Fuyuan 2017-1 Retail Auto Mortgage Loan Securitization Trust ABS Assigned Ratings

Stocks and Financial Services Press Releases Tuesday April 18, 2017 17:16
HONG KONG--18 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 18, 2017--S&P Global Ratings today assigned its ratings to two classes of asset- backed securities issued by Shanghai International Trust Co. Ltd. as trustee of the Fuyuan 2017-1 Retail Auto Mortgage Loan Securitization Trust (see list).

The notes are backed by a pool of consumer loan contracts secured by passenger vehicles that were originated by Ford Automotive Finance (China) Ltd. (FAFC).
Fuyuan 2017-1 Retail Auto Mortgage Loan Securitization Trust is the first China auto loan asset-backed securities (ABS) transaction to which S&P Global Ratings has assigned a 'AAA (sf)' rating.

This is the seventh Chinese auto ABS deal we have rated. The first Chinese auto ABS was issued in 2008. We previously had not rated a Chinese auto loan ABS transaction higher than 'AA (sf)' due to our concern about the uncertainties surrounding Chinese transactions.

China's auto finance sector is relatively new compared with developed markets and is still evolving. New players could enter and underwriting practices could change, weakening loan quality.

In addition, we remain uncertain about the transition of securitization counterparties during periods of stress. In response, S&P Global Ratings capped its ratings on notes issued from such transactions at 'AA (sf)', while waiting for the industry to develop more of a track record.

Our decision is also related to our view on these transactions' ability to withstand potential negative developments in the macroeconomic environment as well as the support from counterparties.

As for Fuyuan 2017-1 Retail Auto Mortgage Loan Securitization, the credit enhancement for its class A notes and the liquidity reserve fully funded at transaction close provide adequate support for the notes to pass under our rating stress cash-flow scenarios.

Such scenarios reflect a combination of the credit and cash-flow stresses correlated with a 'AAA' rating level, servicer commingling losses, and liquidity required for timely payment of senior expenses and interest on the class A notes in the event of a temporary collection interruption due to an abrupt servicer transition for a prolonged period. Furthermore, based on our ratings sensitivity analysis, we are unlikely to lower our rating on the class A notes if the underlying pool performs moderately worse than our assumed base-case default rate and recovery rate.

This suggests the transaction has enough of a buffer in its credit-enhancement level and structural design to deal with scenarios that are moderately worse than our assumptions.
The fully sequential and turbo principal repayment mechanism in this transaction will amortize the most senior tranche first, and utilize excess spread to further pay down the principal of the class A notes.
This feature can build additional credit support for the class A notes through the more rapid reduction of liabilities relative to the asset pool.

The design also prevents credit-enhancement leakage and therefore reduces the risk that a back-loaded default pattern could cause the portfolio to lose more than the available credit enhancements during the later stage of the transaction.

Our concern over underwriting consistency in the industry has been partly addressed by the originator's established track record and stable underwriting policies, as demonstrated by multiyear historical performance data and effective risk management and control on loan quality.

The originator, FAFC, leverages the experience and capability of its parent company, Ford Credit Co., and its global affiliates for risk management. Adaptations for the local environment and onsite expertise also have supported FAFC's record of more than a decade of operations in China.

Based on an underwriting practice review and our discussion with FAFC regarding business strategy, we consider its business origination practices to be conservative and consistently applied to the loans securitized in this transaction. FAFC's information technology infrastructure has been integrated into a global support platform for auto loan securitization, and we believe this is also critical to mitigate operational risk.

The limited exposure period of the underlying pool, illustrated by the weighted-average remaining loan term of around 25 months, means the weighted-average life of the notes is likely to be even shorter, considering the sequential and turbo repayment mechanism.

This typically reduces the negative effects of any potential economic downturn. This is the sixth auto loan securitization transaction originated by FAFC and the second Fuyuan transaction rated by S&P Global Ratings.

The ratings assigned to the notes issued by Shanghai International Trust Co. Ltd. as trustee of Fuyuan 2017-1 Retail Auto Mortgage Loan Securitization Trust (the issuer) reflect: The credit risk associated with the underlying collateral portfolio and the credit support available are commensurate with our view of credit risk under 'AAA' and 'A' rating stresses.

Our assessment of credit risk takes into account the originator FAFC's stable underwriting standards and centralized approval process, which largely leverages parent company Ford Credit Co.'s global practice and risk-management approach, with some local adaptation.

Credit support for the class A notes comprises the subordination of the class B notes and the subordinated notes, and overcollateralization via RMB116.0 million of additional collateral.

Credit support for the class B notes includes the subordination of the subordinated notes and the RMB116.0 million overcollateralization. In addition, any balance remaining in the cash reserve on the maturity date of the notes or when the receivables pool balance reaches zero can be applied toward redemption of the class A and class B notes, providing additional support.

The transaction's cash flows can meet the timely payment of interest and ultimate payment of principal to the rated noteholders under stresses commensurate with the ratings assigned. We have assessed all rating stresses on the basis that the issuer does not call the notes on or beyond the call-option threshold date, and that the notes must be fully redeemed via the mechanisms under the transaction documents.

The timely payment of senior expenses and rated note coupon is supported by the use of interest and principal collections from the underlying pool of loans and a nonamortizing liquidity reserve of RMB30 million, which equals 1.0% of the initial loan balance as of the cut-off date.

The liquidity reserve will be fully funded by FAFC at closing and can be used to support senior expenses and rated note interest on any trust payment date.The legal structure of the trust is established as a special-purpose trust (SPT) under China's Trust Law, and the transaction structure and terms are consistent with the governance of China Banking Regulatory Commission (CBRC) and The People's Bank of China (PBOC)'s credit assets securitization (CAS) scheme.

The legal structure of the SPT meets our criteria for insolvency remoteness.Our ratings also reflect the counterparty exposure to Industrial and Commercial Bank of China Ltd. as a bank account provider.

The rating on the bank account provider, coupled with the replacement trigger of the bank account provider if its rating falls below a certain level, is consistent with our "Counterparty Risk Framework Methodology And Assumptions" counterparty criteria, published on June 25, 2013.

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