European - Structured Finance ABS Germany

Transcription

1 European - Structured Finance ABS Germany Rating Report VCL Master Residual Value S.A., acting for and on behalf of its Compartment 1 Analysts Bruno Franco Senior Vice President bfranco@dbrs.com Alexander Garrod Senior Vice President agarrod@dbrs.com Mark Wilder Vice President European Operational Risk mwilder@dbrs.com Claire Mezzanotte Group Managing Director cmezzanotte@dbrs.com Table of Contents Transaction Summary P1 Rating Rationale P2 Assessment of the P3 Sovereign Sector Overview P3 Transaction Parties and P4 Relevant Dates Origination and Servicing P4 Collateral Analysis Details P7 Historical Performance P10 Transaction Structure P11 Priority of Payments P12 Cash Flow Analysis P14 Legal Structure P17 Transaction Counterparty P18 Risk Methodologies Applied P18 Monitoring and P19 Surveillance Ratings Debt Initial Par Amount ( ) Notes: The ratings address the payment of timely distribution of scheduled interest and ultimate principal by the legal final maturity date. Credit enhancement is calculated over the discounted expectancy rights balance and, at issuance, includes a 39.0% Surbordinated Loan, 3.0% overcollateralisation and a 3.0% Cash Collateral Account. Transaction Summary Maximum Par Amount ( ) Credit Enhancement Class A Series ,600, ,000, % Class A Series ,800, ,000, % Subordinated Loan 145,511, ,344,828 N/A DBRS Ratings Limited ( DBRS ) has finalised Provisional Ratings to the Class A Series and Series of Notes issued by VCL Master Residual Value S.A., acting for and on behalf of its Compartment 1 (the Issuer ) as listed above. The transaction uses a securitisation structure utilising the Luxembourg based VCL Master Residual Value S.A. trust and closed on. The transaction represents the second publicly placed securitisation of expectancy rights receivables that refer to residual values resulting from German leasing contracts under Volkswagen Leasing GmbH s ( VWL ) VCL Master programme. Initial Class A credit support of 45% includes overcollateralisation (3.0% of the discounted lease balance in the form of a purchase price haircut), a Subordinated Loan (39.0% of the discounted lease balance) and a Cash Collateral Account (3.0% of the discounted expectancy right balance at issuance, with a 2.5% floor). Class A Series initial 154,600,000 nominal amount can be increased up to 250,000,000 while Class A Series initial 61,800,000 nominal amount can be increased up to 100,000,000 following the transfer of additional receivables provided that the credit enhancement levels described above are respected. The portfolio securitised in the transaction consists of a revolving pool of solely lease vehicle residual value receivables (no lease instalments) to retail and commercial customers secured by new, used and demonstration vehicles. The pool has an initial weighted average original term of approximately 40.5 months, and leases representing new vehicles account for 95.35% of the receivables. Notable Features The initial portfolio and any additional receivables purchased during the revolving period include solely receivables arising from the residual value component due upon maturity of a lease vehicle contract, thus mainly exposing the transaction to residual value risk on the underlying vehicles. The Issuer benefits from a repurchase agreement whereby it can sell the vehicles back to VWL at their contractual residual value, thus eliminating the transaction s residual value risk. However, in Index Euribor 1m Euribor 1m Euribor 1m Note Margin ISIN 0.55% XS % XS Rating Action Provisional Rating - Finalised Provisional Rating - Finalised 1.70% N/A N/A Overcollateralisation 11,195,216 18,103,448 N/A N/A N/A N/A Cash Collateral Account 11,209,520 18,130,000 N/A N/A N/A N/A Rating AAA (sf) AAA (sf) Not Rated 1 Pre-Sale Report - Structured Finance: European ABS

2 its AAA scenario DBRS has assumed a default of WWL and no credit has been given to such agreement. The Notes feature an initial 7 month revolving period. Each series of Notes can individually extend the length of its revolving period for a specified period, along with a re-pricing of the corresponding notes. The transaction uses a sequential/pro-rata amortisation structure whereby all payments from the receivables will pay down the Class A Notes until Class A overcollateralisation reaches its target level of 52%. Thereafter, the Class A Notes and the Subordinated Loan will be repaid on a pro-rata basis subject to certain performance triggers which have been taken into account by DBRS when modelling the transaction. Strengths Highly experienced, financially strong Servicer. Highly granular portfolio comprising 30,336 vehicles with a a 12,299 average outstanding discounted residual value, whilst the largest lessee exposure accounts for an outstanding discounted residual value of 183,113 or 0.05% of the total initial portfolio. All the expectancy rights underlying lease contracts were performing at the time of the January 31 st portfolio cut-off date. The title to the vehicle is transferred as security to the Issuer following termination of the corresponding leasing contract. Challenges and Mitigating Factors Since the securitised expectancy rights are not interest bearing, the Issuer purchases the assets discounted at a 4.34% Discount Rate comprising the sum of senior costs, servicing fee, Note fixed interest swap rates, theoretical subordinated loan swap rate and a reasonable buffer. The receivables therefore effectively pay a fixed rate of interest while the Notes are paying a floating rate indexed to 1m Euribor. To mitigate risk the issuer entered into an interest rate swap agreement with an eligible swap conterparty for each series of Notes, whereby it will pay a fixed rate of interest on the nominal amount of Notes outstanding against the applicable floating interest applicable to each series of Notes. The transaction uses a revolving period during which the Issuer can substitute repaid assets with additional receivables. The risk of portfolio deterioration is mitigated by suitable early amortisation triggers. Additionally, a 7% purchase price haircut will be applied to receivables purchased during the revolving period in order to build-up additional overcollateralisation up to a target level of 49%. Each receivable produces a single cash flow at maturity and, since almost 72.5% of the discounted receivables mature between April 2015 and November 2016, the amortisation profile of the portfolio is quite concentrated and back-loaded. However the Issuer benefits from a Cash Collateral Account sized to cover around 20 months of senior fees and Note interest swap payments. 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. Credit enhancement is in the form of overcollateralisation, a Subordinated Loan and a Cash Collateral Account. Credit enhancement levels are sufficient to support DBRS projected expected cumulative net loss (CNL) 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 of Volkswagen Leasing GmbH ( VWL ). 2 Pre-Sale Report - Structured Finance: European ABS

