-of rights by lessees in connection with EA189 defected receivables would trigger a repurchase or remedy obligation by the seller under the lease receivables purchase agreement. Moody's notes that no reserve fund has been incorporated into the transaction to secure the seller's repurchase or remedy obligations.

CO2 affected vehicles: The seller estimates that no more than 6.6% of the outstanding discounted principal balance in the VCL22 portfolio are CO2 affected as a percentage of total pool volume for a total of no more than 5,408 affected vehicles. However, a fully funded Market Risk Reserve has been incorporated into the transaction structure to fully reserve for affected CO2 vehicles. Moody's has been informed of the originator's intention to repurchase all contracts financing vehicles affected by C02 misrepresentations once impacted vehicles have been duly identified. It is planned that 2,962 already identified contracts as of closing (circa EUR 30.9 million) will be repurchase at the first payment date occurring in December, thereby deleveraging the portfolio more quickly, and the remaining estimated 2,446 affected vehicles to be identified (circa EUR 25 mn discounted balance) are to be repurchased as soon as the identification is concluded. The effect of these repurchases, particularly the EUR 30.9 mn confirmed repurchase occurring 1 month following closing, is to deleverage the transaction at a faster rate as compared to original expectations when assigning provisional ratings to the transaction. Consequently, the rated notes have benefitted resulting from the (fully collateralized) repurchase mechanism introduced to the final transaction documents and after the assignment of provisional ratings on 20 October 2015.

Moody's has incorporated the additional risk related to the exposure to EA189 vehicles (non-reserved exposure) in its quantitative analysis via set-off modeling and as explained below.

SELLERS WARRANTIES UNDER LEASE RECEIVABLES PURCHASE AGREEMENT

The underlying lease agreements do not contemplate any representations with regards to the emissions standards of the leased vehicle, and as such, the recall should not by itself trigger a termination right under the terms and conditions of the lease agreement.

Moody's notes that following its review of the terms and conditions of the underlying lease agreements and clarification by transaction legal counsel, the lessee's warranty claims against VW Leasing under the lease contract are replaced by an assignment of warranty claims VW Leasing has against the seller/manufacturer of the vehicle under a vehicle purchase contract. Following assignment by VW Leasing, the obligation to provide a warranty in favour of the lessee has been transferred to the dealer. The dealer may have recourse to the manufacturer, however the lessee warranty claim will in a first instance be against the dealer.

Consequently, the lessee may take recourse against the dealer and ultimately the manufacturer in case emission standards were represented in the purchase contract.

Moody's understands that the failure of the dealer to satisfy the lessees' warranty claims will not give rise to the legal ability for the lessees to withhold payments due under the lease agreements as the concept of connected contracts ("verbundene Verträge") pursuant to the German Civil code does not apply to lease agreements.

However Moody's notes that, under the terms and conditions of the underlying lease agreements, lessees may withhold payment of lease instalments under the following scenario:

- The lessee claims rectification for material defects of the leased vehicle; and

- the dealer as the seller of the leased vehicle does not accept the lessee's claim for rectification or such rectification fails and the seller does not accept reduction of the purchase price or rescission from the purchase contract; and

- the lessee brings action in a German court against the seller of the leased vehicle within six weeks following the seller's denial.

Immediately following an action being successfully filed with the court by the lessee as described above, the lessee may withhold any further payments of the lease installments pending the court's ruling on the matter. Should the lessee's action be:

- upheld, then the withheld installment payments need not be returned; the lessee could additionally demand compensation payments for installment payments made and to be paid by VW Leasing. In turn, the lessee could be required to pay a compensation for use to VW Leasing;

- denied, then the lessee would need to immediately pay all the withheld installment payments plus related costs such as forgone interest on interest.

According to the transaction documentation, VW Leasing as seller warrants and guarantees with respect to the purchased lease receivables that they are free of defences (and free from rights of third parties and that the lessees in particular have no set-off claim).

