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Categorized | Capital Markets

VW car loan securities at risk of losses


Posted on September 30, 2015

Martin Winterkorn©Bloomberg

Martin Winterkorn with a VW Passat

Investors in securities sold by Volkswagen may incur losses if prices of second-hand cars fall sharply due to the emissions scandal, Fitch Ratings has warned.

Yields on the company’s asset-backed securities, which move inversely to price, have increased by around 10-15 basis points over the past week, according to market participants.

    Asset-backed securities are bond-like instruments backed by underlying loans. In this case, the securities are based on loans used for the purchase or lease of Volkswagen vehicles.

    The German company’s emissions crisis could have an impact on these complex structures — an important part of the way Volkswagen funds loans and leases to consumers and small businesses — because of the role of second-hand sales in the transaction structures.

    When people borrow money on a car, they may have the option to return the car at the end of the loan period, in lieu of a final payment. If they exercise that option, the loan is discharged and the car company’s finance arm reclaims the vehicle.

    The car company then needs to sell the car to repay investors who have funded the initial loans through securitisation transactions.

    “The risk is market prices of the vehicles turn out to be substantially lower than was anticipated,” said Andreas Wilgen, head of consumer ABS at Fitch. “But they would need to drop a lot to have a noticeable impact on ABS transactions,” he added. The rating agency suggested the impact would not be “direct and immediate”.

    Volkswagen is the largest issuer of auto ABS in Europe. Four of the company’s European ABS deals that Fitch rates are exposed to “residual value risk” — meaning investors in the securities are potentially at risk if the underlying price of the cars falls sharply.

    The majority of the company’s ABS transactions do not take on “residual value” risk and therefore do not depend on resale at maturity, but only the ability of the borrower to service his or her debt.

    Securitisation deals are made up of huge numbers of contracts, and it is unclear how many cars may be affected by the emissions scandal.

    “Everyone in securitisation is currently asking how many cars in each transaction are affected,” Mr Wilgen said. He said the contracts differed significantly across different jurisdictions and regions. In the UK, a small proportion of borrowers choose to return the car at the end of the loan period, although “expectations have now changed”.

    “Clearly people spend a lot of time and money in ABS trying to get transactions remote from the solvency of the seller. That’s a pretty critical definition of what securitisation is,” said Andrew Dennis, a portfolio manager at Aberdeen Asset Management. He added that the market movements were “not cataclysmic but not comfortable”.

    Last week it emerged that the European Central Bank is suspending purchase of Volkswagen’s ABS as part of its purchase programme.

    The company was able to issue a Spanish ABS deal last week, despite the unfolding emissions scandal. Volkswagen said it did not intend to change its “frequent issuance pattern”.