Ratings Assigned To Further Issuances From German ABS Transaction VCL Master Residual Value, Compartment Primary Credit Analyst: Matthew S Mitchell, CFA, London (44) 0-7176-8581; matthew.mitchell@spglobal.com Secondary Contact: Thore Hildebrandt, Frankfurt +49 69 33 999 311; thore.hildebrandt@spglobal.com OVERVIEW We have assigned ratings to VCL Master Residual Value, Compartment 's class A 017-1 and B 017-1 notes. At the same time, we have affirmed our ratings on the issuer's outstanding class A and B notes. VCL Master Residual Value, Compartment is a securitization of a portfolio of German auto lease residual values, which Volkswagen Leasing originated. LONDON (S&P Global Ratings) Sept. 5, 017--S&P Global Ratings today assigned its credit ratings to VCL Master Residual Value S.A., Compartment 's class A 017-1 and B 017-1 notes. At the same time, we have affirmed our '' and '' ratings on the issuer's outstanding class A and B notes, respectively (see list below). We have also discontinued our ratings on the class A 016-3, and B 016- notes as these notes were fully redeemed. VCL Master Residual Value, Compartment is a securitization of a portfolio of German auto lease residual values, which Volkswagen Leasing GmbH (VW Leasing) originated. The class A and B notes issued by VCL Master Residual Value, Compartment are structured with an initial 1-month revolving period. Each year, investors WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 017 1
have the option to renew the revolving period for an additional 1 months. As part of the annual renewal, the note coupons and interest rate swaps are repriced, the legal maturity dates are extended, and other structural features, such as minimum required credit enhancement levels, may be amended to reflect changes in the collateral characteristics. In our view, these amendments would not affect the outstanding ratings as we deem these offers to be opportunistic, rather than distressed. In connection with the annual renewal on Sept. 5, 017, VCL Master Residual Value, Compartment issued new class A 017-1 and B 017-1 notes with initial nominal amounts of 300.0 million and 43.3 million, respectively. At the same time, the existing class A 016-3 and B 016- notes were fully redeemed. A combination of subordination, initial, and additional overcollateralization, and a cash reserve provides credit enhancement to the rated notes. The transaction does not have a principal deficiency ledger mechanism. The class A notes rank senior to the class B notes, and each class of notes ranks pari passu among themselves. Under the transaction documents, amortization is sequential, but switches to pro rata once the class-specific overcollateralization target levels are reached, assuming no specific triggers have been breached. The notes may switch to sequential payment again, once certain credit enhancement increase conditions have been met. If the servicer were to become insolvent at any point in the transaction's life, the notes would permanently switch to sequential amortization. We believe that documented floor credit enhancement levels are likely to outweigh any potential negative effect on collateral performance caused by the emission manipulations. As of the most recent investor report,.9% of VCL Master Residual Value, Compartment 's discounted residual value balance (3.7% of the contracts) related to vehicles equipped with diesel engines affected by the manipulation of nitrogen oxides (NOx) exhaust emissions, compared with 5.% (6.6% of the contracts) at the previous transaction renewal in September 016. As part of our ongoing monitoring of VW Leasing's VCL transactions, we will seek information regarding the extent to which vehicle owners may be entitled to compensation claims or similar remedies against Volkswagen AG and its subsidiaries. They may use these claims to reduce the amount of their securitized lease receivables. As we gain a better understanding of the relevant facts and their potential legal and practical consequences, we will assess whether, in our view, the available credit enhancement remains sufficient, along with other factors, to support the ratings on each class under various stress scenarios. RATING RATIONALE WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 017
Operational Risk VW Leasing has underwritten auto leasing contracts in Germany since 1966. Our ratings on the class A and B notes reflect our assessment of the company's origination policies, as well as our evaluation of VW Leasing's ability to fulfill its role as servicer under the transaction documents. At this time, we do not believe the NOx or CO announcements have materially affected VW Leasing's servicing operations. Our structured finance operational risk criteria do not impose any cap on the maximum achievable rating due to operational risks (see "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published on Oct. 9, 014). Economic Outlook In our base-case scenario, we forecast that Germany will record GDP growth of.0% in 017, 1.7% in 018, and 1.5% in 019, compared with 1.8% in 016. At the same time, we expect unemployment rates to continue to decline to 3.7% in 017, 3.4% in 018, and 3.3% in 019, compared with 4.% in 016 (see "Europe Displays Financial Calm, But What About The Brexit And QE Clouds Ahead?," published on June 30, 017). In our view, changes in GDP growth and the unemployment rate are key determinants of portfolio performance. We set our credit assumptions to reflect our economic outlook. Our near- to medium-term view is that the German economy will remain resilient and record positive growth. Credit Risk The portfolio comprises residual values, which are subject to market value decline risk. We based our analysis on our view of potential market value declines at various rating levels. We assumed a vehicle turn-in rate of 90% at contract maturity and base-case market value declines of 40% in our 'AAA' rating scenario. After making portfolio-specific adjustments to our base-case market value decline assumptions, we assumed a residual value loss of 4.0% in the 'AAA' rating scenario. In addition to market value decline risk, the transaction is also exposed to lessee default risk, as the recovery proceeds from selling the vehicle are split between lease receivable and residual value claims. Our net loss base-case assumption for the securitized pool is 1.15%, which is in line with that applied to VCL Master S.A., Compartment 1, and unchanged from our previous review. Our net loss base-case assumptions reflect our view of the German economy's continued stabilization. We have also considered the transaction's revolving nature, as well as its limited replenishment criteria. We maintained the same base-case multiples of 4.x and.7x at 'AAA' and 'A+' rating levels, respectively. Moreover, we sized stressed recoveries of 40% for all rating levels based on recovery data provided for previous VCL transactions and a peer comparison with other German auto leasing transactions. We have analyzed credit risk by applying our criteria for European auto asset-backed securities (ABS), using historical loss data for VW Leasing's WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 017 3