Moody's understands that action taken by the lessee to withhold payments on the related installments would classify as invoking a defense ("Einrede"). Consequently, the filing of an action by a lessee would trigger a breach of the sellers' warranties under the lease receivables purchase agreement and give rise to remedies/repurchase of the relevant lease receivables if such a breach is deemed to materially and adversely affect the interests of the Issuer or the note holders. VW Leasing as seller would need to remedy/repurchase before the end of the monthly period which includes the 60th day after the date on which VW Leasing became aware or was notified of such breach to cure.

Moody's notes that any failure of VW Leasing to repurchase defected receivables in a timely manner, given the discretion afforded on the timing of the remedy/repurchase obligation, could impact the credit rating of the outstanding rated notes thereby increasing rating volatility in the transaction.

Moody's considers this additional set-off risk (i.e. withholding lease instalments) in its quantitative analysis. Moody's has therefore modeled in its base case an additional risk exposure of 1% vis-a-vis VW Leasing and has assumed reduced recovery rates for the impacted vehicles. In order to evaluate the additional risk exposure, Moody's took into account the share of affected vehicles in the portfolio, the percentage of vehicles potentially being deemed to be defective after a recall by VW, the likelihood of remaining material or simple defects post recall and the percentage of lessees that exercise termination rights under the lease agreements.

In addition to the base case, the rating agency has considered sensitivity runs assuming higher additional set-off risk exposures and a lower credit profile of the lessor, VW Leasing.

MAIN MODEL ASSUMPTIONS

Moody's assumed a mean loss rate of 1.25% for the securitised pool. A coefficient of variation of 48.0% is used as the other main input for Moody's cash flow model ABSCORE. The base case mean loss rate, the assumed volatility and weighted average life define a portfolio credit enhancement of 6.50%.

METHODOLOGY

The principal methodology used in these ratings was Moody's Global Approach to Rating Auto Loan- and Lease-Backed ABS published in January 2015. Please see the Credit Policy 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 rating of the class B notes include a significant better than expected performance of the pool together with an increase in credit enhancement of notes. Factors that may cause a downgrade of the ratings include a decline in the overall performance of the pool, a higher than currently anticipated risk resulting from the emission irregularities and the planned recall programme, and a meaningful deterioration of the credit profile of the originator VW Leasing.

The ratings address the expected loss posed to investors by the legal final maturity of the notes. In Moody's opinion, the structure allows for timely payment of interest and ultimate payment of principal with respect to the Class A notes and Class B notes by legal final maturity. 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 effect on yield to investors.

LOSS AND CASH FLOW ANALYSIS

Moody's used its cash-flow model Moody's ABSCORE as part of its quantitative analysis of the transaction. Moody's ABSCORE model enables users to model various features of a standard European ABS transaction -- including the specifics of the default distribution of the assets, their portfolio amortisation profile, yield as well as the specific priority of payments, swaps and reserve funds on the liability side of the ABS structure.

STRESS SCENARIOS

In rating auto lease ABS, loss rate and loss volatility measured as coefficient of variation (CoV) 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 mean loss: 1.25% (base case), 1.50% (base case + 0.25%), 1.75% (base case + 0.50%) and CoV: 48% (base case), 53% (base case + 5%), 58% (base case + 5%). The results for Class A notes under these scenarios vary from Aaa (base case) model output to Aa3 model output where the mean loss is 1.75% and CoV is 58%. The results for class B notes under these scenarios vary from Aa3 (base case) to Baa3 where the mean loss is 1.75% and CoV is 58%.

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 deal 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 Class A and Class B notes might have differed if the two parameters within a given sector that have the greatest impact were varied. Results are model outputs, which are one of many inputs considered by rating committees, which take quantitative and qualitative factors into account in determining actual ratings.

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 describes its loss and cash flow analysis in the section "Ratings Rationale" of this press release.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Johann Grieneisen
Vice President - Senior Analyst
Structured Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Daniel Kolter
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's has assigned definitive ratings to German auto lease ABS of VCL 22
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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