CCXI’s ratings reflect the expected loss severity of senior notes, and the possibility of timely payment of invest and fully payment of principal on or before legal maturity. This report does not constitute a solicitation of an offer to buy any securities.
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www.ccxi.com.cn
Volkswagen Finance
(China) Co., Ltd.
Asset Backed Notes Rating Report
for Driver China seven Auto Loan ABS
R
Report date
Sep. 18th
, 2017
Analysts
Xiaoyu Wang [email protected]
Kai Kang [email protected] Jingwen Yuan [email protected]
This report is for VWFC’s and investors' reference only. In case there is any divergence between this report and the Chinese version report, the Chinese report shall prevail.
CCXI provides credit ratings in this rating report for the asset backed
notes of Driver China seven transaction based on the information obtained on
and before Sep. 18th
, 2017. The ratings reflect the expected loss severity of
senior notes, and the possibility of timely payment of invest and fully payment
of principal on or before legal maturity. This report does not constitute a
solicitation of an offer to buy any securities.
Credit Rating
Asset
Backed
Notes
Credit
Rating
Amount
(RMB
10,000)
Percentage Interest
Rate
Scheduled
Repayme
nt Date
Legal Final
Maturity Date
Class A AAAsf 351,200.00 87.80% 4.95% Sep. 26th
, 2019 Jul. 26th
,2024
Class B AAsf 15,000.00 3.75% 5.20% Sep. 26th
, 2019 Jul. 26th
,2024
Subordinated - 31,650.00 7.91% - Sep. 26th
, 2019 Jul. 26th
,2024
OC - 2,150.66 0.54% - - -
Total - 400,000.66 100.00% - - -
Asset Pool Consists of auto loans originated by the Seller; the auto loans are distributed across 31 provinces and autonomous regions of China
Aggregate Discounted Receivables Balance
RMB 4,000.01 million
Originator Volkswagen Finance (China) Co., Ltd. (“VWFC”)
Servicer VWFC
Trust Company
CITIC Trust Co., Ltd. (“CITIC Trust”)
Note: 1. Class A and Class B Asset Backed Notes are together called “Senior Notes”;
2. CCXI’s ratings address only the credit risks associated with the transaction. Other
non-credit risks have not been addressed, but may have a significant effect on yield to
investors.
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Rating Opinion
Strengths
The payment of interest and principal adopts the senior/subordinate payment system. Class A
Notes benefit from 12.20% of credit enhancement provided by Class B Notes, Subordinated
Notes and Overcollateralisation; Class B Notes benefit from 8.45% of credit enhancement
provided by Subordinated Notes and Overcollateralisation.
The transaction benefits from 0.54% of credit enhancement provided by initial
Overcollateralisation.
Loans in the securitized portfolio are all auto loans originated by VWFC. Aggregate
outstanding discounted receivables balance is RMB 4,000,006,554.35. Total number of
borrowers in the pool is 67,402. Average outstanding discounted receivables balance per
borrower is RMB 59,345.52 and the maximum outstanding discounted receivables balance
from a single borrower is about RMB 2.26 million. The pool benefits from its granular
composition.
All loans in the pool are “Normal” category of loans based on CBRC’s five-grade loan
classification standard as of the Cut-off Date. The average seasoning of loans is 6.88 months
while the shortest is 2 months. The underlying assets are in good quality and their credit
performance is decent.
All the loans in the pool are fixed interest rate loans. The transaction is hence not subject to
interest risks.
The Originator and Servicer is VWFC, a wholly-owned subsidiary of Volkswagen Financial
Services (“VWFS”). Thanks to the extensive experience of VWFS in automobile finance
management and operations, VWFC is highly competitive in serving its dealers and
individual customers. Since establishment, the company has recorded high growth and
established strong risk control capabilities. As of December 31st, 2016, the NPL ratio of the
company was 0.14%. In addition, VWFS has gained securitization experience over the last 20
years with a good number of well performing ABS transactions in Germany, UK, France, the
Netherlands, Spain, Japan, Australia, Brazil and China. VWFS will provide strong support to
VWFC in this transaction.
This transaction is a static pool transaction. Hence there is no additional loss probability
arising from replenishing portfolio.
Concerns and Mitigants
Due to the limitation of business development and information systems, VWFC only
provides the historical data from Aug. 2010 onwards which is relatively short. Although part
of the historical data has experienced a complete life cycle, it does not reflect a complete
economic cycle. As such, the historical performance plays a limited role in forecasting the
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future performance of the asset pool.
Mitigant: We made appropriate adjustments to the results of historical data analysis based on
macro-economic conditions, industrial developments and the business developments of the
Originator, in order to forecast the future credit performance of the asset pool. In our credit
analysis, we have fully factored in the limitation of historical data and the impact of future
economic movements on the asset pool.
The underlying assets are auto loans. According to relevant arrangement, the underlying
assets are transferred to the trust, but the mortgage registration will not be updated.
Meanwhile, among the assets in the pool, there are loans in relation to which the mortgage
has not been registered. As a result of the foregoing, the mortgage may not be upheld against
bona fide third party. This may impose certain negative impact on the trust interests.
Mitigant: In analyzing the recovery of default assets, we have considered the potential impact
of the lack of registration or re-registration for the security interest over collateral rights.
Before Foreclosure Event is triggered, and after the tax bore by trust company is paid, the
order of cash flow allocation is first to pay for the interest payable for Senior Notes, and then
pay for the principal of Senior Notes until the Targeted Overcollateralisation Amount is
reached, and the remaining cash flow is allocated to pay for the interest and principal of
Subordinated Notes until the outstanding principal amounts of Subordinated Notes after
repayment is no less than 5% of the then outstanding principal amount of the Notes. As such,
Subordinated Notes might receive principal payment before Senior Notes are fully paid down.
Under extreme situation (for example, extremely high prepayment rate scenario),
Subordinated Notes might be rapid paid, so the remain Subordinated Notes may not support
Senior Notes completely.
Mitigant: We have fully-factored in the impact of cash flow Order of Priority in relation to the
repayment of different classes of notes, and we have simulated the principal repayment and
potential loss of different classes of notes under different cash flow scenarios. We believe
Class A and Class B Notes could achieve AAAsf and AAsf rating respectively as stated in the
tranching in this report.
In the asset pool, there are two types of loans that allow borrowers to extend loan tenor when
they are due (Note that it is an option built in the original loan contract) except new car credit
and used car credit. Such loans account for 1.26% of the outstanding discounted receivables
balance of the asset pool as of Cut-Off Date. The uncertainties pertaining to the actual
maturity of such loans may affect the cash flow of the asset pool.
Mitigant: We have simulated different scenarios of cash flow Order of Priority when these
three types of loans are due, and fully-factored in the impact of tenor extension on the asset
pool.
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Rating opinion and consideration
CCXI grants provisional ratings of AAAsf and AAsf to Class A Notes and Class B Notes under
the “Driver China seven Auto Loan ABS”.
Such provisional ratings are based on:
Robustness of the legal structure of the transaction and underlying assets;
Credit quality of the asset pool;
Credit support provided by the senior/subordinate mechanism;
Structural features of the transaction which include the Order of Priority, the switch of the
Order of Priority following Foreclosure Events, the pre-funded Cash Collateral Account and
Monthly Collateral Account, etc;
Credit profile of VWFC and its experience as a Servicer.
Monitoring
CCXI will monitor the ratings while Senior Notes are outstanding. On-going review will be
conducted on the performance of the underlying assets and the credit quality of the Servicer, the
Trustee and the Fund Custodian. CCXI will publish the tracking report every year before 31th
July from the second year of issuance, and provide prompt notice to the Trustee and publicly
announce any changes in the ratings on CCXI’s website.
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Transaction Overview
Transaction summary
Trust company CITIC Trust
Type of structure Static cash flow auto loan ABS
Cut-off Date Aug. 31th ,2017
Closing Date Sep. 21th , 2017
Frequency of interest payment Monthly
Frequency of principal payment Monthly
Legal Maturity Date Jul. 26th,2024
Servicer VWFC
Account Bank China Construction Bank Corporation Beijing Branch (“CCB Beijing Branch”),
Originator VWFC
Lead Underwriter CITIC Securities Co., Ltd.
