Fitch Upgrades One Driver Australia Tranche, Affirms 14; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-16 December 2020: Fitch Ratings has upgraded one and affirmed 14 classes of asset-backed floating-rate notes from four Driver Australia transactions. The transactions are securitisations of Australian automotive finance receivables originated by Volkswagen (DE:VOWG_p) Financial Services Australia Pty Ltd (VWFSA). The social and market disruption caused by the coronavirus and the related containment measures did not negatively affect the ratings, because there is sufficient credit enhancement to offset the effects under Fitch's base-case scenario and adequate liquidity to support the current ratings. The Stable Outlook is based on the notes' liquidity support and ability to withstand the sensitivity to higher defaults and lower recoveries stemming from the pandemic. Driver Australia six Trust ----A AU3FN0050589; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B AU3FN0050597; Long Term Rating; Upgrade; AAAsf; Rating Outlook Stable Driver Australia five Trust ----A AU3FN0041935; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B AU3FN0041943; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable Driver Australia Master Trust ----Series 2016-1 Class A AU3FN0031654; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----Series 2016-2 Class A AU3FN0036612; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----Series 2016-2 Class B AU3FN0036646; Long Term Rating; Affirmed; A+sf; Rating Outlook Stable ----Series 2016-4 Class A AU3FN0033601; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----Series 2017-1 Class A AU3FN0036737; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----Series 2017-2 Class A AU3FN0037180; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----Series 2018-1 Class A AU3FN0043253; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----Series 2018-1 Class B AU3FN0045787; Long Term Rating; Affirmed; A+sf; Rating Outlook Stable ----Series 2019-1 Class A AU3FN0048765; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable Driver Australia four Trust ----A AU3FN0035788; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable ----B AU3FN0035796; Long Term Rating; Affirmed; AAAsf; Rating Outlook Stable KEY RATING DRIVERS Better Performance Offsets Increased Pandemic-Adjusted Base-Case Expectations: Fitch considered the performance of the portfolios in reviewing the base-case assumptions, the performance of US auto loan receivables during the 2007 global financial crisis and VWFSA's response to the pandemic. An adjustment of 1.5x was made to the remaining default rate, which was lowered from the previous rate, for Driver Australia four Trust, Driver Australia five Trust and Driver Australia six Trust to reflect the trusts' strong performance. The same adjustment was made to base-case default rate for Driver Australia Master Trust due to the transaction's revolving nature. Recovery rates were adjusted by 0.9x in Fitch's baseline scenario. Fitch also adjusted the rating stress multiples and haircuts to reflect the agency's through-the-cycle approach and to account for an additional element of economic stress in the base case. The class B notes from Driver six have been upgraded three notches to 'AAAsf', from 'AA-sf', reflecting the trust's increased credit enhancement and overcollateralisation. The revised assumptions are shown below and were applied in this analysis. Base-case default expectations are as follows: Driver four: 1.5% Driver five: 1.8% Driver six: 2.8% Driver Master: 4.2% Base-case recovery expectations are as follows: New Vehicle: 43.0% Used Vehicle: 34.4% The weighted-average (WA) 'AAAsf' default multiple were 4.3x for Driver Australia Master Trust, and 4.2x for the remaining trusts. The WA 'AAAsf' recovery rate haircuts for all transactions were 44.8%. The 30+ day arrears ranged from 2.1% for Driver six to 3.9% for Driver four as of the November payment date, compared with the 3Q20 Dinkum ABS Index 30+ day arrears of 2.0%. The higher arrears observed in Driver four and Driver five reflect the transactions' low bond factors of 14.7% and 28.0%, respectively. The low bond factors mean that the arrears balances, which have been stable over the last year, are magnified because of the shrinking pools. Cumulative defaults ranged from 0.3% for Driver six to 1.1% for Driver five. Commentary describing Fitch's credit views and analytical approach as a consequence of the coronavirus is available in the following reports: - "Global Economic Outlook - December 2020", published on 7 December 2020, available at www.fitchratings.com/site/re/10145707; - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published on 7 December 2020, available at www.fitchratings.com/site/re/10145938; and - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk", published on 3 April 2020, available at www.fitchratings.com/site/pr/10117224. Limited Liquidity Risk from Payment Holidays: We have reviewed the ability of the transactions to survive a significant proportion of borrowers being offered and taking up a payment holiday. The transactions benefit from a cash collateral account with floors. The transactions can withstand over 71.1% of the portfolio being granted a payment holiday for six months, which is well above the average 1.6% of receivables under payment holiday arrangements as of end-October, before needing to draw on the cash collateral account. Low Servicing and Originating Risk: All assets were originated by VWFSA, a wholly owned subsidiary of Volkswagen Financial Services AG which, itself, is wholly owned by Volkswagen AG (BBB+/Stable/F1). Fitch undertook an operational review and found that the operations of the servicer and originator were consistent with market standards for auto and equipment lenders. Origination, collection or servicing activities are not disrupted, as staff are able to work remotely and have access to the office, if needed. Economic Rebound to Support Stable Outlook: Fitch expects loan performance to deteriorate in the near term, but to continue to support the Stable Outlook on the rated notes. Fitch forecasts Australia's GDP to contract by 2.8% in 2020, with the unemployment rate at 6.5%. This is to be partially offset by a low Official Cash Rate of 0.10% and the application of both central bank and government stimulus measures. Fitch expects GDP growth to bounce back to 3.8% in 2021, with the unemployment rate falling to 6.2%. The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action. CRITERIA VARIATION Driver Master's class B notes pass the 'AAsf' stresses within the cash-flow