Rating action

Scope Ratings GmbH (Scope) has today assigned the following ratings:

Class A1, up to SEK 2,600,000,000: rated AAA_SF

Class A2, up to SEK 2,600,000,000: rated AAA_SF

Class A3, up to SEK 2,500,000,000: rated AAA_SF

Class A4, up to SEK 500,000,000: rated AAA_SF

Class A5, up to SEK 1,640,250,000*: rated AAA_SF

Class A6, up to SEK 1,000,000,000: rated AAA_SF

Class B1, up to SEK 400,000,000: rated AA-_SF

Class B2, up to SEK 400,000,000: rated AA-_SF

Class B3, up to SEK 110,000,000: not rated

Class B4, up to SEK 350,000,000: rated AA-_SF

The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Transaction overview

VCL Master Sweden S.A. has established a SEK 15bn securitisation programme of notes backed by auto leases extended to corporates and individuals in Sweden and originated by Volkswagen Finance Sverige AB (VFS).

The current transaction is a 12-month revolving securitisation of a lease portfolio (including the residual value component). VCL Master Sweden S.A., through its Compartment 1, will sub-participate in an initial SEK 9,100m portfolio composed of operating leases (61.2%) and financial leases (38.8%). The sub-participation of the initial portfolio will be financed through the issuance of several class A and class B notes as well as through a subordinated loan granted by VFS. The rated notes have a maximum total amount that can reach up to 12.0bn in case further leases will be sub-participated in.

Rating rationale

The rating reflects: i) the expected performance of the underlying portfolio of leases; ii) the quality of collateral and the potential negative portfolio composition migration during the revolving period; iii) the residual value exposure to movable assets in the context of macroeconomic conditions in Sweden; iv) the legal and financial structure of the transaction; and v) the key transaction counterparties.

The class A notes are supported at closing by a 27.95% credit enhancement, provided by the subordination of class B notes, the subordinated loan and overcollateralisation. Class B is supported by a 17.90% credit enhancement provided by the subordinated loan and overcollateralisation.

Key rating drivers

Established originator (positive). The originator has been active in the leasing market since 2014 and earlier in car loans financing. Its business benefits from seasoned processes, experienced staff and a granular marketing network.¹

Solid macroeconomic environment (positive). VFS operates in the Kingdom of Sweden (AAA sovereign rating by Scope), which has a wealthy and diversified economy, a robust fiscal framework, low public debt and consistent current account surpluses.³

Overcollateralisation (positive). The class A and B notes respectively benefit from 27.95% and 17.90% of overcollateralisation at closing. During and after the revolving period, overcollateralisation for both classes must increase before remaining funds can be released to the subordinated loan and the originator.²

Granular portfolio (positive). The portfolio is granular: the top one, 10 and 100 lessees represent respectively 0.11%, 0.56% and 2.58% of the portfolio. The largest industry concentration, construction, accounts for 11.50%.¹

Residual value risk (negative). Residual values on the operating leases can constitute up to 50% of the securitisation balance. The transaction is highly exposed to market-value risk on the operating leases and to indirect market-value value risk on the security of defaulted receivables for both the operating and the financial leases.¹

Payments junior to rated notes (negative). If class A and B overcollateralisation targets are met, funds can be diverted to the most junior item of the waterfall unless certain performance triggers are hit. However, triggers linked to portfolio performance ratios (delinquencies and defaults) are curable.²

Revolving period (negative). The first issuance under the programme envisages a 12-month revolving period, during which the collateral could change its composition at closing. The originator has provided the issuer with a set of representations that limit the lease receivables in which the issuer may sub-participate. Scope’s analysis incorporates these limits.²

No transfer of receivables (negative). The issuer is not purchasing the portfolio based on a market-standard true sale but is entering in a sub-participating agreement where the leasing components and the vehicles are pledged towards the payment of a participation fee. In an enforcement scenario, this would bring some uncertainty in recovery timing and increased costs related to the sale of the leasing portfolio. Scope considers enforcement unlikely based on the credit quality of both the originator and its parent company.²

Liquidity risk (negative). The non-amortising liquidity reserve covers around two payment dates of senior costs and interest on the class A notes with a stressed three-month Stibor at 6.0%. This coverage is low compared to peer transactions but will increase during the life of the transaction, when the revolving period ends and the notes start amortising.²

Rating-change drivers

Ending of the revolving period (upside). The completion of the revolving period with robust portfolio, originator and sovereign performance could lead to a rating upgrade.

Worse-than-expected asset performance (downside), showing in higher-than-expected defaults or lower-than-expected recoveries upon asset default, may negatively impact the ratings.

Worse-than-expected underlying vehicle performance (downside), for example, through an economic contraction that facilitates a sharp deterioration in collateral values and dampens vehicle sale proceeds, could negatively impact the rating.

Quantitative analysis and assumptions

Scope’s cash flow analysis considered the portfolio’s characteristics and its main structural features. Scope applied its large homogenous portfolio approximation approach when analysing the collateral pool and projecting cash flows over their amortisation period. The cash flow analysis used the probability distribution of the portfolio’s default rate, following an inverse Gaussian distribution, to calculate the expected loss and the expected weighted average life of each rated tranche. Scope has considered the amortisation of assets and liabilities and potential changes in the pool’s composition during both the revolving and the amortisation period.

Scope assumed a stressed portfolio weighted average yield of 2.8% that is reducing over time to 2.3%.

For the analysis of rated notes, Scope assumed a mean default rate of 3.2% and a coefficient of variation of 40%. Scope considered a rating-conditional recovery rate of 48.0% for the class A notes and of 54.4% for the class B notes, and a rating-conditional residual value recovery rate of 63.0% for the class A notes and of 66.4% for the class B notes.

Sensitivity analysis

Scope tested the resilience of the ratings against deviations of the main input parameters: the mean default rate and the recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

For each class A note, the following shows how the quantitative results change when the portfolio’s expected mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• sensitivity to default rate, zero notches
   
• sensitivity to recovery rate, zero notches

For each class B note, the following shows how the quantitative results change when the portfolio’s expected mean default rate is increased by 50% and the portfolio’s expected recovery rate is reduced by 50%, respectively:

• sensitivity to default rate, one notch
   
• sensitivity to recovery rate, one notch

*Editorial note: The Class note size was amended on 20 March 2024. In the initial publication the text read “Class A5, up to SEK 1,640,000,000”.

Rating driver references
1. Loan-by-loan data tape of the securitised pool, originator’s historical data and corporate presentation (Confidential)
2. Transaction documentation (Confidential)
3. https://www.scoperatings.com/ratings-and-research/rating/EN/172372

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow SF EL Model Version 1.1 incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows. For Corporate Credit Ratings: Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this Credit Rating, (General Structured Finance Rating Methodology, 25 January 2023; Consumer and Auto ABS Rating Methodology, 3 March 2023; Counterparty Risk Methodology, 14 July 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The models used for this Credit Rating are (Cash Flow SF EL Model Version 1.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating(s): public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Rating(s) originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party due diligence assessment. The external due diligence assessment was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Davide Nesa, Director
Person responsible for approval of the Credit Ratings: David Bergman, Managing Director
The Credit Ratings were first released by Scope Ratings on 27 March 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings. 

Conditions of use / exclusion of liability
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