Joint Lead Underwriters Standard Chartered Bank (China) Limited / Bank of China Limited
Registry/Paying Agent China Central Depository and Clearing Co., ltd(“CCDC”)
Asset pool and characteristics of pooled assets (At Cut-off Date)1
Discounted Principal balance of the asset pool RMB 4,000,006,554.35
Initial loan size of the asset pool RMB 5,817,582,887.25
Number of borrowers 67,402
Number of loans 68,331
Highest principal balance of single loan RMB 2,257,877.05
Average outstanding discounted receivables balance of single loan RMB 58,538.68
Average outstanding discounted receivables balance of single borrower RMB 59,345.52
Lowest/highest interest rate of loans 0%2/15.72%
Weighted average interest rate of loans 1.85%
Shortest/longest tenor of loans 12 months/60 months
Shortest/longest remaining time to maturity of loans 6 months/58 months
Weighted average remaining time to maturity of loans 22.78 months
Age range of Borrowers 18~86
Geographic distribution of Borrowers borrowers widely distributed in 31 provinces and
autonomous regions of China
Weighted average initial collateralization rate 56.09%
Asset Backed Notes
Asset Backed Notes Proportion of amount Interest
Rate Credit Enhancement
Class A 87.80% 4.95% Class A Notes receive 12.20% of credit enhancement from Class B Notes, Subordinated Notes and Overcollateralisation
Class B 3.75% 5.20% Class B Notes receive 8.45% of credit enhancement from Subordinated Notes and Overcollateralisation
Subordinated Notes 7.91% - -
1 Weighted average data are weighted by outstanding discounted receivables balance 2 Some loans in the pool are loans with interest subsidy, with 0%
interest rate
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Overcollateralisation 0.54% - -
Transaction Structure
The Originator VWFC entrusts eligible auto
loans (“pooled assets” or “pooled loans”) to CITIC
Trust, and sets up “Driver China seven Auto Loan
ABS” (“Trust”). CITIC Trust issues Class A Notes,
Class B Notes and Subordinated Notes backed by the
underlying assets. The Senior Notes are issued to
institutional investors in the interbank bond market as
registered at PBOC and recorded with CBRC. The
Subordinated Notes are issued to VWFC only. CCDC
is the custodian for these notes. Please refer to Figure
1 for details.
Figure 1: Transaction Structure
Asset Backed Notes
The asset backed notes are backed by specific
trust assets. The holders of the asset backed notes are
entitled to the beneficiary rights arising from the
special purpose trust.
The Aggregate Outstanding Discounted
Receivables Balance of the asset pool as of the Cut-off
Date is RMB 4,000.01 million. Such amount is
calculated by discounting the scheduled principal and
interest cash flows by a Discount Rate of 6.61%. The
size of Class A Notes is RMB 3,512.00 million, the
size of Class B Notes is RMB 150.00 million, the size
of Subordinated Notes is RMB 316.50 million and the
size of Overcollateralisation is RMB 21.51 million.
Overcollateralisation refers to difference between
Aggregate Discounted Principal Balance as of the
Cut-off Date and Senior Notes and Subordinated
Notes. Overcollateralisation provides additional credit
support to the transaction.
On each Payment Date, Available Distribution
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Amount is allocated according to the Order of Priority.
The cash flow is allocated according to the Order
of Priority. On each Payment Date, the Available
Distribution Amount which at a level equal to the
Specified Cash Collateral Account Balance will first
to replenish the Cash Collateral Account, then to
continuous be distributed follow the payment
mechanism (Please see Cash flow payment
mechanism for details).
Cash flow payment mechanism
On each Account Bank Transfer Date, the
Available Distribution Amount shall be distributed
according to the following Order of Priority:
Order of Priority before the occurrence of a
Foreclosure Event
Prior to the occurrence of a Foreclosure Event
(Please see Appendix 2 for details of Foreclosure
Event), on the preceding day to each Payment Date,
all or a portion of the Available Distribution Amount
shall be deposited to the Cash Collateral Account to
the extent needed to replenish and maintain the credit
balance of the Cash Collateral Account at a level equal
to the Specified Cash Collateral Account Balance and
any balance will, on each Payment Date, be
distributed according to the following Order of
Priority:
first, amounts payable by the Issuer in respect of
taxes (if any) in relation to the Trust;
second, the Servicer Fee payable to the Servicer;
third, on a pari passu basis, (1) the Trust
Company Fee and Expenses payable to the Trust
Company, (2) the Expenses payable to the Servicer (or
replacement Servicer), (3) the Custodian Fee and
Expenses payable to the Account Bank, (4) the Paying
Agent Fee and Expenses payable to the Paying Agent,
(5) the Rating Agencies Fee and Expenses payable to
the Rating Agencies, and (6) the Auditor Fee payable
to the Auditor;
fourth, amounts payable in respect of (1) interest
accrued during the immediately preceding Interest
Period plus (2) Interest Shortfalls (if any) on the Class
A Notes;
fifth, amounts payable in respect of (1) interest
accrued during the immediately preceding Interest
Period plus (2) Interest Shortfalls (if any) on the Class
B Notes;
sixth, to Class A Noteholders, an aggregate
amount equal to the Class A Principal Payment
Amount for such Payment Date which is equal to the
amount necessary to reduce the outstanding principal
amount of the Class A Notes to the Class A Targeted
Note Balance;
seventh, to Class B Noteholders, an aggregate
amount equal to the Class B Principal Payment
Amount for such Payment Date which is equal to the
amount necessary to reduce the outstanding principal
amount of the Class B Notes to the Class B Targeted
Note Balance;
eighth, amounts payable in respect of accrued
and unpaid interest on the Subordinated Notes
(including, without limitation, overdue interest);
ninth, (i) prior to the satisfaction of Clean-Up
Call Conditions or in the case that the Clean-Up Call
Conditions are satisfied but the Originator does not
exercise a Clean-Up Call, to the Subordinated
Noteholders for repayment of outstanding principal
amounts of Subordinated Notes on condition that the
outstanding principal amounts of Subordinated Notes
after repayment is no less than 5% of the then
outstanding principal amount of the Notes; or (ii) after
the satisfaction of Clean-Up Call Conditions and the
Originator choose to exercise a Clean-Up Call, to the
Subordinated Noteholders, for repayment of
outstanding principal amounts of Subordinated Notes
until it has been reduced to zero; and
tenth, to pay all remaining excess to the
Originator by way of final success fee.
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Cash flow payment adjustment before the occurrence
of a Foreclosure Event
Before the occurrence of a Foreclosure Event, the
repayment of principal for Senior Notes each time
shall be made until the aggregate principal amount of
the notes reduced to its targeted balance. If the
Aggregate Principal Balance as at the end of the
preceding Monthly Period is less than 10 percent of
the Aggregate Cut-off Date Discounted Receivables
Balance or if a Servicer Replacement Event occurs,
the targeted balance of Senior Notes is zero.
Otherwise, the targeted balance of Senior A Notes is
an amount equal to the excess of the Aggregate
Discounted Receivables Balance as at the end of the
preceding Monthly Period over the Targeted
Overcollateralisation Amount of Senior Notes. The
Targeted Overcollateralisation Amount shall be
calculated according to the Trust Agreement as
follows on each Payment Date:
Notes Targeted Overcollateralisation amount
(larger one between the below Two)
Class A
Notes
Class A Targeted Overcollateralisation Percentage multiplied by
the Aggregate Discounted Principal Balance as of the end of the
preceding Monthly Period
Class B
Notes
Class B Targeted Overcollateralisation Percentage multiplied by
the Aggregate Discounted Principal Balance as of the end of the
preceding Monthly Period
The Overcollateralisation percentage is defined
as follows:
Condition
Class A
Overcollat
eralisation
percentage
Class B
Overcollate
ralisation
percentage
Neither Level 1 nor Level 2
Credit Enhancement Increase
Conditions is triggered
25% 18%
After Level 1 Credit
Enhancement Increase Condition
is triggered
32% 20%
After Level 2 Credit
Enhancement Increase Condition
is triggered
100% 100%
Note: Level 1 Credit Enhancement Increase Condition shall be
deemed to be in effect if the Cumulative Gross Loss Ratio
exceeds (a) 1.20% for any Payment Date prior to or during July
2018; or (b) 1.60% for any Payment Date from August 2018
but prior to or during March 2019.
Level 2 Credit Enhancement Increase Condition shall be
deemed to be in effect if the Cumulative Gross Loss Ratio
exceeds 2.00% for any Payment Date.
When Level 2 Credit Enhancement Increase
Condition is in effect, the principal of Senior Notes
will be repaid by way of pass-through.
