Autopia China Retail Auto Mortgage Loan Securitization Trust

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1 Presale: Autopia China Retail Auto Mortgage Loan Securitization Trust This presale report is based on information as of July 29, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings As Of July 29, 2016 Class Preliminary rating* Preliminary amount (mil. RMB) Minimum credit support (%) Credit support provided by subordination and overcollateralization (%) A1 AA (sf) 1, A2 AA (sf) 1, B A- (sf) Subordinated NR N/A N/A *The rating on each class of securities is preliminary and subject to change at any time. Minimum credit support only reflects estimated losses arising from borrower default and does not reflect the results of cash-flow analyses, which consider potential commingling loss. NR--Not rated. N/A--Not applicable. Profile Expected closing date Aug. 10, 2016 Final maturity date May 26, 2021 Collateral Structure type Issuer Servicer Fully amortizing, renminbi-denominated loans to prime-quality borrowers, secured by first registered mortgages over vehicles Prime auto loan-backed securities with conditional sequential repayment mechanism China Foreign Economy And Trade Trust Co. Ltd. as trustee of the Autopia China Retail Auto Mortgage Loan Securitization Trust Beijing Hyundai Auto Finance Co. Ltd. Primary Credit Analyst: Aaron Lei, Hong Kong (852) ; aaron.lei@spglobal.com Secondary Contact: Jerry Fang, Hong Kong (852) ; jerry.fang@spglobal.com See complete contact list on last page(s) JULY 29,

2 Profile (cont.) Primary credit enhancement Note subordination and overcollateralization Supporting Ratings Bank account provider China Merchants Bank Co. Ltd. Loan Pool Statistics As Of March 31, 2016 Total number of contracts 61,495 Total receivables balance of contracts (RMB) 2,999,999,997 Maximum receivables balance of contracts (RMB) 166,667 Average receivables balance of contracts (RMB) 48,784 Weighted average down-payment (%) 39 Weighted average interest rate (%) 8.61 Total balloon payments as a percentage of total pool balance (%) 0 Weighted-average contract seasoning (months) 11.7 Weighted-average remaining term to maturity (months) 20.7 Rationale China's auto finance sector is relatively new and still evolving, with the potential entry of new players and underwriting practices. There is uncertainty over the transition of securitization counterparties in a stress scenario. S&P Global Ratings consequently is capping its ratings on such transactions at 'AA (sf)' until the industry develops more of a track record. This is the second auto loan securitization transaction originated by Beijing Hyundai Auto Finance Co. Ltd. (BHAF) and the second Autopia China transaction rated by S&P Global Ratings. The preliminary ratings assigned to the notes to be issued by China Foreign Economy And Trade Trust Co. Ltd. as trustee of the Autopia China Retail Auto Mortgage Loan Securitization Trust (the issuer) reflect the following factors. The credit risk associated with the underlying collateral portfolio and the credit support available are commensurate with our view of credit risk under 'AA' and 'A-' rating stresses. Our assessment of credit risk takes into account originator BHAF's underwriting standards and centralized approval process, which are largely consistent with parent company Hyundai Capital Services Inc.'s global practice and risk management approach, with some local adaptation. The credit support for the class A1 and class A2 notes is provided via the subordination of the class B notes, the subordinated notes, the liquidity reserve (equivalent to [1%] of initial pool balance), and excess spread, if any. Credit support for the class B notes includes the subordination of the subordinated notes, the liquidity reserve, and excess spread, if any. Any losses on the collateral pool will firstly be covered by excess interest collections from the loans after paying senior expenses and rated note coupon via a turbo principal repayment mechanism, followed by the loss absorption of subordinated notes, then any remaining balance of the liquidity reserve account on the maturity date of the notes. JULY 29,

3 The transaction's cash flows can meet the timely payment of interest and ultimate payment of principal to the rated noteholders under stresses commensurate with the ratings assigned. All rating stresses are assessed on the basis that the issuer does not call the notes on or beyond the call-option threshold date, and that the notes must be fully redeemed via the mechanisms under the transaction documents. The timely payment of senior expenses and rated note coupon is supported by the use of interest and principal collections from the underlying pool of loans and a liquidity reserve equal to [1.0%] of the initial receivables balance. The liquidity reserve will not amortize and will be topped up to a floor of around RMB30 million through excess spread to the extent available, on each payment date. The legal structure of the trust, established as a special-purpose trust (SPT) under China's Trust Law, and the transaction structure and terms, are consistent with the governance of China Banking Regulatory Commission (CBRC) and The People's Bank of China (PBOC)'s credit assets securitization (CAS) scheme. The legal structure of the SPT reflects our criteria for insolvency remoteness. Our ratings also reflect the counterparty exposure to China Merchants Bank Co. Ltd. as a bank account provider. The rating on the bank account provider, coupled with the replacement trigger of the bank account provider if its rating falls below a certain level, is consistent with our "Counterparty Risk Framework Methodology And Assumptions" counterparty criteria, published on June 25, Strengths And Weaknesses Strengths In S&P Global Ratings' opinion, the strengths of the transaction observed in the rating analysis are: The sound quality of the loan portfolio at close. All underlying loans have a full-recourse feature and are fully amortizing ones backed by new passenger vehicles for personal use. The portfolio is well diversified, with a single borrower concentration of less than 0.01%, and it is seasoned by about 12 months in weighted-average terms. The portfolio is static, with no new loans being added throughout the life of the transaction via reinvestment or substitution. Our observations in other markets suggest these features tend to support consistent and stronger performance. The structure capitalizes on its high portfolio yield to create overcollateralization via a turbo principal repayment mechanism, resulting in more credit support for the class A1 and class A2 notes than our estimated minimum losses under a 'AA' stress, and more credit support for the class B notes than our estimated minimum losses under a 'A-' stress. The securitized loans have a weighted-average initial interest rate of 8.61%, which is higher than most comparable transactions issued in China, as revealed in public documents. The transaction will utilize excess spread to meet the principal repayment of the class A1 and class A2 notes, followed by the class B notes. This feature can build additional credit support for the class A1, class A2, and class B notes through the more rapid reduction of liabilities relative to the asset pool; in other words, it creates overcollateralization. The limited exposure period. The remaining terms of most loans are 36 months or less, with a weighted-average asset life of around one year. Coupled with the static nature of the portfolio, this means that the risk exposure period of the pool--or weighted-average life of the notes--is likely to be short. We expect Chinese economic growth to remain relatively strong in the near term, with a slowdown being managed by the government. JULY 29,

