European - Structured Finance ABS United Kingdom

Transcription

1 European - Structured Finance ABS United Kingdom Rating Report Driver UK Master S.A. Analysts Mike Babick Senior Vice President mbabick@dbrs.com Alexander Garrod Vice President agarrod@dbrs.com Claire Mezzanotte Managing Director cmezzanotte@dbrs.com Ratings Debt Senior Notes Programme Amount ( ) Notes: The ratings address the payment of timely distribution of scheduled interest and ultimate principal by the legal final maturity date. +Credit enhancement includes a subordinated loan, overcollateralisation, and a cash collateral account. Transaction Summary Initial Credit Index Note Enhancement + Margin ISIN Rating Action Rating 2,500,000, % Libor 1m 0.60% [ ] New Rating AAA (sf) DBRS, Inc., (DBRS) has assigned ratings to the Notes issued by Driver Master UK S.A. as listed on page 1. Initial Note credit support of 31.00% includes a cash collateral account (1.20% of the Note Balance), the subordinated loan (28.80%), and overcollateralisation (1.00%). The receivables securitized consist of a pool of automobile purchase contracts to primarily retail customers secured by new and used vehicles. The initial pool has a weighted average original term of approximately 43 months, 17 months of seasoning, and new vehicles account for roughly 61% of the initial receivables. Notable Features The transaction has a one year revolving period during which principal collections on the receivables can be used to fund the purchase of additional receivables, provided certain eligibility and performance criteria are satisfied. Table of Contents Transaction Summary P1 Rating Rationale P2 Sovereign Assessment P2 Sector Analysis P3 Transaction Parties and Relevant Dates P4 VFS UK P4 Origination & Servicing P5 Collateral Analysis P7 Transaction Structure P8 Priority of Payment P9 Counterparty Risk P12 Cash Flow analysis P12 Legal Structure P14 Credit Enhancement P15 Methodologies Applied P15 Monitoring and Surveillance P15 Strengths Strict adherence to underwriting procedures has resulted in consistent credit performance despite the current challenging economic environment. Highly experienced, financially strong servicer with significant UK market position. Challenges and Mitigating Factors Certain makes and models have recently demonstrated some deterioration in residual value performance. This risk is mitigated by the transaction s ability to repay the Notes even under stressful assumptions relating to the percentage of the contracts that are turned back and the degree of losses experienced on turnbacks.

2 Rating Rationale The provisional ratings are based upon a review by DBRS of the following analytical considerations: Transaction capital structure, proposed ratings and form and sufficiency of available credit enhancement. o Credit enhancement is in the form of overcollateralisation, a subordinated loan, and amounts held in the cash collateral account. Credit enhancement levels are sufficient to support the DBRS projected expected cumulative net loss (CNL) assumption and residual value turnback and loss assumption under various stress scenarios. The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms in which they have invested. For this transaction, the rating addresses the payment of timely interest on a monthly basis and principal by the legal final maturity date. The transaction parties capabilities with regards to originations, underwriting and servicing and the financial strength Volkswagen Financial Services UK (VWFS UK). o VWFS UK is part of the Volkswagen Group, a leading worldwide manufacturer of high quality automotive vehicles and provider of diversified financial services. The credit quality and industry diversification of the collateral and historical and projected performance of VWFS UK s retail purchase contract portfolio. VWFS UK s underwriting techniques that include the use of proprietary scorecards. The legal structure and presence of legal opinions that addresses the true sale of the assets to the issuer, the non-consolidation of the special purpose vehicle with the seller in addition to the transaction s consistency with the DBRS Legal Criteria for European Structured Finance Transactions methodology. Assessment of the Sovereign DBRS Ratings Limited rates the United Kingdom s long-term foreign and local currency debt at AAA. The trend on both ratings is Stable. The AAA ratings on the United Kingdom are underpinned by the size, openness and diversity of the British economy, its fiscal and monetary policy flexibility, a historical track record of fiscal consolidation and relatively flexible product and labour markets. In addition, the U.K. benefits from having deep, efficient domestic capital markets and the sterling s status as a secondary reserve currency. These strengths are offset by significant fiscal and debt challenges. The United Kingdom s fiscal deficit amounted to 8.4% of GDP in 2011, one of the highest among G7 countries. Government debt has surged by 35% (from 42% to 77% of GDP) between 2005 and 2011, and is expected to peak at approximately 93.9% of GDP in 2014, before gradually declining thereafter. The related interest costs have also risen and are expected by the Office for Budget Responsibility (OBR) to reach 8.3% of government revenues in The long average maturity of the government s debt stock 14 years in 2011, by far the longest among advanced economies limits refinancing risk, greatly reducing the vulnerability of the sovereign s fiscal position to temporary spikes in yields. In March 2012, the Office for Budget Responsibility (OBR) revised its U.K. GDP growth forecasts downward compared to the previous year, from 1.7% to 0.8% in 2011 and from 2.5% to 0.8% for 2012 and lowered its estimate of the U.K. economy s productive capacity by the end of the period by approximately 3.5 percentage points. As a result, the government is expected to meet its mandate of eliminating the cyclically-adjusted current deficit at the end of the five year rolling forecast in albeit, two years later than the OBR s previous estimate of The government responded to the deterioration in the economic and fiscal outlook in its Autumn Statement with additional tightening measures amounting to 15 billion (0.8% of GDP) by This ensures that the fiscal rules are met while preserving the target objective of reducing the public sector net debt as a share of GDP from Rating Report - Structured Finance: European ABS

