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Moody's upgrades 13 ratings on notes issued by 9 Chinese auto ABS due to change in China's local currency country ceiling

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Rating Action: Moody's upgrades 13 ratings on notes issued by 9 Chinese auto ABS due to change in China's local currency country ceiling

Global Credit Research - 09 Dec 2020

Hong Kong, December 09, 2020 -- Moody's Investors Service has upgraded the ratings on notes issued by nine Chinese auto ABS transactions after a change to China's local currency country ceiling to Aaa from Aa3. The change follows Moody's updated methodology for local and foreign currency country ceilings titled "Country Ceilings Methodology" (https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1225594) published on 7 December 2020.

The affected ratings are as follows:

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_ARFTL437015 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

Today's rating actions reflect the impact from (1) the revised local currency country ceiling for China at Aaa, (2) the level of financial disruption risk in the transactions, (3) the presence of sufficient credit enhancement to the notes, and (4) the performance of the securitized auto loans and leases.

China's local currency country ceiling was changed to Aaa on 7 December 2020 from Aa3. Local currency country ceiling indicates the highest rating level that would generally be assigned to the strongest structured finance transactions whose cash flows are generated from the securitized assets in that country.

Moody's analysis of financial disruption risk involves the assessment of (1) the likelihood that the servicer will be able to continue operations during the life of the transaction, (2) the ease of transfer of responsibilities from the servicer in case it needs to be replaced, and (3) the effectiveness of the mitigants, if any, to mitigate the risk of cash flow disruption caused by the financial distress of the servicer.

All the servicers in the auto ABS transactions are unrated. However, they are partially or fully owned by one or two large rated auto manufacturers, from which support is expected. All the rated auto manufacturer parent companies hold an investment grade rating. Hence, the likelihood of servicers' continued operations is high.

All transactions do not have a backup servicer appointed at closing. However, Chinese auto loans and leases are standard assets and almost all payments are made by direct debits. Hence, Moody's views the transfer of servicing duties to be not too onerous.

Reserve fund, a key mitigant to financial disruption risk, is present in some transactions. It can cover fees and notes interest for a few months. All transactions allow principal collections to pay interest in case of interest shortfalls.

All the auto ABS transactions currently have a static asset pool and credit enhancement available to the rated notes has been building up. With the exception of a short spike in February and March this year due to the coronavirus lockdown, collateral performance backing the rated notes remains well within expectations to date across all the transactions Moody's rates.

Bavarian Sky China 2018-2 Trust

After November's payment date, the Class B Asset Backed Notes have 100.9% of credit enhancement. The transaction has a reserve fund, covering more than ten months of fees and notes coupon. At the end of October, 0.04% of the outstanding pool was 60+ days delinquent, and 0.16% of the closing pool had defaulted. Moody's has updated the default rate assumption to 2.1% of the outstanding pool.

Moody's views the financial disruption risk for this transaction as mitigated. The servicer is BMW Automotive Finance (China) Co., Ltd., which is 58% owned by Bayerische Motoren Werke Aktiengesellschaft (BMW, A2/P-1, negative). The presence of the reserve fund reduces the risk of cash flow disruption upon a servicer termination event.

Bavarian Sky China Leasing 2020-1 Trust

After November's payment date, the Class A Notes and Class B Notes have 31.8% and 20.8% of credit enhancement respectively. The transaction has a reserve fund, covering seven months of fees and notes coupon. At the end of October, 0.02% of the outstanding auto lease pool was 60+ days delinquent, and 0.03% of the closing pool had defaulted. Moody's has updated the default rate assumption to 2.3% of the outstanding pool.

Moody's views the financial disruption risk for this transaction as mitigated. The servicer is Herald International Financial Leasing Co., Ltd. (Herald), which is 58% owned by BMW Holdings B.V., itself 100% owned by the A2-rated BMW. The presence of the reserve fund reduces the risk of cash flow disruption upon a servicer termination event.

The transaction is subject to lease termination risk upon Herald's bankruptcy, for which Moody's assumes a low probability of lease termination. The Aa1 (sf) ratings on the notes are commensurate with the available credit enhancement.

Driver China nine Trust

The transaction's one-year revolving period ended in November 2020. After the November's payment date, the Class A Asset Backed Notes have 11.7% of credit enhancement. Credit enhancement available to the notes is expected to build up quickly after that.