4 Weaknesses In S&P Global Ratings' opinion, the weaknesses of the transaction and the corresponding mitigants observed in the rating analysis are: The short operating history of China's auto finance sector, which has seen rapid growth only in the past decade. As a result, the sector has limited historical performance data available for analysis. Unlike the sector in the U.S., it has not experienced true periods of economic stress. We have factored this potential weakness into our credit risk analysis of the transaction. We also note that China's regulators have set forth quite stringent requirements on auto loan origination, and have adopted continued supervision and administrative guidelines on loan quality control. In our view, such regulatory oversight, along with the less-competitive industry environment due to low auto loan penetration, will prevent a lowering of the origination standards in the Chinese auto finance sector, and are the main reasons for the reasonable credit performance we have observed in the vintage loan pools. Lack of experience in servicing transition in China's securitization market. Coupled with the short history of the auto finance sector, this has resulted in the capping of the highest achievable rating at 'AA'. Despite the rapid development of Chinese securitization during the past couple of years, no transactions to date have experienced the critical stress of a failure of important counterparties such as the servicer, and the resulting negative effect on the transaction's cash flow. In this transaction, the risk of servicer transition and cash-flow continuity are partly mitigated by the payment arrangements. All loan payments in this transaction will be collected through the direct debit of borrowers' cash accounts in three national banks rather than by other more demanding collection processes. This will reduce the process complexity and make it easier to find a replacement servicer. We also have considered in our analysis a potential increase in servicer fees if a replacement servicer requires a higher return. Moreover, the transaction sets up a liquidity reserve upfront that could cover 3-4 months of transaction expenses and note interest if asset collections are temporarily unavailable to meet the transaction obligations. In our view, this will allow the transaction sufficient time to find a new servicer and resume the asset collections. Notable Features The transaction has a single--rather than separate "income" and "principal"--cash-flow priority of payments, and there is no concept of a principal deficiency ledger. There are no note charge-off arrangements or note invested/stated amount differentiation in the transaction. Under the transaction's payment structure, collections--after payment of senior expenses and the note interest of class A1, class A2, and class B notes--initially will be allocated to the class A1 and class A2 notes on a sequential-payment basis. If there is a notes early amortization event, such as the termination of the initial servicer or asset pool performance deterioration, or a notes event of default, then collections would be allocated to the class A1 and class A2 notes on a pro rata and pari passu basis until they are fully redeemed. Transaction Structure This is a securitization transaction based on China's CAS scheme set up by the CBRC and PBOC. BHAF will sell a pool of auto loan receivables, along with all related rights such as mortgages, to an SPT, which is set up by the trustee for the purpose of securitization. To fund the receivables purchase, the trustee will issue, on behalf of JULY 29,

5 the SPT, four classes of trust certificates: class A1, class A2, class B, and subordinated notes. Such transfer will segregate the assets from the originator under China's Trust Law, and the SPT reflects our criteria in relation to bankruptcy remoteness. The collateralized assets are loans extended to retail borrowers, used to finance the purchase of new cars manufactured by Beijing Hyundai Motor Co. (BHMC). The loans have original terms of up to 60 months, but with remaining terms within 36 months. Initial loan-to-value (LTV) ratios are mostly 30% to 80%, and the weighted-average initial LTV ratio is 61%. Vehicles financed by these loans are mortgaged for the benefit of the originator. The asset pool will be static, meaning that no asset substitution or reinvestment is allowed. Collections from the assets, inclusive of interests, principals, penalties, and any other payments, will be used to pay down the principal of the rated notes, after satisfying SPT taxes, senior expenses, and interest on rated notes. In other words, the transaction adopts a sequential turbo repayment structure using a single waterfall. Interest payments to the class A1 and class A2 notes will rank pari passu in the payment priority. The class A1 notes' principal will amortize before that of the class A2 notes, however, unless there is an early amortization event, such as servicer transition or asset performance deterioration, or a notes event of default, such as an SPT failing to pay rated notes or default on material obligations. In such case, a pari passu waterfall would be applied for the principal repayment to the class A1 and class A2 notes. Interest payments to the class B notes will be subordinated to interest payments to the class A1 and A2 notes, but be senior to principal repayments to the class A1 and class A2 notes under the ordinary payment priority. A cash liquidity reserve equal to 1.0% of the initial asset pool balance will be funded upon deal closing. The liquidity reserve provides liquidity support to the transaction's senior expenses and interest on the rated notes, if needed. The originator will be the transaction's servicer to collect borrower payments and to manage arrears. Chart 1 shows the transaction structure. JULY 29,