3 - DBRS conducted an operational risk review of VWL at their headquarters in Braunschweig, Germany and deems VWL as an acceptable Servicer. - VWL is part of Volkswagen AG ( VW ), 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 VWL s expectancy rights portfolio. VWL s underwriting techniques that include the use of proprietary scorecards that have enabled delinquencies and losses to remain at manageable levels despite the recent economic downturn. WWL s experience and ability to accurately forecast forward residual values for underlying leased vehicles. The transaction s consistency of the legal structure with the DBRS Legal Criteria for European Structured Finance Transaction s methodology and the presence of legal opinions that address the true sale of the assets to the issuer and non-consolidation of the special purpose vehicle with the Seller. Assessment of the Sovereign On 11 October 2013, DBRS Ratings Limited confirmed its long-term foreign and local currency issuer ratings on the Federal Republic of Germany at AAA, and its short-term foreign and local currency issuer ratings at R-1 (high). The trend on all ratings is Stable. The confirmation reflects DBRS s assessment that Germany s competitive economy and its stable fiscal and macroeconomic policies are likely to support a downward trajectory of the public debt ratio. Germany s broad export base, its current account surplus, and prospects for increased domestic demand provide further support to the rating. However, public debt levels remain elevated due to deficit financing and financial sector support during the financial crisis. Moreover, Germany s public finances could come under pressure from an escalation of the euro area crisis or from mismanagement of the country s longterm demographic challenges. The Stable trend reflects DBRS s belief that Germany has the political and economic capacity to manage its challenges. The result of the September 2013 election requires the formation of a new government. DBRS expects policy continuity vis-à-vis fiscal prudence from the Angela Merkel led coalition that emerges. The rating could, however come under pressure if debt-to-gdp is put on an upward path over the medium term in the unlikely event of a prolonged period of economic underperformance and sustained fiscal deterioration. For more information, please refer to the most recent published press release by DBRS Ratings Limited regarding the Federal Republic of Germany. Sector Overview According to the Verband der Automobilindustrie ( VDA ), an estimated 3.26 million passenger cars and commercial vehicles were registered in Germany in 2013, a 4.2% fall compared to The first quarter of 2013 saw an important drop versus 2012 (-13%) but progressively, new car registration went up during the year and particularly in the last quarter. Despite the fact that the commercial vehicles sector exhibited more volatility, the decline in registrations observed in 2013 has been driven both by commercial vehicles and passenger cars. Regarding German production and export figures, both were driven by commercial vehicles with a 7% jump in production and a 9% rise in exports, while passenger cars production and exports were almost flat on the year (respectively +2% and +1%). 3 Pre-Sale Report - Structured Finance: European ABS

4 According to the German Federal Motor Transport Authority (KBA), the VW Group s market share (excluding Porsche) of new passenger vehicle registrations was 38.5% in Transaction Parties and Relevant Dates Transaction Parties Type Name Rating Issuer VCL Master Residual Value S.A. acting for N/A and on behalf of its Compartment 1 Co-Arrangers HSBC Bank Plc and Volkswagen Financial N/A Services AG Seller and Servicer Volkswagen Leasing GmbH DBRS Private Rating Subordinated Lender Volkswagen Bank GmbH DBRS Private Rating Security Trustee Wilmington Trust SP Services (Frankfurt) N/A GmbH Swap counterparties Skandinaviska Enskilda Banken AB AA (low)/ R-1H / Negative Royal Bank of Canada AA / R-1 H / Stable Expectancy Rights Trustee Wilmington Trust (London) Limited N/A Data Protection Trustee Volkswagen Bank GmbH N/A Listing Agent Bank of New York Mellon, Luxembourg AA (low)/ R-1 M - Stable S.A. Account Bank and Cash Administrator Bank of New York Mellon, Frankfurt Branch DBRS Private Rating Paying Agent, Calculation Agent and Interest Determination Agent Bank of New York Mellon, London branch AA / R-1 H / Stable Corporate Services Provider Wilmington Trust SP Services N/A (Luxembourg) S.A. Relevant Dates Type Date Issue Date First Interest Payment Date 25 March 2014 Payment Frequency Monthly Legal Final Maturity Date 25 September 2020 Origination and Servicing DBRS conducted an operational risk review of Volkswagen Leasing GmbH (VWL) auto finance operations in November 2012 in Braunschweig, Germany. VWL is a wholly-owned subsidiary of Volkswagen Financial Services AG (VWFS), which itself is wholly owned by the Volkswagen Group (VWG). DBRS considers VWFS German origination and servicing practices to be consistent with those observed among other captive auto finance companies. VWL was founded in 1966 and is headquartered in Braunschweig, Germany. VWL is part of Volkswagen Financial Services, AG which is responsible for coordinating the worldwide financial services activities of the Volkswagen Group. VW Financial Services provides banking, leasing, insurance, and other services to its retail, wholesale and fleet customers. As an operating subsidiary of Volkswagen Financial Services AG, VWL looks to provide their customers with everything they need to achieve financial and mobile flexibility. The product offerings range from the financing of new and pre-owned cars of the Volkswagen Group and non-group brands, to wholesale financing and direct banking. Within this business model, VWL also supports the sale of the products of the Volkswagen Group and its brands. VWL co-operates closely with approximately 2,900 dealerships of the Volkswagen Group. A dealer can thus offer the customer complete service from a single source, 4 Pre-Sale Report - Structured Finance: European ABS

