Fitch Ratings has assigned 'AAA(EXP)sf' expected ratings to Driver China fourteen Trust's class A fixed-rate notes.

The notes are backed by Chinese automotive loan receivables originated by Volkswagen Finance (China) Co., Ltd. (VWFC), an indirectly wholly owned subsidiary of Volkswagen AG (A-/Stable).

RATING ACTIONS

Entity / Debt

Rating

Driver China fourteen Trust

A

LT

AAA(EXP)sf

Expected Rating

Subordinated

LT

NR(EXP)sf

Expected Rating

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Transaction Summary

The notes were issued by CITIC Trust Co., Ltd. in its capacity as trustee of Driver China fourteen. At the cut-off date of 31 May 2022, the total collateral pool consisted of 100,517 auto loans with a total discounted balance of around CNY 8.0 billion.

KEY RATING DRIVERS

Stresses Commensurate with Rating (Neutral): Fitch assumes a base-case lifetime default rate for the VWFC portfolio of 1.5%, based on the historical performance data, the pool composition at cut-off, origination trends and our expectation of slowing economic growth in China. We applied a stress multiple of 6x at 'AAAsf' on defaults to stress the transaction cash flow.

Sequential Paydown Structure before Target OC (Neutral): The senior notes are paid down prior to subordinated notes until target overcollateralisation (OC) of 23% is reached, which allows for the build-up of credit enhancement (CE) for the class A notes. However, the subordinated notes will receive principal payments prior to the class A notes being paid in full after the target OC is met. The subordinated notes will be held by the originator and the payment structure is considered in Fitch's cash flow analysis.

Robust Legal Structure (Neutral): The legal opinion states that the trust property transferred to the trust will be isolated from the property of the originator, which, in Fitch's view, underpins our quantitative analysis.

Counterparty Risk Mitigated (Neutral): The transaction has mechanisms that ensure remedial action takes place if the account bank's rating falls below an eligible rating of 'A' or 'F1'. Fitch uses Volkswagen AG's rating as a reference rating to assess commingling risk. The transaction has collateral-posting mechanisms to address commingling risk if the rating on VWFC's ultimate parent no longer fulfils the eligible rating of 'BBB' or 'F2'.

Base Case Intact Against Economic Risks (Neutral): The base-case default rate assumption is intact despite the sector's deteriorating asset outlook. This is supported by the robust performance of VWFC's portfolio, with the performance of its transactions remaining well within Fitch's base case expectations of 1.5% during the pandemic. However, China's near-term economic growth outlook is challenging. The recovery after lockdowns were eased has been uneven and, as such, we see risks to our forecast for China's economic growth of 3.7% in 2022.

Experienced Servicer (Positive): Fitch's review of the originator and servicer found the operation, underwriting, risk management and servicing procedures are adequate and comparable with those of other auto finance companies in China. VWFC's servicer disruption risk is mitigated through a cash reserve that is sufficient to cover at least three months of senior fees and interests. VWFC is an experienced originator and servicer in China and has been active in the securitisation market since 2014.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Unanticipated increases in the frequency of defaults or decreases in recovery rates could produce larger losses than the base case and could result in potential rating action on the notes.

Expected impact on the note rating of an increase in defaults (class A):

10% increase in defaults: AAAsf

25% increase in defaults: AAAsf

50% increase in defaults: AAAsf

Expected impact on the note rating of a decrease in recoveries (class A):

10% decrease in recoveries: AAAsf

25% decrease in recoveries: AAAsf

50% decrease in recoveries: AAAsf

Expected impact on the note rating of a simultaneous increase in defaults and decrease in recoveries (class A):

10% increase in defaults, 10% decrease in recoveries: AAAsf

25% increase in defaults, 25% decrease in recoveries: AAAsf

50% increase in defaults, 50% decrease in recoveries: AA+sf

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The class A notes are rated at 'AAAsf', the highest level on Fitch's rating scale. The ratings cannot be upgraded.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

(C) 2022 Electronic News Publishing, source ENP Newswire