6 Chart 1 Asset Segregation And Issuer's Bankruptcy Remoteness Under The CAS Scheme The CAS pilot program under the management of the PBOC and CBRC shares the typical features of international securitization transactions, such as asset sale and issuer bankruptcy remoteness. The program is primarily for bank and nonbank financial institution originators under the management of CBRC. It started in 2005 and has since undergone multiple reviews and amendments. The related guidelines under the CAS pilot program specify asset eligibility and protection of transferred assets and issuers. We believe the asset true sale and issuer's bankruptcy remoteness in this transaction reflect our special-purpose entity criteria. The primary reason for this is because this securitization transaction adopts an SPT structure by referring to China's Trust Law, in line with the regulations in the CBRC/PBOC CAS pilot program. With the 2001 Trust Law in JULY 29,

7 place and the general acceptance of trusts' legal position, we believe there is a remote risk of issuer bankruptcy due to reasons unrelated to collateral performance or reconsolidation of the assets with the seller's bankruptcy estate if the seller becomes insolvent. The 2001 Trust Law indicates: The trust assets are segregated from the originator's other assets, and are not part of the bankruptcy estate; There is proper separation between the trust assets and the trustee's own assets; The enforcement of trust assets can only be done under very limited situations; Limitation on trustee's set-off rights; and The trust will continue to survive under the insolvency of the entruster (the originator) and the trustees and will terminate only under limited conditions. A trust set-up perfection process in accordance with the Trust Law will be followed before deal closing, through public announcements of the loans to be entrusted, and the trust set-up based on the entrusted loans. In addition, one of the precedent conditions for trust set up is the payment of the asset purchase price by the trustee to the originator (the asset seller). Given this, we believe there is a remote risk that the entrusted assets would be considered assets of the seller in the event that an external administrator is appointed in respect of the seller. The assets that may be securitized through SPT structures are stipulated in the related guidelines under the PBOC and CBRC's CAS pilot program. We believe the securitized assets are eligible to be transferred through the trust structure pursuant to the CAS regulations because the transaction needs to be registered with the CBRC and PBOC. This assurance, coupled with the linkage of CAS program to the Trust Law, supports our view that the SPT will be protected by the Trust Law, and the entrusted assets will be segregated from the originators. We note that there is no official securitization legislation in China for asset segregation and issuer bankruptcy remoteness. The CAS program guidelines provided by CBRC and PBOC are administrative measures, not legislation. As such, there is a residual risk that the measures may be subject to court challenges to the extent that they conflict with laws or other regulations. Collateral Assignment Typical car loan contracts in China have clauses addressing the transferrable and assignable nature of the receivables, meaning that the originators can sell/transfer the contracts to third parties without the borrowers' consent, pursuant to China's Contract Law. The asset eligibility criteria stipulated in this transaction confirms that the purchased loan receivables are assignable. Legally, the issuer will have the title of the loans and the associated rights, including the mortgage, after the asset sale. Practically, however, the transfer will not be effective against the borrowers if the originator does not notify the borrowers of the transfer. Without such notification, although the receivables have been legally acquired by the issuer, the borrowers' payments will continue to be made to the originator or the initial servicer. This issue could be more complicated if the originator becomes insolvent, making it unable to issue a notice to borrowers that a trust has been created over the related loan and that borrowers should redirect their payments to the new lender. JULY 29,

8 The transaction addresses this concern by introducing a rights-perfection event upon the termination of the initial servicer. The occurrence of a rights-perfection event will cause the title and rights transfer to be perfected through the originator's notification to each borrower, each guarantor, if any, and the vehicle's insurance company. Such notification will state a trust has been created over the related loan and all payments on the loans should be made from then on to the issuer accounts or the replacement servicer's account. Through an executed power of attorney upon deal closing, the originator has empowered the trustee to issue the transfer notices to individual obligors directly if the servicer does not do so, and to redirect the loans payments to the replacement servicer's account or the issuer's accounts. Note Terms And Conditions Interest payments The senior notes are fixed-rate, pass-through notes. Interest payments on the class A1 notes and class A2 notes rank pari passu, and rank in priority to interest payments on the class B notes. The subordinated notes will receive payments only after class A1, class A2, and class B notes' principal is fully repaid. The transaction does not have a principal deficiency ledger mechanism. Consequently, the concepts of charge offs, note invested amounts, and note stated amounts are not applicable in this transaction. Interest paid on each class of notes will be calculated with the outstanding principal, which is the initial principal as reduced by cumulative principal repayments on previous payment dates. Principal payment structure Principal repayment to the class A1 and class A2 notes will be sequential before the occurrence of any notes early amortization event, notes event of default, seller's clean-up call, or trust termination. After the occurrence of any such event, the principal repayment to these two classes of notes will switch to pro rata. The class B notes will receive payments only after the class A1 and class A2 notes are fully repaid. The subordinated notes will receive payments only after class A1, class A2, and class B notes' principal is fully repaid. Clean-up call The originator has a "clean-up call" option to purchase the auto loans from the trust if the pool balance at the end of any month is 10% or less of the initial pool balance, or the class A1, class A2, and class B notes have been repaid in full. The originator may exercise its clean-up call option only if the clean-up call price for the loans, together with amounts in certain issuer accounts, will be sufficient to repay in full the rated notes and all fees and expenses of the trust. Upon the originator's exercise of its clean-up call option, the notes will be redeemed and repaid in full and the trust will be liquidated. Priority Of Payments The transaction has a combined interest and principal cash-flow priority of payments. One of three different waterfalls will apply, depending on whether a notes early amortization event, notes event of default, originator's clean-up call, or trust termination has occurred. In all waterfalls, excess spread will be used to meet principal repayment of the class A1 JULY 29,

