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Rating Action:

Moody's has assigned provisional ratings to Spanish auto loan ABS of Driver Espana three, F.T.

20 Jan 2016

Frankfurt am Main, January 20, 2016 -- Moody's Investors Service has assigned the following provisional ratings to notes to be issued by Driver Espana three, F.T.:

....EUR 643.5M Class A Floating Rate Asset Backed Notes due December 2026, Assigned (P)Aa2 (sf)

....EUR 21.7M Class B Fixed Rate Asset Backed Notes due December 2026, Assigned (P)A2 (sf)

RATINGS RATIONALE

The transaction is a static cash securitisation of auto loans extended to obligors in Spain by Volkswagen Finance, S.A. E.F.C. ("VW Finance"; NR) ultimately owned by Volkswagen Aktiengesellschaft ("Volkswagen AG"; A3/P-2/Negative outlook). This is the third public securitisation originated by VW Finance. The Spanish securitization program, however, leverages off Volkswagen Group's world-wide securitization experience gained over the last 17 years with numerous well performing transactions.

The provisional portfolio of underlying assets consists of auto loans distributed through VW Group auto dealers and will have a total amount of € 750.0 million.

As at December 2015, the provisional pool cut shows 120,885 non-delinquent contracts with a weighted average seasoning of 12.5 months and an outstanding balance of EUR 1,139.1 million. The loans in the portfolio finance new cars (82.86%) and used cars (17.14%) to retail customers, including freelancers, (95.04%) and corporate customers (4.96%).

The portfolio consists of 92.21% amortising loans ("Classic Credit" loans), and 7.79% balloon loans ("AutoCredit" loans) which consist of equal instalments during the life of the loan with a larger balloon payment at loan maturity. The balloon payments of the balloon loans are not securitized in this transaction.

For definitive ratings, Moody's understands that VW Finance will provide a new pool cut but with very similar portfolio characteristics.

According to Moody's, the transaction benefits from credit strengths such as the granularity of the portfolio, securitisation experience of the Volkswagen Group, and the retention of title to the vehicles in favor of the originator. However, Moody's notes that the transaction features some credit weaknesses such as commingling risk and the relatively high linkage to the unrated originator and servicer, VW Finance. Various mitigants have been put in place in the transaction structure, such as performance related triggers to switch to sequential amortisation and rating triggers to provide additional reserves. Commingling risk is mitigated by (i) the current rating of Volkswagen AG (A3/P-2), (ii) cash advances upon a downgrade of Volkswagen AG below Baa1/P-2 and (iii) borrower notification to pay into the issuer account upon servicer insolvency.

Moody's analysis focused, amongst other factors, on (i) an evaluation of the underlying portfolio of loans; (ii) historical performance information of the total book and past ABS transactions; (iii) the credit enhancement provided by subordination and the reserve fund; (iv) the liquidity support available in the transaction by way of principal to pay interest and the reserve fund; and the (v) overall legal and structural integrity of the transaction.

Emissions irregularities

On 18 September 2015, the US Environmental Protection Agency (EPA) issued findings that Volkswagen Aktiengesellschaft 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. On 10 December 2015, Volkswagen announced that it has presented specific technical measures for the EA 189 diesel engines to the German Federal Motor Transport Authority KBA. On 16 December 2015, Volkswagen announced that the presented technical measures have been approved by the KBA. These measures apply to Europe (EU-28 markets).

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. On January 2016, the U.S. Department of Justice filed a civil complaint against Volkswagen AG stating that Volkswagen AG installed illegal devices in diesel engine systems to impair emissions controls. However, Moody's notes that these developments are not related to European vehicles.

The seller has confirmed that 34.32% of the outstanding discounted balance in the initial pool is affected by the diesel emission issue. As a result of the emission irregularities the transaction is exposed to the additional risk that borrowers set-off potential claims against their payments due under the loan agreements.

Moody's considers this additional set-off risk (i.e. withholding loan instalments) in its quantitative analysis. Moody's took into account the share of affected vehicles in the portfolio, the percentage of vehicles potentially being deemed to be defected after a recall by VW, the likelihood of remaining material or simple defects post recall and the percentage of customers actually exercising their set-off or termination rights under the purchase- and loan agreements.

MAIN MODEL ASSUMPTIONS

Moody's assumed a mean default rate (gross loss rate) of 3.0% for the securitised pool. The rating agency has mainly based its analysis on the historical cohort performance data provided by the originator for a portfolio that is representative of the one being securitised. The historical analysis has been then complemented with the evaluation of 1) the general Spanish market trend, 2) other Spanish auto loan securitisations, and 3) other qualitative considerations.

A static recovery rate of 35.0% is used as the other main input for Moody's cash flow model ABSCORE. As the originator did not provide separate recovery rate data, the analysis was conducted by comparing the historical net loss data to gross loss data. The historical analysis has been then complemented with the evaluation of 1) the legal analysis of the reservation of title, 2) benchmarking with other Spanish auto loan securitisations, and 3) other qualitative considerations.

The base case mean default rate, the recovery rate assumption and the assumed volatility, which is based on the analysis of the historical volatility levels and by benchmarking this portfolio with past and similar transactions, define a portfolio credit enhancement of 13.0%.

METHODOLOGY

The principal methodology used in these ratings was Moody's Global Approach to Rating Auto Loan- and Lease-Backed ABS published in December 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 ratings include a significantly better than expected performance of the pool together with an increase in credit enhancement of the notes and an upgrade of Spain's local country currency (LCC) rating.

Factors that may cause a downgrade of the ratings include a decline in the overall performance of the pool, a significant deterioration of the credit profile of the originator VW Finance or a downgrade of Spain's local country currency (LCC) rating.

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 the 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 loss 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 loan ABS, loss rate and loss volatility measured as coefficient of variation 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 default rate: 3.00% (base case), 3.25% (base case + 0.25%), 3.50% (base case + 0.50%) and recovery rate: 35.0% (base case), 30.0% (base case - 5%), 25.0% (base case - 10%). The model output results for Class A notes under these scenarios vary from Aa2 (base case) to A1 assuming the mean default rate is 3.50% and the recovery rate is 25.0% all else being equal. 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 notes might have differed if the two parameters within a given sector that have the greatest impact were varied. Please see the new issue report for more detailed sensitivity analysis.

Moody's issues provisional ratings in advance of the final sale of securities and the above rating reflects Moody's preliminary credit opinions regarding the transaction only. Upon a conclusive review of the final documentation and the final note structure, Moody's will endeavour to assign a definitive rating to the above notes. A definitive rating may differ from a provisional rating . Please note that the actual definitive issuance amounts of the rated classes may change from those stated above given confirmed capital structure and final portfolio levels. However, this aspect should not fundamentally impact the ratings as credit enhancement and portfolio credit features are expected to be consistent.

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 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.

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.

Sebastian Schranz
Asst Vice President - 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

Anthony Parry
VP - Sr Credit Officer/Manager
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 provisional ratings to Spanish auto loan ABS of Driver Espana three, F.T.
No Related Data.
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