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Saturday, 18 November 2017

Asia-Pacific Structured Finance Issue: Volkswagen Finance’s Driver China One Rmb796m ABS

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China’s burgeoning securitisation market stepped up a notch in 2014 as six companies won approval to issue securities backed by auto loans, but Volkswagen’s local financing unit went the extra mile to introduce international standards to the domestic arena.

Volkswagen Finance’s Rmb796m (US$130m) Driver China One brought international credit ratings to a domestic Chinese securitisation for the first time, with rankings from both Moody’s and Fitch. The structure allowed VW to manage its local finances without compromising on its global standards, closely emulating the Driver standard that the company has used in multiple jurisdictions worldwide.

China is already VW’s largest market, and some analysts expect the auto ABS market there to double within a year.

“With Driver China One, we have expanded our proven ABS programme into a new currency area and thus opened up a new source of refinancing for our strongly growing Chinese business,” said Frank Fiedler, CFO of German parent Volkswagen Financial Services.

The international format helped to bring in foreign investors and thereby improve pricing, with around half of the deal going to international buyers through local subsidiaries via China’s quota system.

By bringing to China international best practices, such as a funded cash reserve and a target over-collateralisation scheme, other issuers now have a standard to follow that can attract the biggest possible investor base – an important aim at a time when China’s regulators are looking to reduce the economy’s reliance on bank lending.

Based on 13,696 auto loans with a weighted average remaining tenor of 16.45 months, the ABS achieved tight pricing compared with its peers, even though it came to market during a period of high volatility in the Chinese market. It was priced in late July, just as Chinese Treasury yields were spiking, yet managed to lock in tighter pricing than the four foreign-backed auto finance providers to have priced in the weeks earlier.

Driver China One was priced at 4.8% for its Class A tranche and 8.08% for its Class B tranche, towards the tight end of guidance and at the mid-point, respectively. The Rmb699m A tranche, rated AAsf by Fitch and Aa3(sf) by Moody’s, was 1.2 times oversubscribed, while the Rmb44m B tranche, rated A–sf by Fitch and Baa2(sf) by Moody’s, was 1.5 times oversubscribed. A Rmb52.7m subordinated tranche was not rated.

The transaction, which has a legal maturity of August 2020, was the first fixed-rate offering of its kind in China and achieved a weighted average effective interest rate of 8.69%.

HSBC was financial adviser for the transaction and CICC was lead underwriter, with Citic Trust acting as trustee.

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To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

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