5 including the financing. In addition, dealers receive valuable support from VWL 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. As at the end of June 2013, VW Financial Services had total assets of 87.6 billion, equity of 8.5 billion, and its 9,147 employees helped manage a receivables portfolio of 66.2 billion portfolio of loans, leases and wholesale receivables. Pretax profit for the first half of 2013 was 551 million and for 2012 was 993 million. An overview of the Volkswagen Group is shown below: Origination and Underwriting Origination and sourcing VWL also acts under the Audi Leasing, Seat Leasing, Skoda Leasing and AutoEuropa Leasing brands. The objectives of VWL are to lease motor vehicles, especially the following brands: Volkswagen, Audi, SEAT, Skoda, and Volkswagen Nutzfahrzeuge. VWL seeks to provide a modern and cost effective alternative to the purchase of vehicles in Germany and for the financing of investments, the latter in particular for the business partners of the Volkswagen Group. In addition to providing leasing for the brands noted above, VWL also offers service-leasing to commercial and non-commercial customers and leasing options for used vehicles of all makes. VWL co-operates closely with the approximately 2,900 dealerships of the Volkswagen Group. A dealer can thus offer the customer complete, personal service, at one stop and from a single source, including the financing. The co-operation between the manufacturer or importer and the dealer-partner respectively is established by a dealer agreement. Under this agreement the dealer-partner is given the responsibility for marketing the products and services of the Volkswagen Group and to service the trade-marked-products of the Volkswagen Group. 5 Pre-Sale Report - Structured Finance: European ABS

6 The dealer-partners procure leasing business for VWL against commissions. VWL buys the vehicles from the dealer, finances and administers the vehicles and assumes the credit risk. Each dealer-partner is trained in leasing business. The dealer-partner is the local contact person and available to the lessee during the whole life of the leasing contract. Residual Value Management VWL follows an analytical approach to residual value (RV) forecasting using a proprietary model that incorporates information from a variety of data sources including auction performance, long-term historical value tracking, model comparison and benchmarking against used car prices plus specifications and technology considerations including internal knowledge of car s life cycle. The RV model is accessed via the dealership network and also includes real car sale prices. All assets are re-valued monthly and asset risk reporting is provided to the management board monthly. The RV forecast is available for each model type that VWG produces, and depends on the contract and mileage terms. The calculated value is proposed to the dealers and used in the residual value setting in the leasing contract. Contractual residual values are set no higher than 3% over the vehicle residual value forecast, and 1% for contracts originated by dealers of a weaker credit quality. As the RV risk is transferred to the dealer via a dealer guarantee, where the dealer is obliged to pay the book value that is adjusted by the excess or under mileage payment at the end of the contract, the final repayment of the RV depends on the dealer s creditworthiness. On contract maturity, the lessee will return the vehicle to the dealer that originally arranged the contract. The dealer will check the car for damage, excess mileage and general condition on behalf of VWL. VWL will be notified by the dealer of the cars return, and VWL will settle the excess or under mileage payment with the lessee. VWL will make use of the dealer guarantee and sell the car to the dealer at the book value, adjusted by the mileage. Following payment, the legal title is transferred to the dealer. Underwriting process All underwriting activities at VWFS are segregated from marketing and sales. VWFS adheres to standard identity and income verification practices including collection of income statements while identity cards, proof of address and utility bills are reviewed. External credit data is retrieved from two nationallyrecognised bureaux (SCHUFA, Credit reform) and incorporated into the automated credit scoring models. Prior to acceptance of an application, VWL checks the credit standing of the customer. 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 VWL's criteria for an automatic approval. Applications are analysed through VWFS s internal credit scoring system which assigns a band to the lease denoting the risk associated with the borrower and lease contract. Bands A and B are considered the lowest risk while high risk loans are classified as D or Z band. Dual bureau data is primarily used for high risk bands. Automatic decision making only exists for the low risk bands and as expected the approval rate is considerably lower for D bands. Approximately 28% of all applications are referred and 2% are declined immediately. Applications that are not automatically accepted by the scoring system are assessed by an employee of the credit department. The employees of VW Bank's credit department typically have several years' industry experience and degrees in business administration. Each employee is personally assigned a credit ceiling up to which they may underwrite a given loan. Summary strengths Global brands with good reputation and strong position within German market. 6 Pre-Sale Report - Structured Finance: European ABS