3 The slowing global economy, together with growing concerns over the Euro zone sovereign debt crisis, is increasingly affecting U.K. growth. As a result, the OBR expects that the U.K. will post relatively modest growth of 1.6% on average from 2011 to 2014, lower than the previous forecast of 2.5%. The rebalancing of the economy away from private consumption and investment in housing and towards business investment and more externally focused sectors is also proving to be a slower process than anticipated. Nevertheless, DBRS believes that the Bank of England s accommodative policy stance and the adoption of a third round of quantitative easing (QE), should provide some support to the economy, as low interest rates keep private sector debt-servicing costs low, and the currency at competitive levels. The evolution of the U.K. s ratings ultimately depends on the government s continuous commitment to credible medium-term fiscal consolidation in order to achieve fiscal sustainability. DBRS may change the Stable trends to Negative, if (1) there is a prolonged period of very low economic growth in which higher net exports, private sector consumption and investment fail to materialise, making the stabilization of debt ratios more challenging, (2) rising political divisions within the governing coalition were to prevent implementation of the fiscal austerity measures, (3) contingent liabilities rise as a result of financial sector pressures resulting in government support programmes that lead to larger budget deficits or (4) there is a sharp rise in funding costs, driven by an external shock or deterioration in market confidence. Sector Analysis Total car registrations for 2011 were 1.94 M units representing a 4.4% decline from Current market forecasts call for a 0.4% in 2012 to 1.95M units, with stronger growth of 2.6% in 2013 resulting in a total market of 2.00M units. Against the climate of falling registrations, Volkswagen Group's performance has been very strong in comparison with its peers, with total registrations in 2011 being 8.7% higher than in the previous year. This trend has continued in the first quarter of 2012 with total registrations 8.4% higher than in the first quarter of As a consequence of this strong performance, the passenger car market share of the Volkswagen Group within the United Kingdom has seen a steady growth in recent years, with a total share in 2011 of 18.7% compared to 16.7% in The overall share is forecast to increase further in the next few years and is expected to break through the 20% barrier in The origination of auto loans tends to be closely linked to the sale of new vehicles. The motor finance market in the UK is highly competitive and no single player dominates. Consumers are able to arrange their finance through a diverse number of companies; ranging from the high-street banks and building societies, to independent finance companies and car companies' affiliated finance arms. Many of the highstreet supermarkets, including Tesco and Sainsbury's, also offer personal loans. Competition in the auto finance business in the UK has historically been fierce, with traditional banks having to compete with new entrants such as independent leasing companies and specialised car finance institutions. However, as a result of the on-going financial crisis a number of competitors have scaled back their activities in the motor finance market which has given VWKS (UK) Limited the opportunity to significantly increase volumes whilst maintaining favourable margins. 3 Rating Report - Structured Finance: European ABS

4 Transaction Parties and Relevant Dates Transaction Parties Type Name Rating Issuer: Driver UK Master S.A. N/A Seller and Servicer: Volkswagen Financial Services (UK) Limited DBRS Private Rating Security Trustee : Wilmington Trust (London) Limited Account Bank, Cash Administrator, Principal BNP Paribas Securities Services, Luxembourg DBRS Private Rating Paying Agent, Calculation Agent, and Interest Determination Agent: Branch Swap Counterparties Mitsubishi UFJ Securities International PLC A, R-1 (middle) Royal Bank of Canada AA, R-1 (high) HSBC Bank PLC DBRS Private Rating Relevant Dates Type Date Issue Date First Interest Payment Date 20 December 2012 Payment Frequency Monthly Legal Final Maturity Date October 2021 Volkswagen Financial Services (UK) Limited & Volkswagen Financial Services VWFS UK was founded in 1994 and is a wholly owned subsidiary of Volkswagen Financial Services AG (VWFS), headquartered in Braunschweig, Germany. Prior to 1994, financial services within the UK were operated under a joint venture agreement, between V.A.G (UK) Limited and Lloyds-Bowmaker (now LUDT) and marketed under the trading name of V.A.G Finance. In June 1999, following the development of core operating systems, staffing and processes, VWFS began the origination of finance contracts in order to create its own business portfolio. Today VWFS UK provides financing, leasing, insurance and other automotive related services for all automotive brands within the Volkswagen Group to retail and corporate customers in the United Kingdom. For 2011, the VWFS UK portfolio consisted of 3.9 B of retail,.9 B of leasing, and 1.1 B of wholesale average earning assets managed by 460 full time equivalent employees. The portfolio is diversely funded through a combination of ABS, intercompany loans, and internal and external banks. Before tax profit for 2011 was equal to M. Additionally, the Volkswagen Group sold approximately 413,000 units in the UK in 2011 corresponding to a market share of 18.7%. VWFS UK s administrative headquarters are located at Milton Keynes, Buckinghamshire, England which is also the headquarters for Volkswagen Group (UK) Limited which is the UK importer for Volkswagen, Audi, Skoda, and SEAT. VWFS UK co-operates closely with approximately 800 dealerships of the Volkswagen Group. A dealer can thus offer the customer a complete, competent, personal one-stop service from a single source, including the financing. The co-operation between VWFS UK, the importer and the dealerpartner is established by dealer agreements. Under these agreements the dealer-partner is given the responsibility for marketing the products and services of the Volkswagen Group and VWFS UK and to service the trade-marked-products of the Volkswagen Group and VWF UKS. Dealers receive valuable support in the form of diverse training measures and extensive marketing support. VWFS is a 100%-owned subsidiary of Volkswagen AG and is responsible for coordinating the worldwide financial services activities of the Volkswagen Group. VWFS provides banking, leasing, insurance, and other services to its retail, wholesale and fleet customers. As of 6/30/2012, VW Financial Services had total assets of 83.8 billion, equity of 8.7 billion, and its 8,456 employees helped manage a receivables portfolio 4 Rating Report - Structured Finance: European ABS