Order of Priority after occurrence of a Foreclosure
Event
Following the occurrence of a Foreclosure Event,
distributions (other than repayments due to the
Originator) will be made from the Available
Distribution Amount according to the following Order
of Priority:
first, amounts payable by the Issuer in respect of
taxes (if any) in relation to the Trust;
second, the Servicer Fee payable to the Servicer;
third, on a pari passu basis, (1) the Trust
Company Fee and Expenses payable to the Trust
Company, (2) the Expenses payable to the Servicer (or
replacement Servicer), (3) the Custodian Fee and
Expenses payable to the Account Bank, (4) the Paying
Agent Fee and Expenses payable to the Paying Agent,
(5) the Rating Agencies Fee and Expenses payable to
the Rating Agencies, and (6) the Auditor Fee payable
to the Auditor;
fourth, amounts payable in respect of (1) interest
accrued during the immediately preceding Interest
Period plus (2) Interest Shortfalls (if any) on the Class
A Notes;
fifth, to the holders of the Class A Notes in
respect of principal until the Class A Notes are
redeemed in full;
sixth, amounts payable in respect of (1) interest
accrued during the immediately preceding Interest
Period plus (2) Interest Shortfalls (if any) on the Class
B Notes;
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seventh, to the holders of the Class B Notes in
respect of principal until the Class B Notes are
redeemed in full;
eighth, amounts payable in respect of accrued
and unpaid interest on the Subordinated Notes
(including, without limitation, overdue interest);
ninth, (i) prior to the satisfaction of Clean-Up
Call Conditions or in the case that the Clean-Up Call
Conditions are satisfied but the Originator does not
exercise the Clean-Up Call, to the Subordinated
Noteholders for repayment of outstanding principal
amounts of Subordinated Notes on condition that the
outstanding principal amounts of Subordinated Notes
after repayment is no less than 5% of the then
outstanding principal amount of the Notes; or (ii) after
the satisfaction of Clean-Up Call Conditions and the
Originator choose to exercise the Clean-Up Call, to
the Subordinated Noteholders, for repayment of
outstanding principal amounts of Subordinated Notes
until it has been reduced to zero; and
tenth, to pay all remaining excess to the
Originator by way of final success fee.
Fund transfer
According to the transaction arrangement,
VWFC will act as the Servicer. After the sale of assets
to the trust, the Borrowers of the loans in the pool will
still make repayment to VWFC, and VWFC will
consolidate these Collections and make a single
deposit of such monthly Collections into the
Distribution Account no later than the sixth Business
Day before each Payment Date. The Account Bank
will make payment of various taxes, expenses and
compensation to relevant institutions according to the
instruction of the trust company, and transfer the
payable interest and principal of notes to CCDC,
which will make payment of the principal and interest.
If VWFC’s long term credit rating is lower than A, it
shall, on the second business day of each month,
transfer the collections obtained between the 16th
calendar day and the last day of the previous monthly
period (Monthly Collections Part 2) to the Distribution
Account; and, on the second business day after the
15th calendar day of each month, transfer the
collections from the first 15 calendar days of the
monthly period (Monthly Collections Part 1) to the
Distribution Account, and meanwhile, the Monthly
Collateral Account shall apply. In addition, following
the occurrence of a Servicer Replacement Event,
Borrowers and/or Security Providers relevant to the
Borrowers will be requested to make repayment
directly to Trust Company.
Monthly Collateral Account
To mitigate the commingling risks due to the
deterioration of financial or credit profile of the
Servicer, the transaction sets up a Monthly Collateral
Account, and the funding source for this account is the
Servicer. If the Servicer’s long term credit rating falls
below A, it shall make Monthly Collateral payments
to the Monthly Collateral Account twice a month. The
Monthly Collateral Account is an account maintained
in the name of the Trust with the Account Bank.
Specifically, the Servicer should transfer the Monthly
Collateral Part 2 to the Monthly Collateral Account on
the second Business Day following the fifteenth
calendar day of each Monthly Period for the purpose
of securing the Issuer's claim with respect to the
Monthly Collections Part 2, and maintain the Monthly
Collateral Part 2 as collateral on the Monthly
Collateral Account until the Monthly Collections Part
2 have been paid. The Servicer should transfer the
Monthly Collateral Part 1 to the Monthly Collateral
Account on the second Business Day of each Monthly
Period for the purpose of securing the Issuer's claim
with respect to the Monthly Collections Part 1, and
maintain the Monthly Collateral Part 1 as collateral on
the Monthly Collateral Account until the Monthly
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Collections Part 1 have been paid.
Cash Collateral Account
The transaction sets up the Cash Collateral
Account, and the initial source of funding for the
account is from VWFC for the occurrence of Servicer
Utilisation Event. On the Issue Date, an amount equal
to 1.20% of the Aggregate Cut-Off Date Discounted
Receivables Balance will be deposited into the Cash
Collateral Account as the Initial Cash Collateral
Amount by VWFC. On each Payment Date, the Cash
Collateral Account shouldn’t be less than the
Specified Cash Collateral Account Balance, which
shall be the greater of (a) 1.2 per cent. of the
Aggregate Discounted Receivables Balance as of the
end of the Monthly Period, and (b) the lesser of (i)
RMB 40,000,000.00 and (ii) the aggregate outstanding
principal amount of the Class A Notes and Class B
Notes as of the end of the Monthly Period.
Upon the occurrence of a Servicer Utilisation
Event and while it is continuing, on each Payment
Date the General Cash Collateral Amount shall be
used to cover (a) any shortfalls in the amounts payable
under first through fifth items according to the Order
of Priority before the occurrence of a Foreclosure
Event above, or first through seventh items according
to the Order of Priority after the occurrence of a
Foreclosure Event above; and (b) on the Legal
Maturity Date or as soon as no more Receivables are
outstanding, any amounts payable under sixth though
eleventh items of the Order of Priority before the
occurrence of a Foreclosure Event above, or eighth
though tenth items according to the Order of Priority
after the occurrence of a Foreclosure Event above.
In addition, the Originator as Servicer is
entitled to utilise the Cash Collateral Amount for
the purposes of the Clean-Up Call in accordance
with the terms of Trust Agreement. Upon payment
of all amounts payable under the Notes and upon
fulfillment of all claims of all Transaction Creditors,
the Originator shall be entitled to the sums
remaining in the Cash Collateral Account together
with the interest accrued thereon.
Credit Enhancement
According to the senior/subordinate payment
system based on the Order of Priority, the Class A
Notes receive 12.20% credit enhancement from the
Class B Notes, Subordinated Notes and
Overcollateralisation; the Class B Notes receive 8.45%
credit enhancement from the Subordinated Notes and
Overcollateralisation.
Risk and Mitigants
Commingling risk related to the Servicer
If the financial or credit profile of the Servicer
deteriorates, the Collections may be commingled with
other funds of the Servicer, hence causing losses to the
Trust assets.
According to the arrangement of the transaction,
after receiving the Collections, the Servicer shall
make a single deposit of such monthly Collections
into the Distribution Account no later than the sixth
Business Day before each Payment Date. If VWFC’s
long term credit rating is lower than A, the payment
frequency shall be adjusted, and the Monthly
Collateral Account shall apply. When the Servicer is
replaced, Borrowers and/or Security Providers will be
requested to make payment directly to the Trust. In
addition, on each Payment Date the General Cash
Collateral Amount shall be used to (a) cover any
shortfalls in the amounts payable under (1) through
(5) items according to the Order of Priority before
the occurrence of a Foreclosure Event above, or (1)
through (7) items according to the Order of Priority
after the occurrence of a Foreclosure Event above;
and (b) on the Legal Repayment Date or as soon as
no more Loan Receivables are outstanding, any
amounts payable under (6) though (10) items of
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Order of Priority after the occurrence of a
Foreclosure Event above, or (8) through (10) items
according to the Order of Priority after the occurrence
of a Foreclosure Event above.
Considering the good credit quality of VWFC as
the Servicer, Monthly Collateral Account and Cash
Collateral Account mechanism, we believe the
commingling risk related to the Servicer is minimal.
Lack of Back-up Servicer
The transaction does not designate a backup
Servicer at closing, but according to the Transaction
Documents, if the credit rating of VWFC falls below
A, it shall designate a back-up Servicer acceptable to
the Trust Company and send written notice to the
Trust Company. Upon the occurrence of a Servicer
Replacement Event, the Issuer shall be entitled to
dismiss the Servicer by written notification and to
appoint a replacement Servicer (which may be the
back-up Servicer designated by VWFC or such other
Servicer as the Issuer may appoint at its discretion).