7 Rising penetration rate over last few years. Use of multiple rules-based credit scoring models incorporating dual credit bureau data and monthly analysis of rules and performance metrics. Centralised and independent credit and risk management functions with underwriting teams split between retail (individuals and business) and corporates. Servicing Servicing begins during the final stages of initial financing with the customer services department reviewing all borrower documents and credit terms including interest rate, loan maturity, insurance and prepayment terms. The majority of payments are made via direct debit (over 95%) and have monthly payment frequencies and virtually no balloon payments for standard purchase loans. In the rare circumstance where customers do not agree to this requirement, payment comes from standing orders for payment transfers from their bank account, regular bank transfers, or cheque. Servicing is centralised in Braunschweig and the company places considerable focus on customer service evidenced through proactive assessment of customer satisfaction following contract execution and quarterly surveys. VWFS employs a customer contact council as well as a professional planning forum to ensure adherence to corporate strategies involving customer service. Given VWFS s low staff attrition rate, average company tenure among the servicing group is estimated at over five years. The arrears management process is heavily automated and is driven by an SAP workflow system providing collection teams daily workload reports and performance monitoring statistics. VWFS complies with all regulatory guidelines. The company s behavioural scoring model which assigns a probability of default (PD) and loss given default (LGD) to each loan is used to segregated arrears cases based on the risk profile. Initial collections activity starts in the Debt Management unit where letters are sent out immediately following a missed payment. If the lessee does not pay then, a second reminder letter is generally sent after another two weeks, in which interest on arrears and other costs are also mentioned. The third reminder after 45 days includes charges for the reminder, the threat of a summary court order to pay and the threat of termination of the contract. In addition, the dealer who originated the contract is brought into the proceeding and requested to investigate the situation and to help with the collection of the debts. In addition, the debts management department of VWL may write an individual letter to the customer or be in touch with the customer or with the dealer by telephone or telefax. The employees of the debts management department of VWL are authorised to grant justifiable payment extensions though the number of such agreements has been negligible. Summary strengths Majority of lease instalments made via direct debit. Low default rate and stabilised recovery rates. Active early arrears management practices which benefit from automated workflows and behavioural scoring that segregates arrears cases based on risk and loan size. Back-Up Servicer: There is no back-up Servicer on the VCL Programmes. DBRS believes that VWG s current financial condition mitigates the risk of a possible disruption in servicing following a potential Servicer event of default including insolvency. Collateral Analysis Details Data Quality DBRS reviewed the historical credit performance of VWL s originations by monthly vintage on a cumulative net loss basis (CNL) going back to January VWL also provided data relating to 7 Pre-Sale Report - Structured Finance: European ABS

8 delinquencies back to July 2010, monthly weighted average vehicle disposal results dating back to July 2010, and portfolio stratification tables as of the January 31 st cut-off date that allowed DBRS to further assess the portfolio. No dedicated credit recoveries information was made available; however DBRS reviewed previous transactions of auto lease receivables originated by VWL in order to support its analysis. No prepayment information was made available; however in this transaction prepayment covers only the case whereby VWL accepts that a lessee terminates the lease before its contractual term. This would occur when VWL has obtained from the relevant car dealer that it purchases the returned vehicle and settles its outstanding instalments including the contractual residual value payment earlier than expected. The data received from VW Financial Services was considered to be satisfactory. Collateral Analysis The Collateral Portfolio At closing the issuer purchased a portfolio of expectancy rights receivables that refer to the contractual residual value component due at maturity of lease contracts originated by Volkswagen, Audi, SEAT, Skoda and Volkswagen Nutzfahrzeuge (commercial vehicles) dealers as agents. Under the lease contracts, the lessees amortise the difference between the purchase price and the vehicle value at contract expiration. The transaction consists of residual values linked predominantly to closed-end leases. Closed-end lease contracts are based on fixed residual values based upon the contractual mileage and term of the contract, both being guaranteed by the vehicle dealer in respect of a return of the car in compliance with the terms of the contract, while open end lease contracts have no fixed residual values guaranteed by the dealer and the ultimate residual value will depend upon the state of the market when the vehicle is returned to VWL. In open end contracts the lessee is still liable for any vehicle residual value decline, while for close end contracts (99% of the pool) it is the dealer who assumes the residual value risk. However VWL s put option to the dealer has not been transferred to the issuer, and nor have payments due by the lessee for excessive mileage. As a result DBRS has focused its analysis solely on the vehicle market value at contract expiration. Upon termination of the lease contract, either due to its expiry or to a termination for good cause, the legal title to the underlying vehicle is transferred to the Issuer pursuant to the purchase and servicing agreements. However in the event of a default by the lessee, the recovery proceeds from the sale of the underlying vehicles will be split pro-rata between the Issuer and the owner of the lease instalments. The initial pool characteristics as of the cut-off date are shown below: Pool Characteristic VCL Master RV Compartment 1 Outstanding Discounted Receivables Balance ( ) 373,106,912 Number of Lessees 23,249 Number of Contracts 30,336 Average Discounted Balance per Contract ( ) 12,299 Discount Rate 4.34% WA Original Term (Months) WA Remaining Term (Months) Pre-Sale Report - Structured Finance: European ABS