5 of 62.8 billion portfolio of loans, leases, and wholesale receivables. Pre-tax profit for the first half of 2012 was 478 million and for 2011 was 933 million. The VWFS business model focuses on achieving the entire potential along the automotive value chain by integrating both automotive and financial services. Underwriting and Servicing The VWFS UK business model and conservative risk management practices closely follow the policies and procedures in place for retail originations in Germany. There are three types of contracts that are included in the Driver UK Master S.A. collateral pool that are briefly described below. Underwriting Standard Hire Purchase In these contracts, the customer makes equal monthly payments. Asset ownership is retained by VWFS UK until after the final monthly payment after which the customer has an option to pay a fee for the transfer of title. Lease Purchase Equal monthly payments are followed by a non-optional final balloon payment. VWFS UK retains ownership until after all amounts due are paid and the customer then has an option to pay a fee for the transfer of title. Solution (Personal Contract Purchase or PCP ) Equal monthly payments are followed by an option to either take ownership by paying the balloon or returning the vehicle. If the vehicle has greater than the specified number of miles provided for in the contract, excess mileage charges are assessed. VWFS UK retains ownership until after all amounts due are paid and the customer then has an option to pay a fee for the transfer of title. The credit application process begins with customers submitting an application for the financing of a specific vehicle against a specified monthly payment in accordance with the applicable legislation. Prior to acceptance of an application, VWFS will check the credit standing of the customer by obtaining credit reference agency reports. For private and commercial retail customer contracts, applications are automatically approved by a scoring system if the information on the application demonstrates that the applicant meets VWFS UK's criteria for an automatic approval. 5 Rating Report - Structured Finance: European ABS

6 The scoring system takes into account different criteria and factors relating to the type of vehicle being financed in addition to certain customer demographic information. Depending upon the respective information which applies to each criterion, the financing application receives a certain amount of scores per criterion according to statistical methods and historical experience. The sum of the scores provides VWFS UK with an assessment of the risk represented by granting a financing contract to the respective applicant. The scoring process (in particular the weight or the value of the individual scoring criteria and the scoring result) is treated strictly confidential by VWFS UK. The performance of the scoring system is monitored regularly and may be changes to the scoring system may occur based upon the results of regular statistical analysis and validation of the scorecards. Applications not automatically accepted by the scoring system have to be decided by an employee of the new business department. The employees of the new business department have a high level of experience in underwriting (generally with at least two years or more and a wider experience within VWFS). Each employee is personally assigned a credit ceiling up to which she/he may underwrite a given purchase contract. As a rule, VWFS UK requests borrowers to remit their monthly payments via direct debit. To date, approximately 99% of all Obligors voluntarily chose to make use of this procedure. VWFS UK utilizes a rigorous, analytical approach to residual value forecasting that incorporates current and recent auction performance, long-term historical value tracking, model comparison and benchmarking, and specification and technology considerations. There is no singular industry guide or publication that is relied upon for establishing residual values. Residual value exposure is closely monitored on a monthly basis that includes a monthly revaluation of all assets in order to provide the earliest indication possible of potential exposures. The ongoing monitoring also includes comparing the contractual residual values against industry minimum, maximum, and average residual values as well the CAP Monitor forecast benchmark. This consistent residual monitoring has allowed VWFS UK to achieve disposal performance that consistently outperforms the BCA Sector Average. Servicing In the event of non-payment, VWFS UK s collections strategy prioritizes collection efforts based upon the contract s risk profile and contracts with particularly high balances are further prioritized. The collections philosophy is customer centric in that the goal is to work closely with the customer to identify and correct the problem while ensuring that the customer s overall experience and relationship with Volkswagen remains positive. At all times the collection department s policies and procedures are geared to maintain full compliance with all relevant regulations relating to debt collection. Generally, accounts in an early stage of delinquency receive a combination of letters and phone calls. As the severity of delinquency progresses, collection efforts begin to focus more on phone contact, but will also continue to be supplemented by more specific letters. Accounts considered seriously delinquent are handled by senior, experienced personnel who may begin discussions with the customer regarding return of the vehicle. To the extent all appropriate reminder notices have been issued and expired, a termination notice is issued. Upon legal termination of an agreement, the customer is required to pay the full balance or, alternatively, to deliver the vehicle to a location nominated by VWFS UK. In the event of non-compliance, the agreement is transferred to one of the four nominated repossession agents to make contact with the customer. Under FSA guidelines, the customer is advised of this by letter when the agreement is allocated to the agent. The agent will either secure the return of the vehicle, arranging for it to be delivered to a nominated BCA site, or collect payment of the balance. On occasion VWFS UK may accept payment of the full arrears, but 6 Rating Report - Structured Finance: European ABS