9 and class A2 notes, followed by the class B notes. This feature can build additional credit support for the class A1, class A2, and class B notes through more rapid reduction of liabilities relative to the asset pool. The normal priority of payments, which will apply immediately after deal closing, is summarized in table 1. The class A1 notes will be amortized in full before the class A2 notes receive principal payments. The class B notes will receive payments only after the class A1 and class A2 notes are fully repaid. Table 1 Priority Of Payments (Summarized) 1 Taxes - to pay any taxes of the trust due under PRC laws that have not been paid, if any 2 Senior fees and expenses - to pay trustee, fund custodian, notes custodian and paying agent, rating agencies and auditor, (a) their service fees, and (b) up to a maximum amount of RMB150,000 of trust expenses per month 3 Servicer fee 4 Interest on class A1 notes and class A2 notes 5 Interest on class B notes 6 Top up the liquidity reserve up to its required level 7 Class A1 notes principal 8 Class A2 notes principal 9 Class B notes principal 10 Other indemnities, costs, and expenses not covered in item 2 11 Subordinated notes If a notes early amortization event occurs during the normal sequential repayment process, then the priority of payments in table 2 will apply. Under this waterfall, the class A1 and class A2 notes will be amortized on a pari passu and pro rata basis, until they are fully redeemed. A notes early amortization event includes the termination of the initial servicer, credit quality deterioration of the collateral, and an inability to find a replacement for or back-up of an important transaction party. Table 2 Priority Of Payments (Summarized) 1 Taxes - to pay any taxes of the trust due under PRC laws that have not been paid, if any 2 Senior fees and expenses - to pay trustee, fund custodian, notes custodian and paying agent, rating agencies and auditor, (a) their service fees, and (b) up to a maximum amount of RMB150,000 of trust expenses per month 3 Servicer fee 4 Interest on class A1 notes and class A2 notes 5 Interest on class B notes 6 Top up the liquidity reserve up to its required level 7 Class A1 notes principal and class A2 notes principal on a pari passu and pro rata basis 8 Class B notes principal 9 Other indemnities, costs, and expenses not covered in item 2 10 Subordinated notes If at any time the originator exercises its clean-up call option, or a notes event of default or trust termination event occurs, then all available funds, including all amounts deposited in the liquidity reserve account and all proceeds from asset liquidation, if any, will be used to make payments in the order of priority listed in table 3. A notes event of default JULY 29,

10 relates to the issuer's failure to pay the interest of the senior most class outstanding, failure to fully repay the principal of the class A1, class A2, and class B notes on the maturity date, or a severe trustee default on its obligations, such that the noteholders declare a notes event of default. Trust termination events, on the other hand, mostly relate to illegality events of the trust, extinction of assets to support the notes repayment, or the transaction reaching legal maturity date of the trust itself. Table 3 Priority Of Payments (Summarized) 1 Taxes - to pay any taxes of the trust due under PRC laws that have not been paid, if any 2 Senior fees and expenses - to pay trustee, fund custodian, notes custodian and paying agent, rating agencies and auditor, (a) their service fees, and (b) trust expenses 3 Servicer fee 4 Trust liquidation expense, if any 5 Interest on class A1 and class A2 notes 6 Class A1 notes principal and class A2 notes principal on a pari passu and pro rata basis 7 Interest on class B notes 8 Class B notes principal 9 Subordinated notes We analyzed the effect of an immediate moderate macro stress on the transaction to determine whether the maximum expected rating transition of the notes under such a scenario would be in line with those set out in our "Credit Stability Criteria," published on May 3, The results of our analysis suggest that under a moderate rating stress scenario, the maximum expected rating transition on the class A1, class A2, and class B notes would still fall within the bounds of those outlined in the criteria. Originator/Servicer Overview Company background BHAF is a joint venture of Hyundai Motor Group and BAIC Motor Group, one of the largest automotive manufacturing groups in China. Hyundai Capital Services, BHAF's major shareholder, has undertaken many securitizations worldwide. Autopia China Retail Auto Mortgage Loan Securitization Trust is BHAF's second transaction in China. BHAF was set up in June 2012, and commenced operations in August As of March 2016, it employs 423 staff, mostly based at its Beijing headquarters. Its management team has extensive experience in either the automotive or finance industry, or both. In addition to its own risk and compliance/auditing function, BHAF benefits from its parent's support in risk management and the implementation of global policies and systems. As a manufacturer captive finance company, BHAF's primary business is to provide consumer loans to finance the purchase of vehicles related to Hyundai Motor Group and BAIC Motor Group. The vehicle financing coverage includes locally built vehicles from BHMC, Dongfeng Yueda Kia Automobile Co., and BAIC Motor Corp., and imported vehicles from Kia Motors Corp. and Hyundai Motor Co. Unlike other China captive finance companies that have greater exposure to corporate borrowers, BHAF has focused on retail clients to date. JULY 29,