9 Pool Characteristics (% Outstanding Discounted Receivables Balance): Manufacturer Audi 41.28% SEAT 2.13% Skoda 7.89% Volkswagen 34.69% VW Nutzfahrzeuge 13.84% Other Makes 0.16% New / Used / Demonstration 95.35% / 1.58% /3.07% Closed End / Open End 98.98% / 1.02% Top 20% 0.75% Geographic Mix (Top 3 Regions) North Rhine-Westphalia 21.75% Bavaria 18.38% Baden-Wuerttemberg 16.15% Top 5 Industries Manufacturing Industry 20.17% Retail/ Wholesale 18.52% Other services 17.04% Public sector services 13.84% Construction 10.71% Eligibility Criteria The following eligibility criteria are relevant for the transaction; VWL warrants that as of the January 31 st cut-off date (summarised): a. The lease contracts are legally valid and binding agreements and the leased vehicles exist. b. The Seller may sell of the expectancy rights free from rights of third parties and encumbrances. c. The purchased expectancy rights relate to leased vehicles registered in Germany. d. None of the lessees is an affiliate of Volkswagen AG. e. According to VWL s records, no terminations of the lease contracts have occurred or are pending; f. The lease contracts are governed by the laws of Germany; g. The Lease contracts have been entered into exclusively with corporate lessees who have their registered office in Germany, or individuals who are resident in Germany. h. On the initial cut-off date and on the respective additional cut-off dates at least two lease instalments have been paid in respect of each of the transferred lease contracts. i. The lease Contracts require equal monthly payments to be made within months of the date of origination of the contract. j. No more than 5 per cent of the leased vehicles are non-volkswagen, Audi, SEAT, Skoda or Volkswagen Nutzfahrzeuge (commercial) vehicles. k. For the lease contracts which are subject to the provisions of the German Civil Code on consumer financing, none of the lessees has used its right of revocation within the term of revocation. l. According to VWL s records, no insolvency proceedings have been initiated against any of the lessees during the term of the lease contracts. m. None of the Additional Lease Contracts will mature later than one year prior to the latest occurring legal maturity date under any of the Notes. 9 Pre-Sale Report - Structured Finance: European ABS

10 n. The discounted expectancy right balance of a leased vehicle does not account for more than 65% of the discounted total value of the relevant lease contract. o. The residual value of a single leased vehicle is not more than EUR 80,000. p. With regard to the initial portfolio and during the revolving period, the assets cannot exceed the following concentration limits: (i) no more than 6% of the discount balance is related to used vehicles, (ii) no more than 22% of the discounted balance is related to Volkswagen Nutzfahrzeuge (commercial) vehicles. Historical Performance Credit losses The charts below show delinquency and loss data for VWL s total portfolio from January 2010, further data was received from VWL that provided an insight into individual and fleet customer delinquency levels where delinquencies greater than 30 days were marginally higher for the fleet segment: VWL Portfolio 30+ Delinquencies by Customer Type 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 >30 Del. Retail >30 Del. Fleet >30 Del. Total VWL Delinquencies by Delinquency Bucket 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul Del Del. 91+ Del. Oct-13 DBRS observed that individual lessees exhibited lower and more stable delinquency levels over the reported period, whilst overall delinquencies have fallen with slight increases noticed in As at October 2013, receivables of fleet customers represented 51% of the portfolio. The mix of the two subsets from February 2011 has remained stable and is shown below. Lease agreements may be terminated after 53 days of non-payment. This is the earliest point in time where VWL has the right to terminate a contract. However, VWL may delay termination based upon payment arrangements agreed with the client if there are opportunities for the contract to be brought upto-date. The graph below outlines VWL s annualised dynamic default rate, where overall a stable trend is shown with recent improvements noted in VWL has confirmed that the July 2011 peak related to an operational event that artificially inflated defaults for that particular month only. Lessee Mix Annualised Dynamic Default Rate 3.5bn 3.0bn 2.5bn 2.0bn 1.5bn 1.0bn Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Total Fleet Balances Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Total Individual Balances Oct % 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug Pre-Sale Report - Structured Finance: European ABS