Based on our assessment on VWFC (see the following
section of “Servicer”) and its current credit profile, we
believe the possibility of VWFC being dismissed is
low. Meanwhile, according to the Servicing
Agreement, if VWFC is dismissed, it shall execute
transfer plans properly. We believe the lack of back-up
Servicer at the beginning of the transaction have very
limited negative impact on the target rating of the
notes.
Expense risk
According to the Order of Priority, before the
repayment of interest for Senior Notes on each
payment date, the expenses of various participants and
intermediaries shall be paid first, and there is no upper
limit for such expenses. Specifically, the expenses
include Rights Perfection Notice expense, fund
transfer expense and litigation expense incurred by
Trust Company. Due to the uncertainties of such
expenses, it may have negative impact on the
repayment of interest and principal of Senior Notes.
Based on the quality of the underlying assets, the
credit profiles of the Servicer and the Trust Company
and by referring to international practice, CCXI has
fully considered the possible scenarios of relevant
expenses and have carried out stress test. We believe
the negative impact on the credit rating of senior notes
raised by the lack of upper limit for the expense is
very limited.
Liquidity risk
Liquidity risks will occur when the Collections
are not enough to pay for the interest of Senior Notes
and the various kinds of taxes, fees and expenses
before the repayment of interest for Senior Notes.
We measure liquidity risk by the possibility of
interest default. Considering the quality of the
underlying assets, the transaction arrangement and the
distribution of principal and interest repayment, the
possibility of interest default is within the range
required by the rating of Senior Notes based on our
simulation.
Meanwhile, a Servicer replacement will bring
risks to the trust. During the period of replacing the
Servicer, it is necessary to pay for the replacement and
take-over fees and the fees for the Rights Perfection
Notice. According to the arrangement of the
transaction, the trust asset will bear the notice costs.
Meanwhile, the replacing Servicer shall agree to
indemnify and hold harmless the Issuer from all
procedures, claims, obligations and liabilities as well
as all related costs, fees, damages claims and
expenditures which it may incur, arising out of, in
connection with or based upon any negligence, breach
of contractual duties or any other omission or action
of the dismissed Servicer. Considering the good credit
quality of VWFC, we believe the possibility for it to
be discharged is small, and meanwhile, the Cash
Collateral Account will mitigate the risk to some
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extent.
Overall, we believe the good credit quality of the
Assets in the pool, the distribution pattern of the
principal and interest collection and the high
credibility of VWFC have effectively mitigated the
liquidity risk of the transaction. During the life of the
Senior Notes, we will monitor the asset quality of the
pool and the credit profile of VWFC, and will make
adjustments accordingly if any deterioration of asset
quality or credit profile leads to higher liquidity risk
which affects the credit rating of the Senior Notes.
Risk related to collateral rights registration
The underlying assets are auto loans. According
to relevant arrangement, the underlying assets are
transferred to the trust, but the mortgage registration
will not be updated. Meanwhile, among the assets in
the pool, there are loans in relation to which the
mortgage has not been registered. As a result of the
foregoing, the mortgage may not be upheld against
bona fide third party. This may impose certain
negative impact on the trust interests.
In analyzing the recovery of default assets, we
have considered the potential impact of the lack of
registration or re-registration for the security interest
over collateral rights.
Transaction related laws and regulations
The transaction is governed by P.R.C. Trust Law,
P.R.C. Contract Law, P.R.C. Property Rights Law,
P.R.C. Security Law, P.R.C. Bankruptcy Law, Credit
Asset Securitization Pilot Policy, Credit Asset
Securitization Policy for Financial Institutions, Notice
Issued by Ministry of Finance and State
Administration of Taxation on the Tax Policy for
Credit Asset Securitization, Notice on Further
Expansion of Credit Asset Securitization Pilot and
other relevant laws and regulations.
According to King & Wood Mallesons, all the
participants of the transaction are well qualified; the
proposed ABS is not against any mandatory legal or
regulatory requirements; the form of the Transaction
Documents in relation to the issuance is in line with
relevant laws and regulations and the content is not
against any mandatory legal or regulatory
requirements; the transaction does not require any
approval, consent, authorization or agreement from
any government authority except the approval from
CBRC and PBOC; once the trust enters into effect,
there is bankruptcy segregation between the trust asset
and the other property of the Issuer or the property of
the Trust Company.
CCXI’s consideration of the legal status of the
transaction is based on the above laws and regulations,
and we will keep watching any updates thereafter, if
any.
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Asset pool and pooled assets
Overview of asset pool
Qualification of Purchased Loan Receivables (key
criteria)
1. The Purchased Loan Receivables are “normal”
loans according to CBRC’s “5-category” loan
classification method;
2. None of the Purchased Loan Receivables is
overdue as of the Cut-off Date;
3. Each of the Purchased Loan Receivables will
mature no earlier than six months and no later
than fifty-eight months after the Cut-off Date;
4. On the Cut-off Date, at least two contractual
instalments (which include interest payments)
have been paid in respect of each of the
Purchased Loan Receivables;
5. Each Loan Contract under which the relevant
Loan Receivables arise provides for a
mortgage of the relevant Financed Object;
6. The total outstanding amount of Purchased
Loan Receivables entrusted hereunder
pursuant to the Loan Contracts with one and
the same Borrower does not exceed RMB
4,000,000 in respect of any single Borrower;
7. All Financed Objects are insured with the
Originator named as the first loss payee
during the first year of the term of the
relevant loan;
8. Each Purchased Loan Receivable requires
substantially equal monthly payments to be
made within 60 months of the date of
origination of each Loan Contract and may
also provide for a final balloon payment;
9. The Purchased Loan Receivables are free of
defences, whether peremptory or otherwise,
for the agreed term of the Loan Contracts as
well as free of rights of third parties;
10. The Purchased Loan Receivables are
assignable;
11. The Loan Contracts shall be governed by the
laws of China;
12. The maximum delinquent days of each
Purchased Receivable is no more than 60
days.
Loan profile in the pool
According to the above criteria, the loans of
the asset pool have the following characteristics:
Nature of loans: auto loans
Discounted Receivables balance of loan
contract of single borrower (“Discounted
Balance” or “ODRB”): RMB 4,905.09~
RMB 2.26 million;
Loan interest rate is 0%~15.72% on the
Cut-off Date, and all loans of the asset pool
are fixed rate loans;
Five-category loan classification: “Normal”
loans according to CBRC’s five-category
loan classification.
Asset pool overview as the Cut-Off Date3
Number of contracts 68,331
Number of borrowers 67,402
Total outstanding discounted receivables balance
RMB 4,000,006,554.35
Average outstanding discounted receivables balance of single contract
RMB 58,538.68
Average outstanding discounted receivables balance of single borrower
RMB 59,345.52
Weighted average loan interest rate
1.85%
Loan Tenor 12~60 months
Weighted average loan tenor
29.66 months
Seasoning4 2~54 months
Weighted average seasoning
6.88 months
3 Weighted average data is weighted by outstanding discounted
receivables balance (ODRB). 4 Seasoning is the months that the loan is already repaid as loans are
monthly repaid
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Remaining term5 6~58 months
Weighted average remaining term
22.78 months
Characteristics of the asset pool
Interest rate distribution
The lowest interest rate in the portfolio is
0.00% and the highest is 15.72%. The weighted
average interest rate is 1.85%. Below is the
interest rate distribution of the portfolio.
Interest rate
ODRB as a
percentage in
total
Number of
loans as a
percentage
in total
<=3% 66.60% 78.79%
3%~6%(inclusive) 28.62% 16.43%
6%~9%(inclusive) 3.08% 2.98%
9%~12%(inclusive) 1.62% 1.72%
>12% 0.08% 0.08%
Total 100.00% 100.00%
CBRC Category
The assets of the asset pool are individual
auto loans and corporate auto loans. All of the
loans are “Normal” loans according to CBRC’s
five-category loan classification method, and
there was no overdue or default case as at Cut-Off
Day. The amount of loans with co-borrower
accounts for 26.07% of the total outstanding
discounted receivables balance (ODRB) of the
asset pool.
ODRB
The largest ODRB of single loan is RMB
2.26 million, and the smallest is RMB 4,905.09,
with the average being RMB 58,538.68. The 20
largest ODRB loans account for 0.44% of the total
outstanding discounted receivables balance of the
asset pool. The ODRB of single loan and its
proportion in total ODRB of the asset pool are as
follows:
5 Remaining term is the months that the left loan needs to be repaid
according to contract.
