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Rating Action:

Moody's upgrades German auto ABS notes issued by Driver Four, Driver Three and Driver Two, originated by Volkswagen Bank

05 Nov 2010

EUR 103.8 Million debt securities affected

Frankfurt am Main, November 05, 2010 -- Moody's Investors Service today upgrades three classes issued by Driver Four GmbH, Driver Three GmbH, and Driver Two GmbH

Issuer: Driver Four GmbH (Driver Four)

....EUR30 million B notes, upgraded to Aa1 (sf); previously on 7 July 2010, rated A1 (sf) placed under review for possible upgrade

Issuer: Driver Three GmbH (Driver Three)

....EUR35 million B certificate, upgraded to Aa1 (sf); previously on 7 July 2010, rated A1 (sf) placed under review for possible upgrade

Issuer: Driver Two GmbH (Driver Two)

....EUR38.5 million B certificate, upgraded to Aaa (sf); previously on 7 July 2010, rated A1 (sf) placed under review for possible upgrade

RATINGS RATIONALE

Today's rating actions conclude Moody's review of these three transactions and take into consideration the better-than-expected performance of the collateral and the stable macroeconomic environment in Germany. The ratings take into account: (i) the credit quality of the underlying portfolio of auto-loan receivables, from which Moody's determined its cumulative loss rate and volatility assumption; and (ii) the build-up of credit enhancement within the transaction structure. The ratings also consider the transaction structure as assessed in Moody's cash flow analysis. The expected cumulative loss rate and volatility are the two key parameters Moody's uses to calibrate its loss-distribution curve, used in the cash-flow model to rate European ABS transactions.

PORTFOLIOS EXPECTED CUMULATIVE LOSS RATE

Moody's has reassessed its lifetime loss expectation for the pools in each deal, which revealed that the three transactions have out-performed Moody's performance expectations that were assumed at closing.

The collateral performance trend is in line with Moody's stable sector outlook for German auto ABS (EMEA ABS, CMBS & RMBS Asset Performance Outlooks, July 2010). As of October 2010, 90+ day delinquencies on the current balance are 0.41% for Driver Four, 0.39% for Driver Three and 0.41% for Driver Two. Over the past year, cumulative losses reported as a percentage of the original total securitised pool balances marginally increased to 0.42% from 0.27% in Driver Four, to 0.38% from 0.22 % in Driver Three and to 0.47% from 0.37% in Driver Two.

During the review process Moody's also assessed the future performance of balloon loans within the securitised pools. This loan type represents a significant portion of the transaction pools, representing 94%, 87% and 91% of the outstanding portfolio of Driver Four, Three and Two, respectively as of October 2010. The high proportion of balloon loans can be explained by the longer maturity (on average) of these contracts compared with fully amortising loans.

Balloon loans include a large payment obligation by the borrower at the loan maturity. At the maturity of the balloon payment the borrower settles the final payment with either (i) directly paying the balloon amount to Volkswagen Bank GmbH, (ii) returning the car to the dealer who will then make the final payment to Volkswagen Bank GmbH, (subject to physical and technical conditions of the vehicle); or (iii) through refinancing of the purchase price of the car with Volkswagen Bank GmbH. In an insolvency scenario of Volkswagen AG (rated A3/P-2) and Volkswagen Bank GmbH (rated A2/P-1), the borrower with a balloon loan may face greater difficulties to refinance the balloon payment. This translates into a potential increase in both the borrower's default probability and the severity of a default, as Moody's assumes that certain vehicle values may be negatively affected in an insolvency scenario of the manufacturer.

Moody's revised its assumptions, taking into account the consequence of an insolvency scenario of Volkswagen AG and Volkswagen Bank GmbH on the performance of the balloon loans. Under this scenario, Moody's assumes that 5% of the borrowers with a balloon loan will default, and that vehicle recoveries will reach 60% of the defaulted balloon installment. This discounted value is commensurate with the assumptions that Moody's would apply in the current market environment for residual values of auto-lease receivables.

Moody's expects future cumulative losses as a percentage of the remaining balances (as of September 2010) for amortising loan contracts to be 1.1% for Driver Four and 1.4% for Driver Three and Driver Two. Overall, Moody's revised its cumulative loss assumption for the whole portfolio (amortising and balloon loans) to 0.68% from 1.55% on the original balance for Driver Four, to 0.77% from 1.6% for Driver Three and to 0.65% from 1.6% for Driver Two, both on original balance plus replenishments. Expressed as a percentage of current balance as of September 2010, these revised cumulative loss rates translate to 1.6% for Driver Four and Three and 1.7% for Driver Two.

VOLATILITY AND CONSTANT PREPAYMENT RATE

Due to the significant portion of balloon loans in the outstanding portfolios, Moody's increased its volatility assumption to 50% from 40% at close. Moody's understands volatility as the ratio of the standard deviation and the cumulative mean loss rate assumptions of a portfolio. The initial constant prepayment rates--ranging between 12% to 25% among the three transactions--were decreased to 15%. This results in an alignment of these rates to the historical values observed until now in the three transactions.

Driver Four GmbH, Driver Three GmbH and Driver Two GmbH closed in 2007, 2006 and 2005, respectively. All three are auto-loan ABS deals originated by Volkswagen Bank GmbH, the financing arm of Volkswagen AG. For details on the transactions' structures, please refer to the New Issue Reports available on www.moodys.com. The cash collateral accounts in the three transactions are currently at their target levels. So far, the issuers have not used their cash collateral accounts.

The principal methodology used in this rating was "The Lognormal Approach applied to ABS Analysis" published in July 2000 and "Revising Default/Loss Assumptions Over the Life of an ABS/RMBS Transaction" published in December 2008.

Moody's used its excel based cash-flow model Moody's ABSROM™ as part of its quantitative analysis of the transaction. Moody's ABSROM™ 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, or recoveries and replenishments during the revolving period, as well as the specific priority of payments, triggers, swaps and reserve funds on the liability side of the ABS structure. Moody's ABSROM™ User Guide, available on Moody's website, covers the functionality of the model and provides a comprehensive index of the user inputs and outputs.

The combination of the key updated assumptions together with the current credit enhancement levels resulted in the upgrades of all rated notes for the transactions. Moody's analysed various sensitivities of cumulative loss rates to test the robustness of its revised ratings. For instance, Moody's observed that the quantitative/model-indicated rating outcome of the class B notes would remain consistent with the revised rating if the mean loss assumptions increased up to 25% of its revised value (2% vs 1.6% base case assumption) for Driver Four and Three and up to approximately 30% (2.2% vs 1.7%) for Driver Two.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

REGULATORY DISCLOSURES

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Additional research, including the pre-sale report for these transactions and reports for prior transactions, are available at www.moodys.com. In addition Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Frankfurt am Main
Sebastian Hoepfner
Associate Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Carole Gintz
VP - Senior Credit Officer
Structured Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany

Moody's upgrades German auto ABS notes issued by Driver Four, Driver Three and Driver Two, originated by Volkswagen Bank
No Related Data.
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