11 Since August 2012, the company has extended 571,000 loans, with an aggregate notional amount of RMB41.97 billion. As of March 2016, it has 440,000 loans outstanding, with a principal amount of RMB20.5 billion. It originates loans through a nationwide network of more than 1,700 dealerships. The company's business strategy relates to increasing its loan penetration rate in Hyundai, Kia, and BAIC vehicles (i.e., the percentage of Hyundai Motor Group and BAIC-manufactured vehicles financed by BHAF). The loan products being securitized in this transaction include BHAF's consumer loan contracts secured by BHMC-made new vehicles. Risk management BHAF's credit function has a reporting line to senior management that is separate to its sales function, so as to maintain its independence. The risk-management practice at BHAF, which we believe borrows much experience and tools from its parent company, is responsible for risk review, control, and improvement recommendations. The risk-management function at BHAF includes credit management, risk measure, information security, legal and compliance, anti-fraud, and enterprise risk management. A risk-control committee at the company's board level supervises the company's risk-management strategy and daily work. Currently there are about 40 staff in BHAF's risk-management team. The risk-review system, guidelines, and analytical approaches are assisted by Hyundai Capital Services. In our view, BHAF's risk management concentrates on the areas of loan underwriting quality and credit policy reviews, fraud prevention, compliance, and operational risk assessment and prevention. Loan origination and underwriting More than 1,700 auto dealerships across China act as the first-contact points for potential borrowers of BHAF auto loan products. Financial consultants in these dealerships provide services that include loan product introduction, preliminary loan terms suggestions, borrowers' identity verification, and income documents collection. The financial consultants enter loan applications and related information in BHAF's loan review system. All credit decisions are centralized at BHAF's head office. In addition, dealership performance is also tracked via arrears performance that could affect its future business relationship with BHAF. After the dealers' financial consultants enter the client-related information in the loan-review system, BHAF adopts a three-step review and approval process in its credit department. Operation staff in the credit department will first check loan documents and conduct system-based credit record enquiries and borrower credit scoring. Credit reviewers then conduct personal interviews, validation, and credit analyses. The credit reviewers prepare credit reports based on the proposed loan terms and suggest revisions to the terms, if necessary. The credit-approval team, composed of experienced credit staff, makes the final decision on loan underwriting, based on the loan application data and credit analyses conducted by the credit reviewers. BHAF's credit process includes checks on each borrower's identity, the borrower's credit history, and affordability in the Financial Credit Information Database, a nationwide credit reference system. The process also looks into adverse credit history such as fraud and criminal records. Any exceptions on loan applications need to be decided by an independent committee. Applications are previously assessed via BHAF's scorecard, an expert system based on external auto loan default JULY 29,

12 experiences. Starting in March 2015, all loan applications are reviewed under a scoring system that is based on BHAF's internal loan default data to better reflect the loan underwriting experience accumulated in the past years. The loan-review and approval department can access the system via an intranet. The system can provide an objective evaluation of the creditworthiness of borrowers versus their loan application. However, the scores generated are used by BHAF as a supplementary credit reference rather than a recommendation for loan approval. The credit reviewer and the credit approver decide whether a loan is approved based on a full review of all the materials and credit record check results. BHAF does not employ automatic approval systems, as we might see used by other originators. The production of loan documents is controlled by BHAF systems. Documents are printed by the dealer, signed by the borrower, and sent to BHAF's settlements team. System-generated settlement checklists, which include any approval conditions, assist the settlement team in its verification process. All documentation is scanned and stored in BHAF's document-management system for future reference of collections. Stringent regulatory oversight and characteristics of prime loans BHAF's loan underwriting policies reflect the more stringent regulatory control on auto loan risks. The 2004 "Auto Loans Management Guideline" promulgated by the PBOC and CBRC constitutes the following basic loan underwriting requirements that all auto finance companies and commercial banks must follow in their auto loan business: The borrowers need to have good credit history, with demonstration of stable income or other property to support the down-payment and continued debt servicing. The terms of the loans financing a new vehicle should not be longer than five years, and the terms for preowned-vehicle loans should not be longer than three years. The highest LTV ratio on retail loans is 80% for new vehicles, and 50% for preowned vehicles. The value of the vehicles for the calculation of LTV ratio should be the lower of the manufacturers' suggested vehicle price and the amount actually paid by the purchasers (for new vehicles). The borrowers must mortgage the vehicles financed by such loans or other collaterals to the lenders. In January 2008, CBRC announced an administrative guideline in relation to auto loan risks, and asked financial institutions to enhance their fraud-prevention measures, validation of documents, use of credit check systems, and collection management. Since then, the CBRC and PBOC have carried out ongoing surveillance on industry development and loan quality trends, and they could intervene by issuing growth targets or loan-origination guidelines to the industry. S&P Global Ratings believes the strict regulatory oversight and continued surveillance explains the generally sound performance of auto loans in China since Moreover, because auto loan penetration has been about 20% in China in recent years, competition within the industry has not been as fierce as we have observed in other markets. Auto financiers do not try to use looser underwriting practices or higher-risk products as leverage to grow their business. This also partly explains the stable loan performance observed in China's auto loans industry. The stringent regulations that apply to loan underwriting and the industry's aversion to riskier borrowers and products support prudent underwriting. We believe the characteristics of BHAF's auto loan borrowers are consistent with those we typically observe for prime borrowers in other markets. Our view is supported by BHAF's information checks and document-verification processes, its centralized and independent loan-review process, and the low default and loss rate that we have observed in its historical arrears performance data. JULY 29,