model, but Fitch has not assigned a rating higher than 'A+sf' to the class B notes due to the transaction's limited portfolio parameters. This is a variation from the Consumer ABS Rating Criteria, as the difference between the assigned and model-implied ratings is greater than one notch. RATING SENSITIVITIES Unanticipated increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case and are likely to result in a decline in credit enhancement and remaining loss-coverage levels available to the notes. Decreased credit enhancement may make certain note ratings susceptible to negative rating action, depending on the extent of the coverage decline. Hence, Fitch conducts sensitivity analysis by stressing a transaction's initial base-case assumptions. Factors that could, individually or collectively, lead to positive rating action/upgrade: The rated notes are at 'AAAsf' (except for class B notes from Driver Master), which is the highest level on Fitch's scale. Fitch has limited the rating to 'A+sf' to the class B notes during the revolving period due to the transaction's limited portfolio parameters. The ratings cannot be upgraded during the revolving period. Factors that could, individually or collectively, lead to negative rating action/downgrade: A longer pandemic than Fitch expects that leads to deterioration in macroeconomic fundamentals and consumers' financial position in Australia beyond Fitch's baseline scenario. Available credit enhancement cannot compensate for higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increasing gross default levels and decreasing recovery rates over the life of the transactions. Downgrade Sensitivity: For Driver six and Driver Master, Fitch conducted a downgrade sensitivity analysis by increasing default levels and decreasing recovery rates over the life of the transaction: This section provides insight into the model-implied sensitivities the transaction faces when assumptions - defaults or recoveries - are modified, while holding others equal. The modelling process uses the modification of default and loss assumptions to reflect asset performance in up and down environments. The results below should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. Transaction: Driver six Note class: A / B Current Rating: AAAsf / AAAsf Impact on note ratings of increased defaults: Increase defaults by 10%: AAAsf / AAAsf Increase defaults by 25%: AAAsf / AA+sf Increase defaults by 50%: AAAsf / AAsf Impact on note ratings of decreased recoveries: Reduce recoveries by 10%: AAAsf / AAAsf Reduce recoveries by 25%: AAAsf / AAAsf Reduce recoveries by 50%: AAAsf / AAAsf Impact on note ratings of multiple factors: Increase defaults by 10% and reduce recoveries by 10%: AAAsf / AAAsf Increase defaults by 25% and reduce recoveries by 25%: AAAsf / AA+sf Increase defaults by 50% and reduce recoveries by 50%: AAAsf / A+sf Transaction: Driver Master Note class: A / B Current Rating: AAAsf / A+sf Impact on note ratings of increased defaults: Increase defaults by 10%: AAAsf / A+sf Increase defaults by 25%: AAAsf / A+sf Increase defaults by 50%: AAAsf / A-sf Impact on note ratings of decreased recoveries: Reduce recoveries by 10%: AAAsf / A+sf Reduce recoveries by 25%: AAAsf / A+sf Reduce recoveries by 50%: AAAsf / A+sf Impact on note ratings of multiple factors: Increase defaults by 10% and reduce recoveries by 10%: AAAsf / A+sf Increase defaults by 25% and reduce recoveries by 25%: AA+sf / Asf Increase defaults by 50% and reduce recoveries by 50%: A+sf / BBBsf Coronavirus Downside Scenario Sensitivity Fitch has added a coronavirus downside sensitivity analysis that contemplates a more severe and prolonged period of stress, with recovery to pre-crisis GDP levels delayed until around the middle of the decade. Under this more severe scenario, Fitch tested a 2.00x increase in defaults combined with a 1.15x increase at the 'AAAsf' level, which is scaled down with the lower rating stresses, and a 0.77x decrease in recoveries. For Driver six, this results in a WA default base case of 3.8% as well as a lower WA recovery base case of 37.3%. This compares with default and recovery base cases of 2.8% and 41.5%, respectively, in the baseline scenario. The 'AAAsf' default multiple is reduced to 3.4x, compared with 4.2x in the baseline scenario, to reflect the higher degree of stress already included in the base case, while the 'AAAsf' recovery haircut is also reduced to 41.9%, from 44.8% in the baseline. Note class: A / B Current Rating: AAAsf / AAAsf Impact on note ratings of downside scenario: AAAsf / AAAsf For Driver Master, this results in a WA default base case of 5.6% as well as a lower WA recovery base case of 36.4%. This compares with default and recovery base cases of 4.2% and 40.4%, respectively, in the baseline scenario. The 'AAAsf' default multiple is reduced to 3.5x, compared with 4.3x in the baseline scenario, to reflect the higher degree of stress already included in the base case, while the 'AAAsf' recovery haircut is also reduced to 41.9%, from 44.8% in the baseline. Note class: A / B Current Rating: AAAsf / A+sf Impact on note ratings of downside scenario: AAAsf / A+sf Driver four and five have subordination that is at least 3.3x greater than the 'AAAsf' baseline portfolio loss and can absorb Fitch's downside scenario of the coronavirus-related impact. Fitch's previous rating sensitivities for Driver four and five were discussed in: - rating action commentary for Driver four, published on 31 March 2019, available at www.fitchratings.com/site/pr/10067898; and - rating action commentary for Driver five, published on 27 February 2020, available at www.fitchratings.com/site/pr/10112109. Best/Worst Case Rating Scenario International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third-party assessment of the asset portfolio information as part of its ongoing monitoring. Prior to the transactions closing, Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information and concluded that there were no findings that affected the rating analysis. As part of its ongoing monitoring, Fitch reviewed a small targeted sample of VWFSA's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis, according to its applicable rating methodologies, indicates that it is adequately reliable. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Contacts: Surveillance Rating Analyst Bradley Isaac, Senior Analyst +61 2 8256 0306 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Committee Chairperson Chris Stankovski, Senior Director +61 2 8256 0341 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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