7 the customer is advised that the agreement remains terminated and any payments are deducted from the full outstanding balance. To the extent the customer were to default in future, the customer is given no further opportunity to pay the accrued sums and only the full balance or vehicle return is deemed an acceptable remedy. When a vehicle arrives at the nominated BCA site, it is scanned upon entry to the site and entered into the BCA stock management system. Vehicles are then sold in a series of auctions by BCA, some of these are specific to VWFS UK vehicles. If any liability remains outstanding following the sale of the vehicle, the customer is advised of the outstanding amount by letter and if unable to clear the liability in full, an attempt is made to establish a payment plan. In cases where the customer is unable or unwilling to pay, an evaluation is made to determine whether legal action or full and final write off is the appropriate course of action. The aforementioned process is highly efficient and the majority of recoveries are received within two to three months after termination. Collateral Analysis As described above, the collateral pool initially supporting the Notes issued by Driver UK Master S.A. consists of hire purchase, lease purchase, and personal contract purchase ( PCP ) contracts. The chart below captures summary portfolio characteristics of the initial pool of receivables as of 31 st October The transaction has a scheduled one year revolving period during which principal collections on the receivables will be used to fund the purchase of additional receivables. The transaction has numerous eligibility criteria in place to ensure that the additional receivables will not result in negative credit migration of the pool. The eligibility criteria most likely to impact the credit profile of the pool include the limitation of borrowers with a credit score of D or less limited to 5%, used vehicles limited to 50%, receivables can be no more than 15 days past due, PCP receivables relating to commercial borrowers may not include light commercial vehicles, a single obligor is limited to GBP 150,000, and lease purchase contracts are limited to 5% of the aggregate receivables balance. Driver UK Master S.A. Receivables Characteristics as of 31st October 2012 (as a % of Current Principal) 7 Rating Report - Structured Finance: European ABS Amount ( 000) 2,350 Product Type Top 2 Models within Make (% total) Hire Purchase 25.2% Lease Purchase 0.1% Audi PCP (Solutions) 74.7% A % Total 100.0% A4 8.02% SEAT New % 66.9% Ibiza 4.27% Used% 33.1% Leon 1.68% Skoda Direct Debit 99.2% Octavia 2.25% Top 20% 0.060% Fabia 2.06% Retail / Corporate 96.8% / 3.2% Volkswagen Wtd. Avg. Current Yield 8.01% Golf 14.00% Avg. Balance ( ) 9,650 Polo 10.72% WAOT 42.2 Total 53.29% WART 27.4 Seasoning 14.8 Top 3 Regions South East 22.28% Make North West 12.89% Audi 46.9% West Midlands 11.33% SEAT 6.6% Skoda 6.0% VW 39.3% Other 1.2% Total 100.0%