ODRB of single loan
ODRB as a
percentage
in total
Number of
loans as a
percentage in
total
<=RMB50,000 32.47% 54.72%
RMB50,000~100,000 (inclusive)
40.67% 35.05%
RMB100,000~150,000 (inclusive)
13.55% 6.72%
RMB150,000~200,000
(inclusive) 5.40% 1.84%
>RMB200,000 7.91% 1.67%
Total 100.00% 100.00%
Original Term of the loans
The shortest original term of the loans is
12.00 months, and the longest is 60.00 months,
with the weighted average original term being
29.66 months. The specific distribution of original
term is as follows:
Original term of loans
(in month)
ODRB as a
percentage
in total
Number of
Loans as a
percentage
in total
<=12months 0.85% 0.83%
12~24 months (inclusive) 51.21% 58.60%
24~36 months (inclusive) 47.50% 40.30%
36~48 months (inclusive) 0.26% 0.12%
>48 months 0.18% 0.15%
Total 100.00% 100.00%
Remaining Term of the loans
The shortest remaining term of the loans is 6
months, and the longest is 58 months, with the
weighted average remaining term being 22.78
months. As of the Cut-Off Date, there was no case
of delinquency or default. The specific
distribution of remaining term is as follows:
Remaining term of loans
(in month)
ODRB as a
percentage in
total
Number of
Loans as a
percentage in
total
<=6months 0.38% 1.00%
6~12 months (inclusive) 6.64% 11.50%
12~18 months (inclusive) 21.44% 25.93%
18~24 months (inclusive) 32.73% 32.04%
>24 months 38.81% 29.53%
Total 100.00% 100.00%
Seasoning of the loans
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The shortest seasoning is 2 month and the
longest is 54 months; the weighted average is 6.88
months. Please refer to the following figure for
details:
Seasoning
ODRB as a
percentage in
total
Number of
Loans as a
percentage in
total
<=6 months 56.64% 46.95%
6~12 months (inclusive) 32.30% 36.40%
12~18 months (inclusive) 7.68% 12.33%
18~24 months (inclusive) 2.54% 2.85%
>24 months 0.84% 1.47%
Total 100.00% 100.00%
Characteristics of Borrowers
Geographic distribution of Borrowers
The loans are distributed across 31 provinces,
autonomous regions and municipalities in China.
No province accounts for more than 10% of total
ODRB of the asset pool. The asset pool is well
diversified in terms of geographic distribution.
The following are the top 10 provinces with
highest ODRB.
Regions
ODRB as a
percentage
in total
Number of
Loans as a
percentage
in total
Shandong Province 8.59% 9.44%
Guangdong Province 7.29% 6.56%
Hebei Province 6.43% 7.26%
Sichuan Province 6.07% 6.26%
Jiangsu Province 6.04% 5.88%
Zhejiang Province 5.97% 5.93%
Henan Province 5.54% 5.52%
Hubei Province 4.92% 4.86%
Jilin Province 4.67% 4.74%
Beijing City 4.17% 3.38%
Nature of Borrowers
As at the Cut-Off Date, the youngest
individual Borrower is 18 years old, and the
oldest is 86 years old. Please refer to the
following figure for detailed age distribution.
Borrower age
distribution
ODRB as a
percentage in
Number of
Loans as a
total percentage in
total
<=30 37.88% 40.57%
30~40 (inclusive) 34.37% 33.72%
40~50 (inclusive) 20.74% 19.26%
>50 7.01% 6.45%
Total 100.00% 100.00%
Characteristics of collaterals
There are 68,331 automobiles as implied by
the loans in the pool, out of which 67,876 are new
vehicles and 455 are second-hand vehicles. VW
(VW imported are excluded) accounts for 81.39%
of the total, and Audi accounts for 10.83%. VW’s
production technology is decent and the usable
life of vehicles is relatively long.
The range of the initial collateralization rate
is from 6.00% to 80.00%, and the weighted
average initial collateralization rate is 56.09%. As
the weighted average contract term of the loans is
29.66 months, far below vehicles’ normal life.
Therefore, the real collateralization rate is even
lower, and this provides a buffer against the
decline of collateral value.
Collateralization
rate distribution
ODRB as a
percentage in
total
Number as a
percentage to
total
<50% 25.30% 29.76%
50%~60% (incl. 50%)
33.88% 37.57%
60%~70% (incl. 60%)
15.88% 14.30%
>=70% 24.94% 18.37%
Total 100.00% 100.00%
Credit quality
Based on the static asset pool historical data
as provided by the Originator, the figure below
shows the default rate (as of May 2017) of the
loans provided by VWFC from Aug. 2010 to May
2017:
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Default rate of loans provided by VWFC
from Aug. 2010 to May 2017
Note: default rate = OPD of 90-day overdue loans /opening OPD
of the month the loan is provided
According to loans contracts, the repayment
cash flow of the asset pool is distributed as
follows:
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Credit analysis approach
CCXI has built ABS cash flow analytic model
and rating model, which are more suitable to
evaluate the economic environment in China.
CCXI’s approach of computing the expected
loss of auto-loan ABS is based on the analysis of
historical data of static and dynamic pools with
concerning macroeconomic conditions, industrial
trends and features of the assets in the pool, and to
calculate the loss rate and loss volatility of the
pooled assets and obtain the loss probability density
function (assuming auto-loan loss rate is in
lognormal distribution). Based on the function, we
simulate the cash flow (interest and principal) to be
generated by the asset pool at various payment
periods (i.e. cash flow time distribution), and
arrange for simulated cash flow distribution based
on various security payment structure and
mechanism, in order to get the expected loss of
various classes of notes (i.e. required level of credit
enhancement). In the stress test based on target
ratings, we simulate scenarios of loss rate increase,
loss volatility increase, loss time distribution
adjustment and spread decline, etc., in order to
adjust the required credit enhancement level for
various classes of notes. Meanwhile, we also take
into account the impact of structural features of the
trade (e.g. prior/secondary payment, principal
transfer, etc.) and the experience of Servicers on the
credit enhancement level.
To obtain the loss probability distribution,
CCXI first derives the parameters from the data of
overdue loans(i.e. exceed 90 days) of the static pool
between 2010.08 and 2017.05 provided by issuer,
and then adjusts the parameters based on the
features of the asset pool, the macro economy, the
trend of industries and so forth. The following
graph shows the PDF of loss probability
distribution:
The Expected Loss PDF Curve In Normal Situation
Depends on the characteristics of pooled assets
and historical data, CCXI assumes the base default
timing distribution as follows:
The Default Timing Curve In Normal Situation
In addition, based on the historical data from
the static pool and dynamic pool, the recovery rate
and repayment rate under general condition are 10%
and 3% respectively.
In order to justify the target rating, we have
simulated several scenarios with stress parameters,
including descending recovery rates, longer
recovery time, bringing-forward default time
distribution etc. We also take into account the
impact of structural features of the transaction
(senior/subordinated payment mechanism, yield
supplemental over-collateralization amount, Cash
Collateral Account etc.) and the experience of
Servicers on the required credit enhancement level.
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The stress assumptions are shown below:
Stress Assumption Normal Stressed
Recovery Rate 10% 0%
Recovery Time 18 months 24 months
Default timing Historical Default timing
Default timing
front loaded in the first 25 terms
Prepayment Rate 3%
Expected interest rate of Class A Notes6
4.95%
Expected interest rate of Class B Notes6
5.20%
The credit enhancement level of senior notes
under different stress assumptions combination is
shown below:
The credit enhancement level of Class A Notes
which are AAAsf
Recovery Rate decreases to 0% 11.95%
Recovery time increases to 24 months 11.23%
Default timing front loaded in the first 25
terms 12.17%
The credit enhancement level of Class B Notes
which are AAsf
Recovery Rate decrease to 0% 8.27%
Recovery time increases to 24 months 8.02%
Default timing front loaded in the first 25 terms
8.43%
6 The transaction ODRB is discounted by the expected interest rate. It
will be recalculated after issuing. Therefore, the spread between issued
rate and expected interest rate will not affect the support effect to the
senior tranch.