11 Residual Value Losses DBRS was not provided with a loan by loan comparison of contractual residual values to the actual resale price of the corresponding vehicles, or a line by line description of the securitised RVs in order to obtain a third party valuation of the collateral. VWL provided DBRS with data showing average gross monthly vehicle disposal results from September 2010 to June 2013 in percentage of contractual RV. The chart shows a consistent improvement in disposal results from an 8.7% of contractual RV loss in January 2012 to a 14% profit in September However, DBRS has been advised that this trend is unlikely to continue since VWL s strategy with regard to contractual residual values is to calibrate them in order to set the lowest possible monthly instalments without incurring a loss on the vehicle at contract maturity. Transaction Structure The transaction structure is outlined below. VW Leasing Originator/Servicer Lease Contracts Lessees Purchase Price VCL Master Notes Noteholder VCL Master Notes Notes Noteholders VCL Master RV C1 Notes Interest and principal VCL Master Notes Conditional Retransfer of title to Lease Vehicles creating Expectancy Rights Lease Receivables + Security Title to Leased Vehicles & Other Lease Collateral Lease Receivables Purchase price Expectancy Rights Purchase price Final Payment Purchase Price Notes VCL Master S.A. Compartment 1 VCL Master Residual Value S.A. Compartment 1 Expectancy Rights to Leased Vehicles Notes Lease Receivables + Security Title to Leased Vehicles & Other Lease Collateral Final Payment Receivables Interest and principal Notes Swap Counterparties VCL Master Notes Security Trustee Expectancy Rights Trustee Swap Counterparties VCL Master RV Notes VCL Master Notes VCL Master RV Notes 11 Pre-Sale Report - Structured Finance: European ABS

12 The receivables are discounted at a fixed rate of 4.34% equal to the transaction senior costs, plus the weighted average cost of the fixed interest payments under the swaps, plus a 200bp buffer to account for possible increases in the swap rates should the revolving period be extended. During the revolving period the Issuer may acquire further receivables discounting them at the 4.34% discount rate, increased by an additional 7% haircut until the overcollateralisation of the Notes calculated as the excess of assets over outstanding Notes has increased to 49%. As the underlying assets are discounted at a fixed rate and the Notes are floating rate, the transaction benefits from an interest rate swap whereby the Issuer pays a fixed rate to the swap counterparties and receives a floating rate to mitigate interest rate risk. Repayment of the Notes is secured by realisation proceeds with respect to the underlying expectancy rights receivables, which need to be transferred by the Servicer to the Issuer s account within one business day. Priority of Payments Source of Available Funds Funds available to the Issuer are mainly determined by: a) The Expectancy Rights Realisation Amount, meaning the vehicle sale proceeds at contract maturity or, in case of a lessee default, a pro-rata share of the proceeds from the sale of the leased vehicle equal to the contractual residual value share of the lease agreement; b) Servicer Advances; c) Investment earnings from the Issuer accounts; d) Net swap receipts from the swap agreements; and e) Drawings from the Cash Collateral Account. Other sources of funds include a German Trade Tax Risk Reserve to be funded by VWL to cover the risk that German tax authorities deem the interest paid by the Issuer to be taxable in Germany, and the amounts credited to the compartment accumulation account once the transactions enters amortisation. Priority of Payments The transaction benefits from a single combined waterfall, where distributions stemming from the Available Distribution Amount will be made in the following order of priority (summarised): 1. Transaction senior costs. 2. Payments to the Swap counterparties in respect of Net Swap Payments and Swap Termination Payments (except Swap Termination Payments if the Swap counterparties is the defaulting party). 3. Interest on the Compartment 1 Class A Notes. 4. Replenishment of the Cash Collateral Account to its required level. 5. Upon a German Trade tax Event, payments to the Cash Collateral Account in order to credit the Trade Tax Risk Reserve to its required level. 6. Pro-rata to the total Note balance and pari-passu: a. principal amortisation amounts of series of Notes that have entered amortisation; and b. payments to the compartment accumulation account to be used for additional collateral purchases in relation to revolving series of Notes. 7. Any additional payments to the swap counterparties. 8. Interest to the subordinated loan. 9. Redemption of the subordinated loan once the 52% target OC level has been reached. 10. Balance to VWL. 12 Pre-Sale Report - Structured Finance: European ABS

13 The transaction initial overcollateralization (OC) calculated as the assets excess over outstanding Notes is 42%, while the target OC is increased to 49% during the revolving period. Once the Notes amortisation begins principal payments are allocated sequentially. Once a target OC level of 52% is reached, principal will be allocated pro-rata to repay the Notes and the subordinated loan lender. Early Amortisation Events Upon one of the following early amortisation events, the early amortisation and sequential payment of the Notes will be initiated: a) The occurrence of a Foreclosure Event as defined in the Trust Agreement; b) The amounts deposited in the Accumulation Account on three consecutive payment dates exceed 10% of the aggregate collateral balance; c) Termination of the swap agreement with no replacement or failure by the respective swap counterparty to post collateral; d) On any payment date falling six months following the Issue Date, the Class A Notes OC is lower than 42%; e) Failure by the Seller to pay a put option repurchase price to the Issuer on a respective vehicle repurchase date; f) The Cash Collateral Account balance falls below a specified amount; g) The occurrence Servicer termination event or a VWL insolvency event; h) The cumulative net loss ratio of the discounted lease receivables balance (instalments and RV payment) exceeds any of the following triggers: Weighted-average seasoning is <=12 months 0.45%, Weighted-average seasoning is >12 and <=24 months 1.20%, Weighted-average seasoning is >24 and <=36 months 1.75%, Weighted-average seasoning is >36 months 2.25%; i) The dynamic net loss ratio of the total discounted lease receivables balance (instalments and RV payment) exceeds any of the following triggers for three consecutive months: Weighted-average seasoning is <=12 months 0.40%, Weighted-average seasoning is >12 and <=24 months 1.00%, Weighted-average seasoning is >24 and <=36 months 2.00%, Weighted-average seasoning is >36 months 2.80%; or j) The late delinquency ratio, calculated as the percentage of total discounted lease receivables balance with six or more overdue instalments exceeds any of the following triggers: Prior to 25 September %, After 25 September %. Enforcement Events An Enforcement Event will be recognised if an enforcement notice is served upon the Issuer by the Security Trustee following a request by 2/3 of the Noteholders excluding VW Bank and its affiliates. Following an Enforcement Event, distributions from the Available Distribution Amount will be made in the following Order of Priority (summarised): 1. Transaction senior costs; 2. Payments to the Swap counterparties in respect of Net Swap Payments and Swap Termination Payments (except Swap Termination Payments if the Swap counterparties is the defaulting party); 3. Interest on the Compartment 1 Class A Notes; 4. Pro-rata to the total Note balance and pari-passu principal amortisation amounts of all the series of Notes that have entered amortisation; 5. Any additional payments to the swap counterparties; 6. Upon an insolvency of VWL transfer all remaining funds to be used as Available Distrubution amount on the following payment date until all series of Notes are redeemed in full; 7. Interest to the subordinated loan; 8. Redemption of the subordinated loan; and 9. Balance to VWL. 13 Pre-Sale Report - Structured Finance: European ABS

