Fitch: VW Scandal Has No Impact on Existing ABS Transaction Ratings in China

 The emission test scandal at Volkswagen AG (VW AG, A/RWN/F1) has no rating impact on the Driver China One Trust and Driver China two Trust transactions, which are Chinese auto loan ABS transactions originated by Volkswagen Finance (China) Co., Ltd., (VWFC). The latter is a wholly owned subsidiary of Volkswagen Financial Services AG, which is in turn 100% owned by VW AG.

Fitch believes that there is no rating impact to existing transactions under the Driver ABS programme in China as there are no affected EA 189 EU5 diesel engines in the transaction portfolios. The quantifiable risk to VWFC's entire portfolio is limited, with less than 50 loan contracts related to affected vehicles, and nationwide, there are less than 2,000 vehicles delivered in China with the affected engine. VWFC has told Fitch that VW AG will bear all the expenses for the recall of the vehicles.

The scandal commenced in September when VW AG was alleged to have manipulated emission tests in the US for vehicles with EA 189 EU5 engine, which is in violation of the Clean Air Act by the US Environmental Protection Agency (EPA). In Fitch's view, any impact on affected ABS transactions will likely relate to recoveries due to reductions of used-car values rather than defaults.

While there are no affected vehicles in the Driver China ABS transactions, it is still possible that used-car values of unaffected VW manufactured cars in China may be lower as a result of reputational damage from the scandal. Fitch believes that this risk has been addressed by stressed recovery rates in Fitch's criteria. In Fitch's analysis of transactions in China, no credit was given to recovery due to repossession of vehicles and therefore lower car values, if any, will have no impact on the ratings assigned by Fitch.

At end-September 2015, the cumulative gross loss for Driver China One Trust and Driver China two Trust stood at 0.97% (weighted average (WA) seasoning of 32 months) and 0.06% (WA seasoning of 13 months), respectively, which are well within Fitch's expectations.