8 Transaction Structure The transaction structure is illustrated above. As the underlying assets are fixed rate automobile purchase contracts and the Notes are floating rate, the transaction benefits from an interest rate swap whereby the issuer pays a fixed rate to the swap counterparty and receive a floating rate to mitigate interest rate risk. Repayment of the Notes is secured by payments from obligors with respect to the underlying receivables as well as the residual values associated with the PCP Solutions contracts. The transaction is scheduled to revolve for one year. Early Amortisation Events include: (i) (ii) (iii) (iv) (v) the occurrence of a Servicer Replacement Event; the amounts deposited in the Accumulation Account on two consecutive Payment Dates exceed in aggregate 15 per cent. of the Included Receivables Balance; any written representation or warranty made by the Issuer, the Seller or the Servicer in any Transaction Document to which it is a party was incorrect, in any material respect, when made or deemed to be made by reference to the facts and circumstances then subsisting (provided, that repurchase of a Receivable by the Seller shall be deemed to remedy such circumstances in respect of such Receivable) if such incorrect representation or warranty shall remain unremedied for sixty (60) days (or, if such failure is not capable of remedy, in the Servicer s sole discretion, five Business Days) after receipt by the Servicer of written notice from (as the case may be) the Issuer or the Co-Manager requiring the circumstances causing or responsible for such misrepresentation to be remedied (which Early Amortisation Event shall be deemed to occur only upon the last day of the relevant period); the occurrence of a Foreclosure Event; the Credit Enhancement Increase Condition is in effect; or (x) the aggregate outstanding principal amount of Notes exceeds the Targeted Note Balance on any Payment Date; or (xi) VWFS ceases to be an Affiliate of Volkswagen Financial Services AG or any successor thereto; or (xii) the Issuer or the Seller fails to observe or perform any material term, covenant or agreement under any Transaction Document to which it is a party, and such failure shall remain unremedied for sixty (60) days (or if such failure is not capable of remedy, in the Seller s sole discretion, five Business Days) after receipt by the Issuer or the Seller of written notice from (as the case may be) the Is- 8 Rating Report - Structured Finance: European ABS

9 suer or a Noteholder requiring the relevant failure to be remedied (which Early Amortisation Event shall be deemed to occur only upon the last day of the relevant period). Foreclosure Events The following represent Foreclosure Events under the transaction documents: (a) (b) (c) (d) with respect to Driver UK Master S.A. an Insolvency Event occurs; or the Issuer defaults in the payment of any interest on any of the Notes then outstanding when the same becomes due and payable, and such default continues for a period of five Business Days; or the Issuer defaults in the payment of principal of any of the Notes outstanding on the Legal Maturity Date; or the Credit Enhancement Increase Condition is in effect Credit Enhancement Increase Condition A Credit Enhancement Increase Condition shall be deemed to be in effect if: (a) the Dynamic Net Loss Ratio for three consecutive Payment Dates exceeds (i) 0.25 per cent., if the Weighted Average Seasoning is less than or equal to 12 months (ii) 0.45 per cent., if the Weighted Average Seasoning is between 13 months (inclusive) and 24 months (inclusive), (iii) 2.0 per cent. if the Weighted Average Seasoning is between 25 months (inclusive) and 36 months (inclusive), or if the Weighted Average Seasoning is greater than 36 months the Dynamic Net Loss Ratio shall not apply; or (b) the Cumulative Net Loss Ratio exceeds (i) 0.6 per cent., if the Weighted Average Seasoning is less than or equal to 12 months (inclusive), (ii) 1.2 per cent., if the Weighted Average Seasoning is between 13 months (inclusive) and 24 months (inclusive), (iii) 2.3 per cent., if the Weighted Average Seasoning is between 25 months (inclusive) and 36 months (inclusive) (iv) 3.5 per cent. if the Weighted Average Seasoning is greater than 36 months,; or (c) if the Late Delinquency Ratio (prior to expiration of the Revolving Period) exceeds 0.7 per cent. on any Payment Date, for any Payments Date thereafter, provided that this event will be waived if the Issuer receives a confirmation of the Rating Agencies that the sale of the Receivables in accordance with Clause 11 of the Receivables Purchase Agreement will not result in a downgrade of the outstanding Notes on or before the Payment Date immediately following the occurrence of such event; or (d) in case of the occurrence of an Insolvency Event with respect to VWFS; or (e) the Cash Collateral Account does not contain the Specified Cash Collateral Account Balance. Priority of Payments Prior to any Enforcement Event, distributions from the Available Distribution amount will be made in the following order of priority: first, amounts due and payable in respect of taxes (if any) by the Issuer and allocated to the Compartment 1 of the Issuer; second, amounts (excluding any payments under the Trustee Claim) due and payable and allocated to Compartment 1 of the Issuer (i) to the Security Trustee under the Trust Agreement and the Deed of Charge and Assignment and (ii) pari passu to any successor of the Security Trustee (if applicable) appointed pursuant to the Trust Agreement or under any agreement replacing the Trust Agreement; third, of equal rank amounts due and payable and allocated to Compartment 1 of the Issuer (i) to the Corporate Services Provider under the Corporate Services Agreement, (ii) to the Servicer, the Servicer Fee, (iv) to the Rating Agencies the fees for the monitoring, and (v) to the Process Agent and the English Process Agent under the process agency agreements; fourth, of equal rank amounts due and payable and allocated to Compartment 1 of the Issuer (i) to the directors of Driver UK Master S.A. and (ii) in respect of other administration costs and expenses of the Issuer including, without limitation, any costs relating to the listing of the Notes on the official list of the Luxembourg Stock Exchange and the admission to trading of the Notes on the regulated market of the Luxem- 9 Rating Report - Structured Finance: European ABS