CCXI’s ratings address the likelihood of
timely payment of interest when due and the
repayment of principal in full by the legal final
maturity date for the Senior Notes, the final rating
assigned is based on the expected losses on the
Senior Notes caused by the decline in cash flow
generated from the asset portfolio due to the
deterioration of credit quality of the underlying
loans
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Important participants
Originator/ Servicer
Volkswagen Finance China Co,. Ltd (“VWFC” or
the Company) was established on August 30, 2004
as a fully-funded subsidiary of Volkswagen
Financial Services AG (“VWFS”). As a non-bank
financial institution subject to the jurisdiction of
CBRC, the company had RMB 0.5bn as its initial
registered capital. During 4 times increase the
registered capital, As of end of 2016, the registered
capital of company had reached RMB 4bn. The
business scope of VWFC includes extending
automobile loans to residents and institutions
permanently or temporarily residing in China (e.g.
taxi companies and driving schools); providing
purchase loans to automobile dealers etc.
With the growth of VW automobiles in
Chinese market, the company’s auto finance
business has been growing rapidly. VWFC has
cooperated closely with Shanghai Volkswagen,
Faw-Volkswagen and Volkswagen Group Import
(China) Co., Ltd (VGIC), etc., and has applied
services for VW, Audi, Skoda, Porsche, Scania,
Seat, Bentley, Lamborghini and Man etc. major
brands. At the end of June 2016, VWFC’s retail
business has covered 310 cities in China, and with
cooperation relation with 2,786 auto dealers; its
corporate business has covered 114 cities and
applied loan services for 549 dealers. VWFC’s
total assets increased to RMB 48.54bn, the total
amount of loans and advances is RMB 43.27bn,
and the owner's equity is RMB 6.67bn. During the
first half of 2016, the operating revenue totaled
RMB 0.92bn. Meanwhile, VWFC has controlled
its risk strictly, at the end of 2016, the
non-performing loan ratio of VWFC is 0.14%.
The Company rolled out retail business in
2004, providing loan services to consumers,
including both individuals and institutes. The
business has been growing quickly since launched.
As of end of 2016, the penetration rate of the
company in retail loan market reached 13.5%.
In terms of product structure, the retail
business is divided into new car credit and used car
credit; and new car credit are further divided into
several sub-categories (i.e. classic loan, balloon
credit, exquisite easy loan, enjoyable balance loan
and used car classic loan) to meet different needs
of consumers. There is a steady increase in the
retail business of VWFC during the past 3 years.
As of end of 2016, the number of retail loan
contracts reached 850 thousand, increasing 32%
from last year, and the number of new contracts in
2016 was 528 thousand. As of end of 2016, the
balance of loans for retail business reached RMB
40.53bn, increasing 24% from last year.
Due to a policy restriction, the Company only
has one office in China at the moment which is the
head office in Beijing. The head office has set up
the Board of Directors, but without shareholder
meetings or a Board of Supervisors. The Board of
Director is responsible for all business-related
decision making and supervision. The Board of
Management and other managers are responsible
for the day-to-day operation management. The
business units of the Company are divided into
Front, Middle and Back offices. Front Office
includes Retail Sales, Wholesale Sales, Marketing
& Communication, Business Strategy & Product
Development, Treasury Front Office, Government
Relationship and Brand Relationship & Corporate
Strategy department; Middle Office includes
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Customer Care, Retail Sales Care and Operation
Planning & Excellence; Back Office includes Risk
Management, Wholesale Back Office, Accounting
& Treasury Back Office, HR & Administration,
Controlling, Purchasing department, IT & Project
Management departments and Legal &
Compliance. Specifically, Risk Management
Department is responsible for drafting and
maintenance of risk management policies and the
collections of overdue retail loans and asset
preservation; and the Retail Sales Care Department
is responsible for underwriting loans.
The Company has been strengthening risk
management since establishment, and has set up a
risk management framework comprised of decision
making system, execution system, supervision
system. Specifically, the decision-making body is
the Board of Directors; the execution system is
comprised of various business units led by Risk
Management Department; and the supervision
system is comprised of Legal & Compliance
Department and Internal Audit Department. The
Risk Management department is further divided
into three working groups, respectively taking
charge of risk assessment, overdue loan collection,
and wholesale stock management. The risk
assessment team is responsible for providing
procedures and policies regarding risk related
issues, supervision and quality assurance of credit
business related policies, guidelines and
procedures, risk analysis, assessment and
controlling, risk cost analysis and internal and
external risk reporting and conduct of risk reviews.
The Company has established a complete set of
risk management policies and procedures,
including Credit Application Guideline (Retail),
Field Visit Guideline, Retail Loan Origination
Guideline, Client Management Guideline, Credit
Authorization – Loan Business, Risk Management
Principle, and Asset Provision Guideline, etc.
For credit risk management, the company has
established a standard loan business process
centering on retail business. A customer will first
signs a credit application materials and gives
personal documents to the car dealer, and the
information will be sent to VWFC via on-line IT
tool; and the scoring system will generate a credit
score to the applications. Based on score results,
the application will be automatically accepted
/rejected or enter manual decision process. By the
end 0f 2016, about 50% applications are
automatically approved, and 3% are automatically
rejected. Applications which enter manual decision
process will receive a comprehensive credit
assessment by credit officers, including client
stability (working stability, living stability and
family information), repayment capacity, credit
behavior, living status, and income and expense
information. When necessary, the credit officers
will require additional document or field visit, in
order to make a final decision. The credit team is
divided into five levels based on their working
experience, and has different approval limits. It is
effective to control the credit risk of VWFC. The
whole underwriting process generally takes only
2.5 hours.
The Customer Care Department will provide
loan servicing. Before the repayment date, the
hotline team will send a SMS to remind clients
about the repayment date and the amount, in order
to reduce overdue cases. The collection team of
Risk Management Department is responsible for
collecting overdue installments: Reminding text
message and warming letter will be sent to clients
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whose loan installments are overdue less than or
equal to 5 days. Not only Reminding text message
and warming letter will be sent to clients, but also
Intensive-collection text message and call will be
made to clients whose loans are overdue by 6~30
days. Collections via call will be conducted for
loans which are overdue more than 30 days but
less than 60 days, and loans overdue more than 60
days will be intensive-collections and terminate a
contract while overdue 90 days. Loans overdure 95
days will be outsourced for collections or
transferred to Legal department.
The IT & Project Management Department is
responsible for information management. There are
six working teams respectively taking charge of
infrastructure, project management, system
development, IT compliance, application
management system and IT service desk. The
Company allocates much budget for IT operations.
Currently VWFC invested in Data Center
Capabilities (primary and 2nd
location) within
China to be fully compliant and to provide
performed /reliable IT services for the market
China.
CCXI believes VWFC is one of industry
peers in terms of its expertise and efficiency of
underwriting by relying on a set of well-
established application management system and
techniques, which reduces the inconsistency of
human judgment.
After an on-site due diligence, CCXI believes
VWFC has good credibility, and its business
process, risk control and information systems can
properly satisfy the needs of loan servicing in this
transaction.
Trust Company
CITIC Trust was established from CITIC
Industrial Trust Investment, a fully-funded
subsidiary of CITIC Group set up on March 5,
1988. In 2002, it was restructured into CITIC Trust
Investment Co., Ltd, and in 2007, its name was
changed to CITIC Trust Co., Ltd. Through twice
capital increase in 2005 and 2006, CITIC Trust has
had RMB1.2bn of registered capital, and the
shareholders are CITIC Group and CITIC East
China. As of end-2015, the balance of trust asset
totaled RMB 1,763.95bn. During the whole year of
2016, operating revenue of CITIC Trust was RMB
5.82bn, and net profit was RMB 3.12bn.
CITIC Trust has obtained business licenses as
a special purpose trust company in ABS
transactions, enterprise annuity fund legal entity
trust company and account manager, qualified
domestic institutional investor (QDII) as well as
national social security fund trust company. The
scope of business includes trust business,
traditional business and other business. Trust
business includes investment, financing and
management businesses; and traditional business
includes short term loans, financial product
investment, and long term equity investment, etc.
As of end-2016, the amount of collective trust
plans reached RMB 373.56bn, and the amount of
single trust projects was RMB 597.10bn.
In terms of risk management, CITIC Trust has
established fire walls and risk control frameworks
according to CBRC requirement. It issued Risk
Management Handbook in 2011 to improve the
risk management system, internal control process
and management systems.
In terms of IT construction, CITIC Trust has
set up two server rooms for production systems
and one server room for disaster recovery through
ten years of efforts from 2002, which can properly
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meet the demand of information processing and
security.
According to the arrangement of this
transaction, Trust Company authorizes VWFC to
manage the asset of the pool and the collections of
the repayment based on “Service Contract”. Trust
Company authorizes Bank of China to manage
trust fund according to Account Agreement. The
key work of CITIC Trust is to handle day-to-day
trust related affairs, and supervise the performance
of duties of various parties. We believe CITIC
Trust as the Trust Company for the transaction can
properly provide the required service of trust asset
management and trust related affair handling.