13 Loan servicing BHAF will be responsible for servicing the receivables in the collateral pool. Its customer-service department tracks and manage loan repayments. The collections department, centralized at the head office and comprising 32 staff as of March 2016, is responsible for telephone contact on overdue loans, on-site collection for severe delinquency, outsource management, and legal and foreclosure processes. Borrowers repay their loans through direct-debit repayments into BHAF's account. To do this, all borrowers need to maintain a bank account at China Merchants Bank Co. Ltd., Industrial and Commercial Bank of China Ltd., or Agricultural Bank of China Ltd., and deposit sufficient money for periodic loan repayments. Each of these banks has a nationwide network in China for such service. When a contract falls into arrears, BHAF follows a staged collections process of text messaging, phone notification, official letters, BHAF collections, and vehicles repossession as agreed with the borrowers, depending on how long the loans are delinquent. The process starts with a loan payment reminder three days before the payment date, followed by text messaging and phone notification of delinquency within three days, then delivery of official letters for loans overdue by more than 20 days. On-site collections and borrower-agreed repossession can apply for severely delinquent loans, loss of contact with borrowers, or other material adverse developments relating to the loan or the borrower. For any remaining amount owed to BHAF after a vehicle is sold, including costs and expenses incurred during the collection process, BHAF has the right to continue pursuing the borrowers, due to the full-recourse nature of the loans. Collateral The pool contains 61,495 consumer loan contracts, secured by vehicles manufactured by BHMC. In terms of principal repayment method, all of the receivables require either equal installments or equal principal. The aggregate outstanding principal balance is about RMB3.0 billion. The following summarizes some distinct features of the collateral pool: The collateral pool is a static auto loan pool that will amortize each month, with no reinvestment or substitution of receivables. The entire portfolio comprises receivables that are backed by new passenger vehicles. Historical data in other markets show that losses when the motor vehicle financed was new are typically lower than those when the motor vehicle was used. There are no balloon or bullet loans in the asset pool; all loans are fully amortized with either equal instalments or equal principal. The transaction has a diversified pool of 61,495 loans, with the largest single loan accounting for 0.01% of the initial loan balance. Borrower concentrations therefore do not present an additional risk for this transaction. The collateral pool is somewhat seasoned, with a weighted-average contract seasoning as of the cut-off date of 11.7 months. The loans in the collateral pool have interest rates that are relatively high but unevenly distributed. The pool has a weighted-average initial rate 8.6%. The loans with interest rates 8% or higher account for 67.5% of the pool, while those with interest rates less than 2% represent 28.2%. The resultant potential excess spread, combined with the JULY 29,

14 turbo repayment mechanism, provides an additional source of credit support. All contract payments, including interest, principal, expenses, and prepayment penalty, are full-recourse obligations of the borrowers. As a result, the trust is not exposed to any market-value risk associated with the sale of the motor vehicles (on performing receivables), which is a risk that could be associated with products such as operating leases. The receivables pool for Autopia China Retail Auto Mortgage Loan Securitization Trust as of April 30, 2016, is summarized in table 4. Table 4 Characteristics (% pool by outstanding principal balance) Customer type Retail Corporate 0.00 New and used (financed vehicle) New Used 0.00 Loan payment method Direct debit Seasoning (months) >=3 and < >=12 and < >= Remaining term to maturity (months) >=6 and < >=12 and < >=24 and < Interest rate (%) >=0 and < >=2.00 and < >=8.00 and < >=10.00 and < >=12.00 and < >=14.00 and < Outstanding principal balance (RMB) <50, , , , , , , Manufacturer BHMC The obligor concentrations for the collateral pool are set out in table 5. JULY 29,

15 Table 5 Obligor Concentrations (% Of Pool Outstanding Principal Balance) The largest obligor The largest 10 obligors The largest 20 obligors Chart 2 to chart 6 illustrate characteristics of the collateral portfolio. Chart 2 JULY 29,

16 Chart 3 JULY 29,

17 Chart 4 JULY 29,

18 Chart 5 JULY 29,

19 Chart 6 Eligibility Criteria The representations and warranties made by BHAF in respect of the receivables on the cutoff date include that each loan securitized is an eligible asset, which is defined as follows: The borrower was a citizen or permanent resident of the People's Republic of China (PRC), and at least 18 years old at the time the loan was originated. The borrower was not an employee of BHAF at the time the loan was originated. The loan is denominated and payable in renminbi. The loan was originated by BHAF in the PRC in the ordinary course of BHAF's business and underwritten according to BHAF's underwriting criteria and guidelines. The financed vehicle was manufactured by BHMC. The financed vehicle was a new vehicle at the time the loan was originated. The loan is secured by the grant of a mortgage over the related financed vehicle, and the mortgage and the financed vehicle have been registered at the relevant registry office such that the PRC and BHAF are the first priority registered mortgagee. Direct debit authorization has been established by the borrower for amounts to be directly debited by BHAF from the borrower's bank account in payment of amounts due and payable under the loan agreement. JULY 29,