10 bourg Stock Exchange, each Agent's fees and expenses, without limitation, the Administrator Recovery Incentive, any auditors' fees, any tax and any annual return filing fees which are to be allocated to Compartment 1; fifth, amounts due and payable to the Account Bank and to the Cash Administrator maintaining the Accounts for account management fees due under the Account Agreement; sixth, pari passu and rateably as to each other amounts due and payable by the Issuer to the Swap Counterparties in respect of any Net Swap Payments or any Swap Termination Payments under a Swap Agreement (if any and provided that a Swap Counterparty under the respective Swap Agreement is not a defaulting party (as defined in the respective Swap Agreement)); seventh, pari passu and rateably to each other, amounts due and payable in respect of (a) interest accrued during the immediately preceding Interest Period plus (b) Interest Shortfalls (if any) pari passu and rateably as to each other on all Notes; eighth, to the Cash Collateral Account, until the Cash Collateral Amount is equal to the Specified Cash Collateral Account Balance; ninth, pari passu and on a pro rata basis, the Amortising Amount to each Amortising Series of Notes; tenth, during the Revolving Period, the Accumulation Amount plus the Further Funding Amount to the Accumulation Account maintained f or the non-amortising Series of Notes; eleventh, pari passu and rateably as to each other by the Issuer to the Swap Counterparties, any payments under the respective Swap Agreements other than those made under item sixth above; twelfth, amounts due and payable in respect of (a) interest accrued during the immediately preceding Interest Period plus (b) Interest Shortfalls (if any) on the Subordinated Loan; thirteenth, to the Subordinated Lender the Subordinated Loan Principal Payment for such Payment Date; and fourteenth, any surplus in or towards satisfaction of payment of the Deferred Purchase Price and the Additional Deferred Purchase Price Amount to VWFS. Prior to a Foreclosure Event, if the Cash Collateral Amount exceeds the Specified Cash Collateral Account Balance and no Credit Enhancement Increase Condition is in effect, then such excess amounts can be used to pay accrued and unpaid interest as well as principal on the subordinate loan and any surplus will be released to VWFS UK. After an Enforcement Event, distributions from the Available Distribution amount will be made in the following order of priority: first, amounts due and payable in respect of taxes (if any) by the Issuer and allocated to Compartment 1 of the Issuer; second, amounts (excluding any payments under the Trustee Claim) due and payable and allocated to Compartment 1 of the Issuer (i) to the Security Trustee under the Trust Agreement and the Deed of Charge and Assignment and (ii) pari passu to any successor of the Security Trustee (if applicable) appointed pursuant to the Trust Agreement or under any agreement replacing the Trust Agreement; third, of equal rank amounts due and payable and allocated to Compartment 1 of the Issuer (i) to the Corporate Services Provider under the Corporate Services Agreement, (ii) to the Servicer, the Servicer Fee, (iv) to the Rating Agencies the fees for the monitoring, and (v) to the Process Agent and the English Process Agent under the process agency agreements; fourth, of equal rank amounts due and payable and allocated to Compartment 1 of the Issuer (i) to the directors of the Issuer and (ii) in respect of other administration costs and expenses of the Issuer including without limitation, without limitation, any costs relating to the listing of the Notes on the official list of the Luxembourg Stock Exchange and the admission to trading of the Notes on the regulated market of the Luxembourg Stock Exchange, each Agent's fee and expenses, the Administrator Recovery Incentive, any auditors' fees, any tax filing fees and any annual return which are to be allocated to Compartment 1; fifth, amounts due and payable to the Account Bank maintaining the Accounts for account management fees due under the Account Agreement; 10 Rating Report - Structured Finance: European ABS