14 Cash Collateral Account The Cash Collateral Account holds funds for two distinct purposes. The General Cash Collateral Amount represents all funds held within the Cash Collateral Account except those identified as part of the German Trade Tax Risk Reserve. The German Trade Tax Risk Reserve is funded upon the occurrence of a German Trade Tax Event that is dependent on whether the Issuer is deemed to be subject to German trade tax. On the Issue Date the Cash Collateral Account was funded by VWL for an amount of corresponding to 3.00% of the maximum expectancy rights balance, or maximum portfolio balance, and is available to cover any liquidity shortfalls during the life of the transaction whilst becoming available on the final payment date for the repayment of the outstanding Notes. Provided that no early amortisation event has occurred, the General Cash Collateral account has to be equal to: (i) 5.18% of the nominal amount of the Notes then outstanding prior to September 25 th 2014; (ii) after September 25 th 2014, the greater of: (i) 4.32%; and (ii) following the end of the revolving period, 2.5% of the maximum expectancy right balance. In each case plus any additional amount calculated by the Servicer and as required to cover any shortfall in any interest payment of the Notes. Following the occurrence of any early amortisation event, the General Cash Collateral Account needs to be equal to the greater of: (i) 5.18% of the nominal amount of the Notes then outstanding; and (ii) 2.5% of the maximum discounted expectancy right balance. In each case plus any additional amount calculated by the Servicer and as required to cover any shortfall in any interest payment of the Notes. Hedging Agreement The discounted receivables pay a fixed interest rate and the Rated Notes pay 1-mo Euribor plus fixed margins; hence the Transaction envisages a hedging structure in order to protect the Issuer against fluctuation of the floating interest rate index. The hedging is achieved through interest rate swaps (IRS) with notional corresponding to the actual outstanding principal of the Class A. Under the IRS contracts the Issuer pays a fixed rate of 0.85% in exchange for 1-mo Euribor +0.55% payable under the Class A Notes which is paid by the Swap Counterparties. The above mentioned structure provides protection against interest rate fluctuations, but does not provide credit enhancement to the Transaction. The interest rate swaps envisage downgrade provisions with respect to the Swap Counterparties consistent with DBRS criteria. Cash Flow Analysis The DBRS cash flow model assumptions focused on the amount and timing of defaults and recoveries, prepayment speeds, interest rates, and residual value losses on vehicles not repurchased by VWL. Based on a combination of these assumptions, a total of 12 cash flow scenarios were applied to test the performance of the Class A Notes based on a combination of three credit loss distribution scenarios, two interest rate scenarios, and a residual value haircut. 14 Pre-Sale Report - Structured Finance: European ABS

15 Excess Spread and Liquidity Risk At closing the transaction benefits from a theoretical excess spread of around 2.00% calculated as the difference between the receivables discount rate (4.34%), and the sum of the weighted average Compartment liabilities (1.31%) and the Compartment senior costs (1.03%). However, although the expectancy rights are discounted at a rate of 4.34%, the portfolio is comprised solely of rights to receive payment of the future contractual RVs and the discounted interests are only paid to the trust once the contracts mature and the vehicles are sold. Since almost 72.5% of the discounted receivables mature between August 2015 and July 2016, the amortisation profile of the portfolio is quite concentrated and back-loaded. However the Cash Collateral Account has been sized to cover over twelve months of senior costs and net swap payments in order to ensure timely Note interest payments. DBRS has also assumed stressed senior costs (including servicing fee) of 1.30%, from their initial level of 1.03%, an increase deemed sufficient to attract a replacement Servicer. Credit Losses DBRS reviewed the historical performance of VWL originations by monthly vintage on a cumulative net loss basis (CNL) going back to January Given the volume of data, this information is portrayed on an annual basis below. DBRS observed that the 2002 to 2004 vintages displayed a weaker CNL performance compared to those after However, while many lenders experienced deterioration during the recent global economic downturn, VWL s underwriting criteria and credit and collections polices has resulted in consistent performance in the post 2005 vintages with improvements observed from VWL Cumulative Net Loss by Annual Vintage 15 Pre-Sale Report - Structured Finance: European ABS