book and performance data from previous VCL leasing transactions (see " Methodology And Assumptions For European Auto ABS," published on Oct. 15, 015). About.9% of the pool (by volume) relates to cars equipped with diesel engines affected by the manipulation of exhaust emissions. At this stage, we consider that the stressed market value decline and recovery rate assumptions cover a potential reduction in resale values. Cash Flow Analysis We have assessed the transaction's documented payment structure, and in our cash flow analysis we have assumed that the class A and B notes will begin with the minimum required credit enhancement levels according to the transaction documents. The issuer can extend the transaction's revolving period several times, each time for one year. Once the revolving period ends, the transaction amortizes sequentially until certain overcollateralization targets for the class A and B notes are reached. However, the amortization between the class A and B notes and the subordinated loan switches to pro rata amortization from sequential if certain conditions (for instance, the credit enhancement increase condition not being in effect) are fulfilled, or when class-specific target overcollateralization levels are reached. Our analysis indicates that the available credit enhancement for the class A and B notes is sufficient to withstand the credit and cash flow stresses that we apply at the respective rating levels. We have therefore affirmed our ratings on the issuer's outstanding class A and B notes. Counterparty Risk Our ratings on the class A and B notes also consider that the replacement mechanisms implemented in the transaction documents adequately mitigate the counterparty risks to which the transaction is exposed. We have analyzed these counterparty risks by applying our current counterparty criteria (see " Counterparty Risk Framework Methodology And Assumptions," published on June 5, 013, and "Global Derivative Agreement Criteria," published on June 4, 013). Our ratings on the notes reflect that the swap agreements are in line with our current counterparty criteria. Legal Risk We believe the transaction may be exposed to commingling and trade tax risk. If VW Leasing were to become ineligible, an advance mechanism would be triggered, mitigating commingling risk. We have sized the unmitigated seller risks as an additional loss. We consider the issuer to be bankruptcy remote, in line with our legal criteria (see "Structured Finance: Asset Isolation And Special-Purpose Entity Methodology," published on March 9, 017). Rating Stability We analyzed the effect of a moderate stress on the credit variables and their ultimate effect on our ratings on the notes (see "Scenario Analysis: Gross Default Rates And Excess Spread Hold The Answer To Future European Auto ABS Performance," published on May 1, 009). We ran two scenarios and the results WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 017 4
are in line with our credit stability criteria (see "Methodology: Credit Stability Criteria," published on May 3, 010). Sovereign Risk The application of our structured finance ratings above the sovereign criteria does not cap the ratings in this transaction (see "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 016). RELATED CRITERIA Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 9, 017 Criteria - Structured Finance - General: Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions, Aug. 8, 016 Criteria - Structured Finance - ABS: Methodology And Assumptions For European Auto ABS, Oct. 15, 015 Criteria - Structured Finance - General: Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March, 015 Criteria - Structured Finance - ABS: Global Methodology And Assumptions For Assessing The Credit Quality Of Securitized Consumer Receivables, Oct. 9, 014 Criteria - Structured Finance - General: Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 014 Criteria - Structured Finance - General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 014 General Criteria: Methodology Applied To Bank Branch-Supported Transactions, Oct. 14, 013 Criteria - Structured Finance - General: Counterparty Risk Framework Methodology And Assumptions, June 5, 013 Criteria - Structured Finance - General: Global Derivative Agreement Criteria, June 4, 013 Criteria - Structured Finance - General: Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 1, 01 General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 01 General Criteria: Methodology: Credit Stability Criteria, May 3, 010 Criteria - Structured Finance - General: Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 8, 009 General Criteria: Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 1, 009 Criteria - Structured Finance - ABS: European Consumer Finance Criteria, March 10, 000 RELATED RESEARCH European Economic Snapshots For Q17 Published, Sept. 14, 017 017 EMEA ABS Scenario And Sensitivity Analysis, July 6, 017 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 017 5
European Economic Outlook: The Eurozone Is Fielding A Powerful Game Of Catch-Up, June 8, 017 Europe Displays Financial Calm, But What About The Brexit And QE Clouds Ahead?, June 30, 017 Stalling Diesel Car Sales In Europe Could Weaken Auto ABS Collateral Performance, June 5, 017 European Auto ABS Index Report Q4 016, March 30, 017 Bulletin: Volkswagen Rating And Outlook Not Immediately Affected By $4.3 Billion U.S. Fines, Jan. 13, 017 Global Structured Finance Scenario And Sensitivity Analysis 016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 016 European Structured Finance Scenario And Sensitivity Analysis 016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 016 How We Rate And Monitor EMEA Structured Finance Transactions, March 4, 016 Scenario Analysis: Gross Default Rates And Excess Spread Hold The Answer, May 1, 009 RATINGS LIST VCL Master Residual Value S.A., Compartment 4.08 Billion Asset-Backed Floating-Rate Notes (Including A 906.100 Million Unrated Subordinated Loan) Ratings Assigned Class Rating Amount (mil. ) A 017-1 300.00 B 017-1 43.30 Ratings Affirmed Class A 015-1 A 015- A 015-3 A 015-4 A 015-5 A 015-6 A 016-1 A 016- A 016-4 B 015-1 B 015- B 015-3 B 016-1 Rating WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 017 6
B 016-3 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 5, 017 7
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