11 sixth, pari passu and rateably as to each other amounts due and payable by the Issuer to the Swap Counterparties in respect of any Net Swap Payments or any Swap Termination Payments under a Swap Agreement (if any and provided that a Swap Counterparty under the respective Swap Agreement is not a defaulting party (as defined in the respective Swap Agreement)); seventh, pari passu and rateably to each other amounts due and payable in respect of (a) interest accrued during the immediately preceding Interest Period plus (b) Interest Shortfalls (if any) pari passu and rateably as to each other on all Notes; eighth, pari passu and on a pro-rata basis, to each Series of Notes the amount of principal due on such Series of Notes until the Notes have been redeemed in full; ninth, pari passu and rateably as to each other by the Issuer to the Swap Counterparties, any payments under the respective Swap Agreements other than those made under item sixth above; tenth, amounts due and payable in respect of (a) interest accrued during the immediately preceding Interest Period plus (b) Interest Shortfalls (if any) on the Subordinated Loan; eleventh, to the Subordinated Lender the Subordinated Loan Principal Payment for such Payment Date; and twelth, any surplus in or towards satisfaction of payment of the Deferred Purchase Price and the Additional Deferred Purchase Price Amount to VWFS. Servicer Replacement Events The following events will result in replacement of the servicer under the transaction documents. 1. the Servicer fails to make any payment or deposit to be made by it to the Distribution Account within five (5) Business Days of when due; 2. the Servicer fails on two separate occasions within any continuous period of 12 months to deliver a copy of the Monthly Investor Report to the Noteholders within three (3) Business Days of the date upon which it is required so to do pursuant to the terms of the Servicing Agreement; 3. the Servicer shall fail to perform or observe in any material respect any material term, covenant or agreement hereunder applicable to it (other than as referred to in paragraphs (a) or (b) above) and such failure shall remain unremedied for sixty (60) days (or if such failure is not capable of remedy, in the Servicer's sole discretion, five Business Days) after receipt by the Servicer of written notice from the Issuer or any Noteholder requiring the failure to be remedied, (which Servicer Replacement Event shall be deemed to occur only upon the last day of the relevant period); 4. any material written representation or warranty made by the Servicer in its capacity as such in the Servicing Agreement or any of the Transaction Documents proves to have been incorrect, in any material respect, when made or deemed to be made by reference to the facts and circumstances then subsisting (provided, that repurchase or exchange of a Receivable by VWFS in accordance with the Receivables Purchase Agreement or the Warranty Breach Repurchase Deed shall be deemed to remedy such circumstances with respect to such Receivable), and such incorrect representation or warranty shall remain unremedied for sixty (60) days (or, if such failure is not capable of remedy, in the Servicer's sole discretion, five Business Days) after receipt by the Servicer of written notice from the Issuer or any Noteholder requiring the circumstances causing or responsible for such misrepresentation to be remedied (which Servicer Replacement Event shall be deemed to occur only upon the last day of the relevant period); 5. the Servicer becomes subject to an Insolvency Event; 6. the Servicer fails to renew, or suffers the revocation of, the necessary licences to conduct its business under the Consumer Credit Act 1974 or the Data Protection Act, and such licences are not replaced or reinstated within 60 days; or 7. there is a going concern qualification in the annual audited financial statements of the Servicer, If a Servicer Replacement Event referred to under paragraph (a), or (b) above has occurred and was caused by an event beyond the reasonable control of the Servicer and if the respective delay or failure of 11 Rating Report - Structured Finance: European ABS

12 performance is cured within a period of 90 days, a Servicer Replacement Event will be deemed not to have occurred. Transaction Counterparty Risk Servicer The Servicer will service the receivables in accordance with its customary practices and as compensation will receive a servicing fee of 1.0% of the aggregate outstanding receivables balance. In the beginning and the middle of the month, the servicer will remit to the Distribution Account the expected collections for the following 15 day period. On the subsequent payment date, to the extent the actual collections exceed the advance deposits, the excess amount will be transferred to the Distribution Account. To the extent, the advance deposits exceed the actual collections, such excess amounts will be released from the Distribution Account. Swap Counterparty Under the terms of the swap agreements, on a monthly basis the Issuer will remit a fixed interest rate to the Issuer and will receive a floating rate that consists of 1-Month Libor plus the applicable spread. The swaps contain downgrade provisions relating to the swap counterparties consistent with DBRS legal and swap criteria. Bank Accounts The Cash Collateral, Accumulation, Distribution, and Counterparty Downgrade Collateral Accounts are held by BNP Paribas Securities Services, Luxembourg Branch. DBRS has concluded that the bank meets DBRS criteria to act in these capacities. The transaction contains downgrade provisions relating to the account bank consistent with DBRS criteria. Cash Flow Analysis Data Quality and Historical Performance DBRS reviewed the historical performance of VWFS UK originations by monthly vintage going back to Q This information was available for each product type on both a new and used basis. Given the volume of data, this information is portrayed below on an annual basis below. The chart on the left shows the static pool gross loss for all products while the chart on the right shows vintage recovery data. 12 Rating Report - Structured Finance: European ABS

13 VWFS UK - Vintage Gross Losses, All Products VWFS UK - Vintage Sales Proceeds, all Products 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% % 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% % % For purposes of determining a loss estimate for the current transaction, for vintages that were not fully seasoned, ultimate losses were projected using historical data relating to loss timing. The data received from VWFS UK was considered to be satisfactory. Loss Analysis Credit Losses Given the revolving nature of the transaction, the collateral composition is expected to change over time. To mitigate the potential for negative credit migration, the transaction has numerous eligibility criteria. However, as each product in the transaction has its own unique risk profile, evaluating the sufficiency of the credit enhancement in the transaction requires consideration of the proportion of each product type. The eligibility criteria limit the percentage of lease purchase contracts to 5% and there are no limits with respect to hire purchase or PCP receivables. While credit losses are higher for lease purchase, given the absence of residual value risk in this product, from a credit perspective, the most conservative assumption is to assume a pool with 100% PCP contracts. Additionally, the historical data suggest that loss performance for used PCP contracts is higher than for new. Given that the eligibility provide for up to 50% used vehicles, to evaluate the sufficiency of credit enhancement, DBRS assumed the pool consisted of 100% PCP contracts, 50% new, and 50% used. This assumption resulted in a gross credit loss expectation of 5.79% on the transaction. Recoveries were assumed to be 72.5% (with a three month lag), resulting in a net credit loss expectation of 1.59%. Residual Value Losses Residual value losses can arise on PCP contracts to the extent the borrower keeps the vehicle until the end of the term, returns the vehicle to VWFS UK, and the sale proceeds from the disposal of the vehicle are less than the contractual residual value. Historically, the return rate for PCP contracts has been very low, ranging from approximately 2% to 8%. Under the DBRS AAA stress, 70% of the residual value balances were assumed to be turned back to VWFS UK. Residual value losses will also be a function of the used vehicle market at the time of turnback. To determine potential price volatility in the UK used vehicle market, DBRS examined historical used vehicle sales data from CAP Black Book since Based upon this data, DBRS assumed AAA residual value stress equal to approximately 52% of the contractual residual value. This figure is quite conservative relative to VWFS UK s actual portfolio residual value experience whereby vehicles are often sold at or close to the contractual residual value. However, VWFS UK historical residual value data indicated that performance varies by make and model and the conservative residual value loss assumption reflects the potential for negative migration with respect to turnback trends. 13 Rating Report - Structured Finance: European ABS

