Skip navigation
Newswire

RPT-Fitch assigns Red & Black Auto Germany 2 UG expected rating

(Repeat for additional subscribers)

Sept 30 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Red & Black Auto Germany 2 UG's (haftungsbeschraenkt) class A notes the following expected rating:

EUR732m class A notes (XS0968462316): 'AAA(EXP)sf'; Stable Outlook

EUR68m class B notes (XS0968462829): NR(EXP)sf

EUR8m Subordinated Loan: NR(EXP)sf

The final rating is subject to the receipt of final documents that are in line with information already received and the presence of downgrade language in line with Fitch's criteria in the swap documentation.

KEY RATING DRIVERS

The rating reflects the pool's expected asset performance, the class A notes' available credit enhancement, the transaction's legal structure and the sound origination and servicing procedures of Bank Deutsches Kraftfahrzeuggewerbe GmbH (BDK; not rated).

Fitch analysed separate default and recovery data for sub-pools of private (86% of the initial pool) and commercial (14%) customers. The agency determined a weighted average (WA) base case default rate of 2.3% and a WA base case recovery rate of 59.5%. The base case assumptions incorporate a stable economic outlook. Credit enhancement for the class A notes is 9.5% and provided via the subordination of the class B notes (8.5%) and the reserve fund (1.0%). The strictly sequential amortisation of the notes will cause the credit enhancement to rise further. The transaction also benefits from excess spread to cover defaults.

Commingling risk arises from cash flows that might fall into the servicer's bankruptcy estate before being transferred to the issuer's account. To reduce this risk Societe Generale (A/Stable/F1) will pay a certain amount (the lesser of actually lost collections and a predefined amount) to the issuer account if the servicer fails to transfer collections. We judge this mechanism sufficient to mitigate commingling risk.

BDK acts as servicer of the loans. A back-up servicer will be appointed prior to a servicer termination event if the credit quality of Societe Generale or any other majority shareholder of BDK deteriorates. In this case, BDK will continue servicing the loans, with the back-up servicer taking over if the initial servicer needs to be replaced. Fitch views this procedure positively. In addition, a non-amortising reserve fund of EUR8m will be available to bridge any liquidity gaps due to servicer discontinuity risk or any other payment interruption.

Set-off risk arises from a possible claim back of handling fees charged by BDK at contract initiation (equivalent to 1% of the initial pool balance), due to legal uncertainty on whether such fees were rightfully charged. In addition, set-off risk also results from unused insurance premiums (equivalent to 0.8% of the initial pool balance) that could be claimed back by the obligor in case of insolvency of the insurance company. Fitch took into account the additional potential set-off loss to account for these risks in its cash flow model.

RATING SENSITIVITIES

The transaction's performance is sensitive to increased defaults in the portfolio. Fitch considers unemployment the main default driver of fixed rate auto loans with private customers, which make up the majority of the pool. Fitch expects German unemployment to remain at historical low levels over the transaction's weighted average life. Fitch has applied a high default stress multiple of 6.7 to account for the impact of unexpected economic deterioration on the portfolio and to capture refinancing risk arising from balloon contracts. The ratings would also be sensitive if recoveries from defaulted loans turn out significantly lower than expected, e.g. in case of a severe downturn of the German used car market.

Unremedied counterparty risk e.g. in the case of unhedged interest rate risk following the swap counterparty's default or lost funds following a default of the account bank can also create downward pressure on the ratings.

TRANSACTION CHARACTERISTICS

This transaction is a true sale securitisation of German auto loans originated by BDK. BDK is a 51% subsidiary of ALD Lease Finanz which is part of the Societe Generale Group. The class A notes are euro-denominated and pay a floating rate. This is BDK's second securitisation. The predecessor deal was rated by Fitch in March 2012.

The transaction is static and will start amortising from closing. The final portfolio consists of 90,995 loans, with an outstanding aggregate principal balance of EUR800m. 58% of the pool balance consists of amortising loans, balloon loans account for 42%. The vehicles financed are new cars (19%), newly used cars (38%) and used cars (43%).

A presale report, including further information on transaction related stress, key rating drivers and rating sensitivities, as well as material sources of information that were used to prepare the credit rating, is available at www.fitchratings.com.

Link to Fitch Ratings' Report: Red & Black Auto Germany 2 UG

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719205