20 The loan has a well-defined amortization schedule. The loan requires the borrower to make monthly payments. The repayment method can be equal installment or equal principal. The loan accrues interest at a floating rate of not less than zero percent, which BHAF can adjust, based on changes in the PBOC benchmark lending rate or at a fixed rate of not less than zero percent. The loan agreement allows the borrower to prepay the loan in full subject to a prepayment penalty, if any. The loan agreement requires the borrower to obtain insurance on the financed vehicle pursuant to industry standard. The loan agreement does not contain any restriction on BHAF's ability to transfer the loan or its related security or to create a trust over the loan. The loan is evidenced by a contract--effective on the date the vehicle was registered or the loan has been settled, whichever earlier--governed by PRC laws and the contract is legal, effective and binding on the borrower upon execution and includes rights allowing BHAF to enforce the borrower's repayment obligation under the loan and to take other remedies. As of the cutoff date, the loan has been serviced in compliance with PRC laws in all material respects. As of the cutoff date, the loan has not been paid off, charged off or rescinded, neither has the related financed vehicle been released from the mortgage registration. The borrower has paid all costs and expenses due and payable in respect of the origination of the loan. To BHAF's knowledge, no right of rescission, setoff, counterclaim, or defense has been asserted or threatened with respect to the loan, and there is no unsettled dispute between BHAF and the borrower, and there is no litigation, arbitration, or enforcement proceedings concerning the loan. As of the cutoff date, the loan is current--i.e. it is not a delinquent or defaulted loan. As of the cutoff date, the loan was a "normal" loan, as determined under the CBRC's "five-category" loan classification method under the Guideline Principles for Asset Risk Classification of Non-Banking Financial Institutions. The loan has remaining tenor not greater than 36 months. As of the cutoff date, at least three scheduled monthly payments have been made on the loan. The LTV ratio of the loan is not greater than 80%, when "loan" is the original principal amount financed under the loan and "value" is the lower of the value of the financed vehicle as identified in the loan agreement and the manufacturer's suggested retail price of the financed vehicle. Under the loan agreement, the original principal amount borrowed is not greater than RMB200,000. Commingling Risk S&P Global Ratings' counterparty criteria consider a transaction's commingling risk through the rating on the servicer, the amount of funds likely to be held in a servicer account at any given time, and the potential impact of a delay in receipt of those funds on the supported securities. In our opinion, there is potential commingling risk in this transaction if the servicer defaults, because BHAF, acting as the servicer in this transaction, can hold the collections for a period of one month before remittance to the SPT account. A commingling reserve account will be established for this transaction with the account bank upon closing. The servicer will arrange for the originator to deposit an amount that equals the collections in the previous monthly collection period (defined as "required commingling reserve amount") into the commingling reserve account if the servicer's rating is lowered to certain levels, based on local ratings agencies' scales. Before each payment date, the JULY 29,

21 trustee will transfer an amount equal to "the excess of commingling reserve account balance over the actual collections in the month" from the commingling reserve account to the originator. BHAF will top up the commingling reserve account to ensure the account's balance is at least equal to the required commingling reserve amount. The aforementioned mitigating mechanism is in line with transactions we rate in other markets. However, the rating triggers that require the originator to top up the commingling reserve account do not include S&P Global Ratings' ratings. Without the ratings triggers on BHAF, we believe the current transaction arrangement does not sufficiently mitigate commingling risk in accordance with our counterparty criteria, given that the collection holding period could be up to one month, the commingling reserve does not have a balance up front, and the asset collections are not made directly to SPT accounts or to a specific lock box after deal closing. For this reason we have assumed that one full month of collections may be lost before collections could be redirected to the SPT accounts or the accounts of the replacement servicer, when the original servicer becomes insolvent. We have considered this one-month collection loss in our cash-flow analysis of the transaction. Set-Off Risk There is no set-off risk for cash deposits in this transaction because BHAF is not an authorized deposit-taking institution in China. In addition, the representations and warranties provided by BHAF in respect of the collateral pool include that the borrowers in particular have no set-off claim thereto or thereunder the loans, or the status and enforceability of the purchased loan receivables is not impaired by set-off rights. Counterparty Risk With Respect To The Bank Account Provider Issuer accounts for this transaction, including the collection and distribution account, the liquidity reserve account, and the commingling reserve account, will be held with China Merchants Bank pursuant to the Account Bank Agreement. The agreement requires minimum ratings for the account provider, as per the ratings scales of ratings agencies in China. Moreover, the bank will be replaced if its ratings are lower than 'BBB/A-2', within 30 calendar days of the downgrade. This arrangement meets our counterparty criteria to support a 'AA' rated transaction, considering the transaction's cash-flow arrangement. Counterparty Risk With Respect To The Servicer BHAF cannot resign from its role as the initial servicer, but can be removed if a servicer termination event occurs. Such an event might happen if BHAF were to become insolvent, failed to remit collections to the issuer when due, or could not remedy a breach of a material covenant that has a material adverse effect on the note holders. The transaction does not have a back-up servicer upon deal closing. Only if the ratings of BHAF fall below a certain level, based on local rating agencies' rating scales, will a note-holders' meeting appoint a back-up servicer. This raises concern because securitization deals in China to date have not experienced the critical stress of a failure of important counterparties, including the servicers. Therefore, the potential resultant negative effect on transaction cash flows is uncertain. JULY 29,

22 Prime auto transactions in other markets do not typically include back-up servicers upon deal closing, however, because of the high credit quality and homogeneous nature of the receivables, combined with the availability of institutions experienced in servicing them. Unlike other markets, where the trustees of transactions may become the successor servicer in situations when no other substitute has been appointed, we consider that trustees in China would not take this role due to their trust company nature and the sheer volume of loan accounts and their geographic dispersion. S&P Global Ratings believes that in China the most likely servicer replacement would be other auto finance companies or commercial banks that have a nationwide network for loan collections. All loan payments in this transaction will be collected through the direct debit of borrowers' cash accounts in three national banks rather than by other more demanding collection process. This will reduce the workload of the servicer and make it easier to find a replacement. S&P Global Ratings has also factored into its analysis a potential increase in servicer fees should a replacement servicer require a higher return. Finally, the transaction includes a liquidity reserve that is funded up front and could cover 3-4 months of transaction expenses and note interests should asset collections be temporarily unavailable to meet the transaction obligations. In our view, this will allows the transaction sufficient time to find a new servicer and resume asset collections. Liquidity Support Timely payment of senior expenses and rated note interest is supported by the use of principal collections through the combined waterfall, and a liquidity reserve funded at closing by BHAF, equal to 1.0% of the initial receivables balance. The liquidity reserve is held in the liquidity reserve account. It does not amortize and will be topped up to a floor of RMB30 million through excess spread, to the extent available, on each payment date. On each payment date, the trustee may draw funds in the liquidity reserve account if asset collections are insufficient to cover the tax, if any, senior fees/expenses, servicing fees, and interest due to the class A1, class A2, and class B notes. Upon deal maturity, any balance remaining in the liquidity reserve will be transferred to the collection and distribution account for payments to the notes, creating another source of credit support. S&P Global Ratings assumes in its cash-flow adequacy analysis of the transaction that one month of collateral collections will be lost due to the potential servicer commingling risk (discussed in section "Comingling Risk"). In such a scenario, the liquidity reserve would provide liquidity support for the transaction. Based on our cash-flow analysis, we believe the risk of a portion of the principal collections required to repay the rated notes being diverted to meet senior expenses under rating stress assumptions, especially in the later months of the transaction life, is fully mitigated by the ability to apply any remaining balance of the liquidity reserve toward repayment of principal on the rated notes on their maturity date. Interest-Rate Risk A total of 70% of the collateral loans carry a variable interest rate, while the interest rate is fixed on the issued class A1, class A2, and class B notes. This creates potential interest-rate risk in the transaction. JULY 29,