The transaction has a reserve fund, covering three months of fees and notes coupon. At the end of October, 0.08% of the pool was 60+ days delinquent, and 0.28% of the closing pool plus cumulative purchases of loans during the revolving period had defaulted. Moody's has maintained the default rate assumption at 1.6% of the outstanding pool.

Moody's views the financial disruption risk for this transaction as mitigated. The servicer is Volkswagen Finance (China) Company Limited, which is 100% owned by Volkswagen Financial Services AG (A3/P-2, negative). The presence of the reserve fund reduces the risk of cash flow disruption upon a servicer termination event.

Generation 2019-2 Retail Auto Mortgage Loan Securitisation

After November's payment date, the Class A2 Senior Notes and Class B Senior Notes have 65.9% and 40.3% of credit enhancement respectively. The transaction has a reserve fund, covering three months of fees and notes coupon. At the end of October, 0.08% of the outstanding pool was 60+ days delinquent, and 0.16% of the closing pool had defaulted. Moody's has updated the default rate assumption to 1.8% of the outstanding pool.

Moody's views the financial disruption risk for this transaction as mitigated. The servicer is Genius Auto Finance Co., Ltd, a joint-venture 80% owned by Geely Automobile Holdings Limited (Baa3, stable) and 20% owned by BNP Paribas Personal Finance (Aa3/P-1, stable). The presence of the reserve fund reduces the risk of cash flow disruption upon a servicer termination event.

Rongteng 2019-2 Retail Auto Loan Securitization

After November's payment date, the Class A2 Notes have 54.2% of credit enhancement. The transaction has a reserve fund, covering two months of fees and notes coupon. At the end of October, 0.25% of the outstanding pool was 60+ days delinquent, and 0.36% of the closing pool had defaulted. Moody's has updated the default rate assumption to 1.7% of the outstanding pool.

Moody's views the financial disruption risk for this transaction as mitigated. The servicer is SAIC-GMAC Automotive Finance Company Limited (SAIC-GMAC), a joint-venture -- through direct and indirect ownerships -- 55% owned by Shanghai Automotive Industry Corporation (SAIC, unrated) and 45% by General Motors Company (Baa3, negative). SAIC is majority-owned by Shanghai Automotive Industry (Group) Corporation, a state-owned enterprise under the Shanghai municipal government. The presence of the reserve fund reduces the risk of cash flow disruption upon a servicer termination event.

Rongteng 2019-3 Retail Auto Loan Securitization

After November's payment date, the Class A2 Notes and Class B Notes have 42.3% and 26.1% of credit enhancement respectively. The transaction has no reserve fund and the only sources of liquidity are principal to pay interest mechanism and excess spread. At the end of October, 0.28% of the outstanding pool was 60+ days delinquent, and 0.43% of the closing pool had defaulted. Moody's has updated the default rate assumption to 1.8% of the outstanding pool.

Moody's views the financial disruption risk for this transaction as not fully mitigated because the servicer, SAIC-GMAC, is an unrated joint-venture and there is no reserve fund. Upon a servicer termination event, cash flow disruption could result in insufficient collections to pay interest on the notes, which would trigger an event of default. Due to the limited financial disruption risk, the maximum achievable rating for the Class A2 Notes and Class B Notes is at Aa1 (sf).

If the credit quality of SAIC-GMAC's parents changes significantly, Moody's would re-evaluate the financial disruption risk and consider whether it impacts the notes rating.

Toyota Glory 2020 Phase I and Phase II Retail Auto Loan Credit Asset-backed Securities

Toyota Glory 2020 Phase I's Class A2 Notes has 29.0% of credit enhancement after November's payment date. The transaction has no reserve fund. At the end of October, 0.05% of the outstanding pool was 60+ days delinquent, and 0.20% of the closing pool had defaulted. Moody's has updated the default rate assumption to 1.6% of the outstanding pool.

Toyota Glory 2020 Phase II's Senior Notes has 16.1% of credit enhancement after November's payment date. The transaction has no reserve fund. At the end of October, 0.01% of the outstanding pool was 60+ days delinquent, and 0.02% of the closing pool had defaulted. Moody's has updated the default rate assumption to 1.6% of the outstanding pool.