Account Bank
In the transaction, China Construction Bank
Corporation Beijing Branch (“CCB Beijing”) acts
as account bank to custody funds. The bank, which
was founded in September 2004, is one of the four
largest commercial banks in China, and it has
about 10.15% of the market share of the banking
system. In October 2005 and September 2007,
CCB has successively listed in the Hong Kong
stock exchange and the Shanghai Stock Exchange,
respectively. By the end of 2016, the total amount
of the capital stock of CCB is 250.01bn, and its
largest shareholder is the Central Huijin
Investment Co., Ltd holds 57.31% of the shares.
CCB’s branches have covered provinces and
cities nationwide in China, and the number of
branches has ranked among the leading banks in
the bank system in China. By the end of 2016,
there are 14,956 commercial institutions in
domestic market and 29 commercial branches
located in other regions and nations. Meanwhile,
CCB has 369,482 staff.
As of the end of 2016, CCB held total assets
of RMB 20,963.71bn, include the loans and net
advances RMB 11,488.36bn; the liabilities of CCB
is RMB 19,374.05bn, include client deposit RMB
15,402.92bn; stockholder's equity is RMB
1,589.65bn; capital adequacy ratio is 14.94%, tier
1 capital ratio is 13.15% and core tier one capital
ratio is 12.98%; non-performing loan ratio is
1.52%, provision for coverage is 150.36%.
Operating revenue for 2016 was RMB 605.09bn
and net profit was RMB 232.39 bn.
In terms of Credit risk, recently, the Bank
actively responded to the complex and volatile
economic situation, continuously optimised credit
policies and credit systems, focusing on the
overcapacity industry, make the screening criteria
standards details, continuously the quota
management and reduce the government financing
platform loans. In addition, CCB reinforced the
fundamental management on pre-lending
evaluations, business structure, storage assets and
creating new products to reduce the concentration
of credit risks.
In terms of liquidity Risk Management,
According to both the regulatory requirements and
the principle of prudence, CCB has formulated
related management policies. CCB measures the
liquidity Risk by liquidity factors analysis,
remaining maturity date analysis and cash flow
analysis of non-discounted contracts. Moreover,
the bank would measure the influence of liquidity
risk by predicting the cash flow in next year in
different scenarios.
According to our credit assessment, we believe
CCB can properly provide the required service as
the Account Bank for the transaction.
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Appendix 1
Development and competitive dynamics
of automobile industry
The automobile industry has become an
essential pillar industry in China’s national economic
development. Automobile industry is moving into
high gear in the 21st century, crystallizing into
multiple-categories and a full range of competed
vehicles and parts production. China auto industry
now has upgraded degree of industrial concentration
and improving technical standards up to the level of a
major global producer.
In 2016, China’s automobile industry has shown
a rapid growth, and the production and sales volume
are 28.12mn and 28.03mn, respectively, up to 14.46%
and 13.65% increase on a year-on-year basis (YoY).
The growth rate is 11.21 percentage points and 8.97
percentage points higher than last year respectively.
The production and sales volume of passenger
vehicles are 24.42mn and 24.38mn, respectively, up
to 15.50% and 14.93% increase YoY, higher than that
in 2015. As the effect of the reducing vehicles tax
policy, the sales volume of passenger vehicles within
1.6 liters displacement engine is 17.61mn, grew
21.40% than last year. The small liters engine
passenger vehicles sales volume is 72.20% of the
total passenger vehicles sales volume, and up to 3.60%
increase YoY. Between January and March of 2017,
the production and sales of vehicles are 7.13mn and
7.00mn, up to 7.99% and 7.02% increasing YoY
respectively, the growth rate has decreased 5.26
percentage points and 6.15 percentage points
comparing to them of the same time of 2015. As the
impact of the reducing tax of small liter displacement
vehicles policy expired at the end of 2016 and
subsidies to new energy vehicles will reduce in 2017,
the vehicles market has taken up the segment of the
potential demands, and may have negative
impact in 2017.
Sales Volume of China’s Automobile Industry
The growth of the domestic economy, the
deepening of urbanization and the
improvement of the living standard of residents
are the main factors of the growth of China's
automobile industry, and the large number of
population and the low car inventory provide
large space for China's automobile industry.
The car inventory of 1,000 person in USA is
797, which at the same time, the car inventory
of 1,000 person in China was only 125, about
15% of that in USA.
With the rapid development of China’s
automobile industry, the car inventory has
increased to 194mn at the end of 2016, and the
car inventory of 1,000 person has passed to 140,
up to 12.79% increase comparing to 2015. As
of the differences between different provinces,
the development of automobile industry in
different provinces is not the same. According
to the car inventory at the end of 2016, some
cities’ car inventory of 1,000 person has further
exceeded the average of the nation, and some
cities are far behind. There are 46 cities which
their car inventory has passed 1mn, and there
are 18 cities which are Beijing, Chengdu,
Shenzhen, Chongqing, Shanghai, Suzhou,
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Tianjin, Zhengzhou, Xi’an, Hangzhou, Guangzhou,
Wuhan, Shijiazhuang, Nanjing, Qingdao, Dongguan,
Ningbo, foshan, their car inventory has passed 2mn.
In medium and long term, the first demand of
automobile from third and fourth-tier cities with large
population and the replacing demand of automobile
from first and second-tier cities will certain high
growth of China’s automobile market.
Overall, the reducing tax of small liter
displacement vehicles policy in 2016 had improved
the passenger vehicles market, along with the cars
market. In 2017, as the policy expired, the car market
growth rate may experience a slight drop.
Developments of automobile finance
companies
As an integral part of the modern automobile
sales chain, automobile financial companies are
improving the sales of manufacturers, promoting the
consumption of cars and the cost recovery of
manufacturers. Meanwhile, automobile financial
companies also gain loads of profits from providing
professional financial services. During the
development of automobile financial industry, they
play a positive role in improving the profit structure
of automobile industrial chain and enhancing the
capabilities of manufacturers in comprehensive
service and competition, as well as promoting the
sustained and stable development of automobile
industry.
Automobile financial industry has developed for
almost 100 years in overseas market, while in China
it is still an emerging industry. According to China’s
commitment for WTO entry, the CBRC issued the
Policy on the Management of Automobile Finance
Companies and the Details on the Execution of the
Policy on the Management of Automobile Finance
Companies in October and November 2003, which
opened China’s automobile consumer credit
market to overseas entities and allowed
qualified foreign institutions to set up
automobile finance companies in China. As the
domestic consumer finance markets are
immature at that time, the above policies were
prudent. The policies give many limitations to
automobile financial companies, in particular,
they only allowed automobile financial
companies to raise fund through shareholder
deposits or borrowing from banks, which
restricted the funding channel and curbed the
growth of business. Meanwhile, despite of
international practice, the policies did not allow
automobile leasing to be part of the business
for automobile finance companies.
To promote healthy growth and complete
supervision of the automobile financial industry,
the CBRC issued the new version of Policy on
the Management of Automobile Finance
Companies in December 2007. The Policy
entered force on January 24, 2008, which lifted
the control over the funding channels of
automobile financial companies by allowing
them to issue bond to obtain long term fund
and alleviate the mismatch of assets and
liabilities, and it allowed for inter-peer
borrowing/lending to increase short term
financing capabilities. Meanwhile, it also
allowed automobile financial companies to
engage in leasing business, which creates a
new profit growth engine and makes it possible
for automobile financial companies to establish
three core businesses of retail loans, wholesale
loans and financing leasing based on
international practice. In addition, the new
Policy increased the threshold on the economic
strength of fund providers, stressing on their
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management experiences, and raised higher
requirement on the risk management framework of
automobile finance companies. In 2014, PBOC and
CBRC issued an announcement (Document No.:
Other[2014]8) to further standardize financial-bond
issurance of automobile finance companies. The
announcement also relaxed the requirements of bond
issuance, which contribute to financing of automobile
financial companies.
At the end of 2016, 25 companies have been
established, including SAIC-GMAC Automotive
Finance Co.,Ltd., Toyota Motor Finance (China) Co.,
Ltd., etc. According to automobile financial industry
report published by CHINA BANKING
ASSOCIATION-AFC Association Standing
Committee, as of end 2015, the total equity of all
automobile companies raise to 419 billion, which is
23.12% higher than the number in 2014.