23 According to the loan contract templates and the originator's underwriting practice, any changes to interest rates on the variable-rate loans is at BHAF's discretion, rather than based on changes to a benchmark rate. The loan documents do not include a formula for the determination of interest rates, such as the typical "benchmark rate + margin" that we have seen in other transactions. They instead state that the lender has the right to adjust the interest rate applied to such loans, when market rates change. Given this, the current interest rates on the securitized loans could remain the same, even if the PBOC were to revise down the policy rate. If the PBOC were to raise its policy rates, then BHAF could choose to raise the loan interest rates to address the resultant higher funding cost. Despite this mechanism, we believe that BHAF could face pressure to revise down the interest rates on the auto loans if consecutive easing in policy rates is not reflected in the interest rates of the loans. In addition to the scenarios in which the loan interest rates remain unchanged throughout the transaction's life, we conducted cash-flow scenarios that assume the loan interest rates change in line with the PBOC one-year lending rate, a widely referred benchmark rate for lending in China. We assumed two downward-moving curves of the PBOC one-year lending rate under 'AA' rating category stress scenarios for class A1 and class A2 notes as well as 'A' rating category stress scenarios for class B notes. In interest-rate stress scenarios, the interest collections from the collateral pool will drop quickly due to assumed interest-rate reductions on the variable-rate loans. Credit And Cash-Flow Analysis S&P Global Ratings considers a significant performance deterioration of the underlying receivables to be the principal factor affecting rating transition in this transaction. We have applied our "Global Methodology And Assumptions For Assessing The Credit Quality Of Securitized Consumer Receivables" criteria, published Oct. 9, 2014, to the credit risk analyses in this transaction. Historical performance data We received the following historical performance data for auto loan pools originated by BHAF: Static pool data grouped by origination month, including detailed origination amounts, repayments every month, and delinquency track every month. The data included vintage performance data from August 2012 to February Dynamic pool data: aggregate loans amounts, repayments, and delinquency statistics for each month from August 2012 to February The pay-out ratio for each vintage is depicted in chart 7. JULY 29,

24 Chart 7 BHAF does not set specific delinquency dates for the recognition of loan defaults and loan loss. A loan can be deemed defaulted or irrecoverable for events such as losing contact with the borrower, the commencement of court proceedings, the sale of the vehicle and receipt of recovery proceeds, or the vehicle being deemed missing. In our credit-risk analysis, we assumed all loans delinquent for more than 90 days would default, and used this classification to determine the base-case default frequency for the securitized pool. This assumption reflects the low but stable cure rates--returning from delinquency to current--of loans overdue for more than 90 days, and the practical collection operations BHAF adopts. BHAF can start court processes and conduct vehicle repossession after loans become delinquent for 60 days. We assume that loans overdue for more than 180 days would be deemed as a loss due to the remote prospect of recovery after this point of time. We use this as a benchmark to estimate the recovery after defaults for the collateral pool. Charts 8 and 9 illustrate the cumulative default and cumulative loss experience of BHAF's total auto loan portfolio, based on our assumptions of deemed default and deemed loss, from August 2012 to February JULY 29,

25 Chart 8 JULY 29,

26 Chart 9 Data limitation There was a limit to the data we received in respect of the credit risk analysis for this transaction because of the shorter operation history of the industry and the originator. Historical performance data reflect BHAF's whole portfolio, rather than just the fully amortized loans to finance BHMC-made vehicles: Loans to be securitized are 'P+I' equal installments (44% of the whole portfolio as of March 2016; 72% in the securitization portfolio) and equal principal loans (about 55% of the pool outstanding as of March 2016; 28% in the securitization portfolio) used to finance the purchase of BHMC cars. The aggregate loan pool includes disproportionate loan combinations and other products such as balloon loans (about 1% of the pool), and might include loans used to finance other brands. Given that non-fully amortizing loans account for 1% of the whole portfolio, and BHAF adopts the same underwriting criteria for loans used to finance other brands, we believe the historical performance of BHAF's whole book is a reliable indicator to project future performance of the to-be-securitized pool. Short operation history limits the availability of historical performance data:the loans have not experienced true stress periods. This makes default and loss projections purely based on the historical performance data more difficult. S&P Global Ratings in this case has considered different default extrapolation techniques to gauge the full-life loan default behavior. We also placed more weighting on the worse-performing vintages when determining base-case default rates. We also have applied a higher stress multiple to reflect higher expected loss under stress conditions. JULY 29,