The servicer, Toyota Motor Finance (China) Company Limited, is 100% owned by Toyota Financial Services Corporation (A1, negative), itself 100% owned by Toyota Motor Corporation (A1, negative). Moody's believes if the unrated servicer experiences financial disruption, it is likely to receive support from its A1-rated parent and therefore the credit quality of the servicer is closely linked to the credit quality of its rated parent.

Moody's views the financial disruption risk for the two transactions as mitigated. The expected support of the A1-rated parent increases the likelihood of continue operation by the unrated servicer.

However, if the ownership structure of the servicer or the expected support of the rated parent changes, or if the rating of the servicer's parent changes, Moody's would re-evaluate the financial disruption risk and consider whether it impacts the notes rating.

VINZ 2019-3 Retail Auto Loan Securitization Trust

After November's payment date, the Senior Class A2 Notes and Senior Class B Notes have 56.1% and 41.2% of credit enhancement respectively. The transaction has no reserve fund. At the end of October, 0.02% of the outstanding pool was 60+ days delinquent, and 0.05% of the closing pool had defaulted. Moody's has updated the default rate assumption to 1.2% of the outstanding pool.

The servicer to the transaction is Dongfeng Nissan Auto Finance Co., Ltd. (Dongfeng-Nissan), which is -- through direct and indirect ownerships -- 50.5% owned by Nissan Motor Co., Ltd. (Baa3, negative) and 49.5% by Dongfeng Motor Group Company Limited (A2, stable).

Moody's views the financial disruption risk as not fully mitigated, because the servicer is an unrated joint-venture and there is no reserve fund. Upon a servicer termination event, the cash flow disruption could result in insufficient collections to pay interest on the notes, which would trigger an event of default. Due to the limited financial disruption risk, the maximum achievable rating for the Senior Class A2 Notes and Senior Class B Notes is at Aa1 (sf).

If the credit quality of Dongfeng-Nissan's parents changes significantly, Moody's would re-evaluate the financial disruption risk and consider whether it impacts the notes rating.

The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of auto loans from the current weak Chinese economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

These transactions are Chinese ABS backed by portfolios of auto loans or leases originated by seven auto finance companies in China.

The principal methodology used in these ratings was " Moody's Global Approach to Rating Auto Loan- and Lease-Backed ABS" published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1236186. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the ratings:

Factor that could lead to an upgrade of the Aa1 (sf) ratings include: (1) a decrease in financial disruption risk in the transactions, and (2) an improvement in the credit quality of the servicers. For Bavarian Sky China Leasing 2020-1 Trust, an increase in credit enhancement to the notes could also lead to an upgrade of the Aa1 (sf) ratings.

Factors that could lead to a downgrade of the ratings include: (1) an increase in non-diversifiable country risk in China, (2) an increase in financial disruption risk, (3) a deterioration in the collateral pool that is worse than Moody's expectations, (4) a decrease in the notes' available credit enhancement, and (5) a deterioration in the credit quality of the transaction counterparties.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are all solicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_ARFTL437015 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

** Rating Solicitation

** Issuer Participation

** Participation: Access to Management

** Participation: Access to Internal Documents

** Disclosure to Rated Entity ** Endorsement ** Lead Analyst ** Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

Moody's either did not receive or take into account one or more third-party due diligence assessment(s) regarding the underlying assets or financial instruments (the "Due Diligence Assessment(s)") in this credit rating action.

The Due Diligence Assessment(s) referenced herein were prepared and produced solely by parties other than Moody's. While Moody's uses Due Diligence Assessment(s) only to the extent that Moody's believes them to be reliable for purposes of the intended use, Moody's does not independently audit or verify the information or procedures used by third-party due-diligence providers in the preparation of the Due Diligence Assessment (s) and makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of the Due Diligence Assessment(s).

The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

For PRC only: Neither MCO nor any of its majority-owned affiliates is a qualified credit rating agency within the PRC. Any rating assigned by MCO or any of its majority-owned affiliates: (1) does not constitute a rating as required under any relevant PRC laws or regulations; (2) cannot be included in any registration statement, offering circular, prospectus or any other documents submitted to the PRC regulatory authorities; and (3) cannot be used within the PRC for any regulatory purpose or for any other purpose which is not permitted under relevant PRC laws or regulations. For the purposes of this paragraph, "PRC" refers to the mainland of the People's Republic of China, excluding Hong Kong, Macau and Taiwan.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Kan Leung, CFA Vice President - Senior Analyst Structured Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Marie Lam Associate Managing Director Structured Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077

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