Automobile Financial Companies approved to be
established by-2016 Q4
Company name Establishment
SAIC-GMAC Automotive Finance
Co.,Ltd. Aug, 2004
Volkswagen Finance (China) Co., Ltd.
Aug, 2004
Toyota Motor Finance (China) Co., Ltd.
Jan, 2005
Ford Automotive Finance (China) Limited
May, 2005
Mercedes-Benz Auto Finance Ltd. Nov, 2005
Dongfeng Peugeot Citroen Auto Finance Co., Ltd.
Aug, 2006
Volvo Automotive Finance (China) Limited
Aug, 2006
Dongfeng Nissan Auto Finance Co., Ltd.
Oct, 2007
FCA Automotive Finance Co., Ltd.
Dec, 2007
Chery Motor Finance Service Co., Ltd.
Mar, 2009
GAC-SOFINCO Automobile Finance Co., Ltd.
May, 2010
BMW Automotive Finance (China) Co., Ltd.
Sep, 2010
Sany Auto Finance Co. Ltd. Oct, 2010
FAW Auto Finance Co., Ltd. Dec, 2011
Beijing-Hyundai Auto Finance Co., Ltd.
Jun, 2012
Changan Auto Finance Co.,Ltd. Aug, 2012
Fortune Auto Finance Co.,Ltd. Jan, 2013
Tianjin Great Wall Binyin Automotive Finance Company Ltd.
May, 2014
Hawtai Motor Finance co. Ltd Feb, 2015
BYD Auto Finance Company Limited
Mar, 2015
Brilliance-BEA Auto Finance Co., Ltd
Apr, 2015
Shanghai Dongzheng Automotive Finance Co., Ltd.
Apr, 2015
Genius Auto Finance Co., Ltd Aug, 2015
Shandong HOWO Auto Finance Co., Ltd
Sep, 2015
Yulon Motor Finance (China) Co., Ltd.
Apr, 2016
Source: CCXI from public material
In terms of operation model, most
automobile financial companies are under the
direct control of their shareholders, and most of
them only provide services to shareholders’
automobile brands. There are also a few
automobile financial companies providing
services to all brands. Given the exclusive
service model, most automobile financial
companies have consistent interest with their
shareholders, and receive strong support from
shareholders in terms of management and
funding.
Given the exclusive service model, the
competition is not fierce among automobile
financial companies. However, given the
complexity and JV nature of business, there are
three kinds of competitions:
1. Competition between automobile
financial companies and banks (automobile
loans). As automobile loans are highly
specialized and the risk structure is
complicated, banks do not have strong
competitiveness, as evidenced by the high bad
debt ratio before 2004. In terms of loan interest
rate, banks do have some advantages, but
automobile companies are more competitive
given the highly efficient approval procedure,
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low application threshold and low cost of guarantee.
As such, banks are not competitive vs automobile
financial companies from retail business perspective.
For wholesale business, except for interest rate, banks
are not competitive given the exclusiveness of
automobile financial companies.
2. Competition between exclusive and non
exclusive automobile financial companies. Such
competition mainly concentrates on retail business
and focuses on dealer relation maintenance and loan
services. However, such competition does not pose
any significant threat to automobile financial
companies with strong brand influence.
3. Competition between automobile financial
companies solely owned by foreign shareholders and
financial companies of Chinese shareholders. For
joint venture automobile brands, the financial
companies of Chinese shareholders also provide
automobile loans, which take away some business,
causing competition against the automobile financial
companies solely owned by foreign shareholders.
However, given the strong willingness of Chinese
shareholders to develop proprietary brands, their
financial companies mainly focus on the financing
support for proprietary brands, hence leaving large
room for automobile financial companies. Meanwhile,
in terms of systemization and service efficiency,
automobile financial companies are quite
competitive.
China has been in a quick growth period
of automobile consumption, and automobile
financial industry enjoys broad market prospect.
In developed countries, more than 60% of
automobile consumption rely on loans, while in
China the figure is only 10%~20%, indicating
remarkable growth potential. In recent years,
automobile financial companies have recorded
high earnings growth. According to CAAM,
the market size of China’s automobile financial
industry will reach Rmb525bn by 2025.
Overall, with the new version of Policy on
the Management of Automobile financial
Companies and the quick growth of China’s
automobile sales, more automobile brands and
financial companies will enter the market and
cause intensified competition. Meanwhile, with
the growing demand for automobile financial
services, the competition among automobile
producers will inevitably extend to the finance
perspective, leading to competition among
automobile financial companies.
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Appendix 2
"Foreclosure Event" means any of the following events:
(a) With respect to the Issuer an Insolvency Event occurs; or
(b) The Issuer defaults in the payment of any interest on the Controlling Notes then outstanding when
the same becomes due and payable, and such default continues for a period of ten (10) Business Days (or
such longer period as approved at a Controlling Noteholders’ Meeting); or
(c) The Issuer defaults in the payment of principal of any Note on the Legal Maturity Date,
provided that it shall not be a Foreclosure Event until after a decision has been made by unanimous
consent at the relevant Controlling Noteholders’ Meeting that the replacement of the Issuer with another
Trust Company which meets the Trust Company Qualified Standard is not viable.
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Appendix 3
Rating classes and definitions
AAAsf The ABS noteholder is highly likely to be repaid on time and in full amount for the principal and interest, basically immune from any adverse economic condition, subject to minimum expected loss.
AAsf The ABS noteholder is very likely to be repaid on time and in full amount for the principal and interest, relatively insensitive to adverse economic condition, subject to very low expected loss.
Asf The ABS noteholder is quite likely to be repaid on time and in full amount for the principal and interest, but sensitive to adverse economic condition, subject to low expected loss.
BBBsf The ABS noteholder has moderate likelihood of being repaid on time and in full amount for the principal and interest, very sensitive to adverse economic condition, subject to moderate expected loss.
BBsf The ABS noteholder has low likelihood of being repaid on time and in full amount for the principal and interest, extremely sensitive to adverse economic environment change, subject to relatively high expected loss.
Bsf The ABS noteholder’s likelihood of being repaid on time and in full amount for the principal and interest is dependent on the availability of positive economic condition, subject to major uncertainties and high expected loss.
CCCsf
CCsf
The ABS noteholder’s likelihood of being repaid on time and in full amount for the principal
and interest is highly dependent on the availability of positive economic condition, subject to significant uncertainties and very high expected loss.
Csf The ABS noteholder’s likelihood of being repaid on time and in full amount for the principal and interest is low, subject to extreme uncertainties and extremely high expected loss.
Note: except for AAA and below CCC ratings, each rating class can be modified with “+” or “-“,
indicating the rating is slightly higher or lower than such rating class.
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Appendix 4
About CCXI
China Chengxin International Credit Rating Co., Ltd (“CCXI”) is a pioneer of the credit rating
agency in China, and it is an advanced independent credit rating service provider.
Founded in Oct. 1992, CCXI was formerly the credit rating department of China Chengxin
Securities Appraisal Co., Ltd (Now renamed as China Chengxin Credit management Rating Co., Ltd).
CCXI is the first nation-wide credit rating institution in China as approved by the head office of People’s
Bank of China.
Since 2006, the internationally recognized rating agency Moody's Investors Service (“Moody's”)
has invested CCXI. Moreover, CCXI integrates Moody’s advanced rating methodology and system with
its more-than-a decade rating experience, and successfully achieves the localization of international
leading rating technology.
CCXI holds the business certificate issued by the head office of People’s Bank of China, National
Development and Reform Commission, China Insurance Regulatory Commission, State Economic and
Trade Commission etc. CCXI is the longest and largest rating agency in China nationwide, which owns
the largest market share and achieves a high reputation in capital market.
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Appendix 5
Disclaimer
CCXI hereby makes the following disclaimer regarding the project undertaken and the report
issued:
1. Except for the mandate and cooperation relation with the participants of this project for the
purpose of rating, CCXI and its rating staff do not have any connection with the participants of this
project which may affect the independence, objectiveness and fairness of the rating.
2. CCXI have executed independent and prudent analysis obligation for the rating of the project.
The rating result herein is based on the independent and objective judgment of CCXI, without any
influence from the mandating institution or any other institutions or individuals.
3. The rating opinion provided by CCXI herein is not intended to guide investors to buy, sell or hold
the asset backed notes under this trust item. The basic information of the underlying credit asset as
quoted by this report is provided by the originator, and CCXI do not take any responsibility for the
authenticity of such information, or any loss incurred by anyone due to the use of the rating herein.
China Chengxin International Credit Rating Co., Ltd
Sep. 18th, 2017