16 For purposes of determining a credit loss estimate for the current transaction, for vintages that were not fully seasoned, cumulative net losses were projected using historical data relating to loss timing. Additional information relating to recoveries and prepayments for similar collateral was available through Servicer reports for prior VCL securitisations. DBRS weighted its analysis on vintages originated after 2006 to allow for a more relevant base case comparison which resulted in an expected cumulative net credit loss assumption of 0.93% for the proposed portfolio. DBRS was not provided with separate recoveries information however, based on a review of actual VCL performance from existing transaction, recoveries were assumed to be 60% with a 4 month lag, thus resulting in a base case gross loss of 2.33%. DBRS then analysed cash flows that replicated the cash flows of the assets relative to the established priority of payments in the transaction. Three different loss distributions were modelled as outlined below. Given the short remaining tenor of the lease receivables, for cash flow modelling purposes, losses were distributed over 24 months as follows: Months Front Belly Back 1 to 8 50% 20% 20% 9 to 16 30% 50% 30% 17 to 24 20% 30% 50% 100% 100% 100% Prepayment Speeds In the context of a lease portfolio, prepayments are only contemplated in cases whereby the lessor accepts that a lessee terminates the lease before its contractual term. Since in its AAA scenario DBRS assumed that VWL is insolvent, a zero prepayment rate has been assumed when modelling the transaction. Credit Loss Multiples Due to the transaction s dual exposure to credit losses and residual value losses, RV losses are only applicable to the non-defaulted portion of the underlying receivables. In order to contemplate scenarios maximising potential RV losses vs. credit losses, DBRS has also run cash flow scenarios with a zero credit loss multiple on top of running scenarios with a standard AAA credit loss multiple. Residual Value Handback Rate Due to the fact that neither VWL s put option to the dealer or the fund s put option to VWL have been taken into account by DBRS in its AAA scenario, a 100% vehicle handback rate has been assumed. Residual Value Haircut Calculation In order to establish a portfolio embedded residual value assumption, DBRS received monthly data on VWL s disposal results before costs from September 2010 to September 2013 (see Historical Performance section). Residual value losses are also a function of the used vehicle market at the time of handback. To determine potential price volatility in the German used vehicle market, DBRS examined historical used vehicle sales data from external data providers since January This data looked at the market as a whole for 3-year / 90,000km second-hand vehicles, which is deemed to be a good proxy of the past volatility of the securitised residual values since (a) with their granularity, different bands and broad coverage of segments and models, VW securitised pools are fairly representative of the German auto market as a whole; and (b) 3 years and 90,000 Km reflect the average contract maturity and mileage of the securitised vehicles at contract expiry. Based upon this data, DBRS has assumed a AAA residual value stressed haircut equal to approximately 43% of the vehicles contractual residual value. 16 Pre-Sale Report - Structured Finance: European ABS

17 Interest Rate Stresses The assumed interest rate stresses have been determined in accordance with the DBRS Unified Interest Rate Model Methodology. Summary of Cash Flow Analysis Based upon the results of the cash flow modelling, the loss protection afforded to the Class A Notes is consistent with the assigned rating of AAA (sf). Sensitivity Analysis DBRS expects a lifetime base case loss rate and residual value loss for the rated pool based on a review of historical data. Adverse changes to asset performance may cause stresses to base case assumptions and therefore have a negative effect on credit ratings. The table below illustrates the sensitivity of the rating to various changes in the base case default rates and RV loss assumptions relative to the key base case assumptions used by DBRS in assigning the rating. Class A Increase in RV Loss % Increase in Default Rate % AAA AAA AAA 25 AAA AAA AAA 50 A (High) A (High) A (High) Legal Structure Law(s) Impacting Transaction The Class A and Subordinated Loan Swap Agreements are governed under English law while the other transaction documents are subject to German law. The Issuer has expressly elected in its Articles of Incorporation to be governed by Luxembourg Securitisation Law. Under the Lease Receivables Purchase Agreement, the Issuer has purchased from VWL the lease receivables and in the case of fully securitized receivables, certain expectancy rights. The transaction counsel rendered opinions with respect to (a) corporate good standing of Originator, Issuer and Management Company, (b) enforceability of documents against Originator and Issuer, (c) True Sale of assets from Originator to Issuer and (d) tax regime of the Issuer and the Notes. Set-Off Risk Upon an insolvency of the originator, the lessees or dealers may invoke the right to set-off the amount they owe to the originator at any given time, by any amounts due and payable to them by VWL. Pursuant to the Expectancy Rights Purchase Agreement, the Issuer will be the legal owner of the leased vehicles at contract maturity and the Expectancy Rights Trustee will hold and administrate such legal title on behalf of the Issuer, thus preventing any set-off risk over the securitised expectancy rights receivables. 17 Pre-Sale Report - Structured Finance: European ABS