14 Increase in LGD and Haircut % Driver UK Master S.A. Prepayments DBRS evaluated several different prepayment scenarios when evaluating the sufficiency of credit enhancement. From a credit enhancement perspective, the most conservative scenario considered how the transaction would perform in the case of 0% prepayments as this assumption exposes the transaction to the maximum amount of residual value risk. In addition, DBRS evaluated scenarios whereby prepayments were assumed to be 10% and 25% CPR. While these higher prepayment scenarios stress the amount of excess spread available as potential credit enhancement, the stress to the excess spread is eclipsed by the decline in the residual value exposure due to prepayments. Loss Distribution Three different loss distributions were modeled as outlined below. Given the short tenor of the receivables, for cash flow modeling purposes, losses were distributed over 12 or 24 months as follows: Year Front Belly Back 1 100% 75% 65% 2 25% 35% Summary of Cash Flow Analysis Based upon the results of the cash flow modeling, the loss protection afforded to the Notes is consistent with the assigned rating of AAA (sf). Sensitivity Analysis The table below illustrates the sensitivity of the rating to various percentage changes in certain rating assumptions. Increase in Default and Turn-back % AAA AA AA 25 AA AA A 50 AA A A Legal Structure Law(s) Impacting Transaction The Receivables Purchase Agreement, the Dunyard Receivables Purchase Agreement, the Warranty Breach Repurchase Deed, the Servicing Agreement, each Swap Agreement and the Deed of Charge and Assignment are governed under English law while the Conditions, the Trust Agreement, the Account Agreement, the Agency Agreement, the Note Purchase Agreement and the Subordinated Loan Agreement. will be subject to German law. The Issuer has expressly elected in its Articles of Incorporation to be governed by Luxembourg Securitisation Law. Transfer / Assignment of the Receivables Under the Receivables Purchase Agreement, the Issuer has purchased from VWFS UK the receivables inclusive of the residual values associated with respect to PCP receivables. 14 Rating Report - Structured Finance: European ABS

15 Representatives and Warranties Please reference the attached report that contains a detailed description of the representations and warranties in the transaction. Buy-Back/Indemnity Mechanics Please reference the attached report that contains a detailed description of the representations and warranties and enforcement mechanisms in the transaction. Credit Enhancement Credit enhancement for Driver Master UK transaction is comprised of overcollateralisation, a subordinated loan, subordination, and a cash collateral account. The Notes: Initial credit enhancement for the Notes is 31.00% and is made up of the following components: overcollateralisation (1.00%), the subordinated loan (28.80%), and the cash collateral account (1.20% of the Note balance, subject to a floor of GBP 10,000,000). Methodologies Applied The following are the primary methodologies DBRS applied to assign the rating to the above referenced transaction, which can be found on under the heading Methodologies. Legal Criteria for European Structured Finance Transactions. Swap Criteria for European Structured Finance Transactions. Rating European Consumer and Commercial Asset-Backed Securitisations. Operational Risk Assessment for European ABS and SME CLO Servicers. Unified Interest Rate Methodology for U.S. and European Structured Credit. Monitoring and Surveillance The transaction will be monitored DBRS in accordance with its Master European Structured Finance Surveillance Methodology available at 15 Rating Report - Structured Finance: European ABS

16 Note: All figures are in Euro unless otherwise noted. This report is based on information as of November 2012, unless otherwise noted. Subsequent information may result in material changes to the rating assigned herein and/or the contents of this report. Copyright 2012, DBRS Limited, DBRS, Inc. and DBRS Ratings Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is obtained by DBRS from sources DBRS believes to be accurate and reliable. DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings, reports and any other information provided by DBRS are provided as is and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. A report providing a DBRS rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS. ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITA- TIONS AT ADDITIONAL INFORMATION REGARDING DBRS RATINGS, IN- CLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON 16 Rating Report - Structured Finance: European ABS