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Structured Finance
www.fitchratings.com 28 April 2016
Asset-Backed Securities / Australia
Driver Australia Three Trust New Issue
Capital Structure Class
a Rating
b Outlook Amount (m) CE (%)
c Final Maturity TT (%)
d TTLM (x)
e
A AAAsf Stable 500.0 14.0 May 2024 87.2 44.9 B AA-sf Stable 31.0 8.6 May 2024 5.4 2.8 Subordinated loan NRsf n.a. 36.7 n.a. May 2024 6.4 n.a. Collateral loan NRsf n.a. 5.7 n.a. May 2024 1.0 n.a. Total issuance 573.5 Cash Collateral Account (CCA) 6.9 a Overcollateralisation is provided via collateral loan
b NRsf – Not Rated;
c Fitch’s rating analysis is inclusive of credit to the cash collateral account
d Tranche Thickness (TT) percentage – ratio of class size to collateral balance
e Tranche Thickness Loss Multiple – TT% divided by Fitch's base-case loss expectation
See also Structured Finance Tranche Thickness Metrics
Transaction Summary
Fitch Ratings has assigned final ratings to the Driver Australia Three Trust’s pass-through
floating-rate notes. The issuance consists of notes backed by a pool of first-ranking Australian
automotive loan receivables originated by Volkswagen Financial Services Australia Pty Ltd
(VWFSA). The notes have been issued by Perpetual Corporate Trust Limited as trustee for
Driver Australia Three Trust (the issuer).
Key Rating Drivers
Credit Support: The class A and B notes benefit from credit enhancement (CE) of 14.0% and
8.6%, respectively, provided by the subordinated loan and overcollateralisation via the
collateral loan. A cash collateral account (CCA) will be fully funded at closing to cover any
potential interest shortfalls on the rated notes. Any amounts outstanding in the account at final
maturity are available to cover any principal shortfalls on the notes.
Discounted Assets: The aggregate nominal amount of the notes, plus the subordinated loan
and overcollateralisation via the collateral loan, equals the present value of the purchased
receivables discounted at issuance using the discount rate. The transaction, therefore, yields
no excess income to cover losses, or to reimburse losses.
VWFSA Risk: There is no back-up servicer, and the transaction is dependent on VWFSA’s
operational and credit assessment capabilities. VWFSA is an unrated entity; and, as such, an
advance mechanism is in place so that collections are prepaid and segregated from VWFSA’s
own funds. The transaction is reliant on VWFSA making compensation payments to cover
interest shortfalls if borrowers on interest rates higher than that of the discount rate prepay.
This risk has been included within Fitch’s cash-flow analysis under various stressed scenarios.
Balloon Loans Within Portfolio: Obligors that are subject to balloon payments are required to
make such payments if balloon payments cannot be refinanced. The pool, by balance, contains
56.8% that are subject to balloon payments, which is higher than peer transactions. Fitch
expects higher default risk if limited refinancing options exist within the market. This could be
the case under more severe economic stress. Fitch has incorporated this risk in its analysis.
Impact of Emissions Allegation: In accordance with the transaction documents, any legally
permissible reduction of instalments, or termination, of contracts by obligors would be a breach
of warranty made to the issuer by the seller. Fitch has also considered higher price declines for
7.4% of the discounted portfolio balance that are affected vehicles.
Inside This Report
Transaction Summary 1 Key Rating Drivers 1 Key Differences with Previous Driver Australia Transactions 2 Base-Case Assumptions and Credit Enhancement Levels 2 Expected Rating Sensitivity 2 Historical Performance 3 Asset Analysis 5 Model, Criteria Application and Data Adequacy 7 Credit Analysis 7 Transaction and Legal Structure 10 Counterparty Risk 15 Appendix A: Outlook 19 Appendix B: Eligibility Criteria 20 Appendix C: Transaction Summary 22
Related New Issue Appendix
dffffff Driver Australia Three Trust Appendix
Related Criteria
Global Structured Finance Rating Criteria (July 2015)
Global Consumer ABS Rating Criteria (December 2015)
Counterparty Criteria for Structured Finance and Covered Bonds (May 2014)
Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (May 2014)
Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (April 2016)
Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds – Derivative Addendum (April 2016)
Analysts
Spencer Wilson +61 2 8256 0320 [email protected] Ben Newey +61 2 8256 0341 [email protected]
Performance Analytics James Zanesi +61 2 8256 0306 [email protected]
Structured Finance
Driver Australia Three Trust
April 2016 2
Key Differences with Previous Driver Australia Transactions
The collateral characteristics are consistent with previous VWFSA transactions across average
balance, seasoning, composition of product type, and both geographic composition and
concentration. The collateral pool is similar to Driver Australia Two, with marginal increases in
remaining term from Driver Australia One – from 35.3 months to 45.6 months – while the
weighted-average (WA) interest rate of the pool has decreased to 6.5% from 7.7%. The
transaction structure replicates the previous Driver Australia Two and Driver Australia One
transactions.
Base-Case Assumptions and Credit Enhancement Levels
Figure 2 Base-Case Loss and Recovery Summary (%) Pool Gross loss Recovery rate
a Net loss
New cars 88.9 3.0 57.6 1.3 Used cars 11.1 5.0 44.6 2.8 Portfolio weighted 100.0 3.2 56.1 1.4 a 10% haircut applied to 6.3% new vehicles, and 1% used vehicles that have been affected by recent emissions incident
Source: Fitch
Figure 3 Credit Enhancement Levels (%) Gross loss Recovery rate Net loss Current hard CE
a
AAAsf 16.1 28.1 11.7 14.0
AA-sf 11.8 35.6 7.7 8.6 a Current Hard CE; current subordination provided by the lower notes/loans and the CCA (1.2%)
Source: Fitch
Rating Sensitivity1
Unanticipated increases in the frequency of defaults and loss severity on defaulted receivables
could produce loss levels higher than Fitch’s base case, and is likely to result in a decline in CE
and remaining loss-coverage levels available to the notes. Decreased CE may make certain
note ratings susceptible to potential negative rating actions, depending on the extent of the
decline in coverage. Hence, Fitch conducts sensitivity analysis by stressing a transaction’s
initial base-case assumptions.
This section of the report provides better insight into the model-implied sensitivities the
transaction faces when one risk factor is stressed, while holding others equal. The modelling
process first uses the estimation and stress of base-case assumptions to reflect asset
performance in a stressed environment; and second, the structural protection is analysed in a
customised proprietary cash flow model (see Cash Flow Analysis). The results below should
only be considered as one potential outcome, given that the transaction is exposed to multiple
risk factors that are dynamic variables.
Rating Sensitivity to Increased Default Rates Class A Class B
Original Rating AAAsf AA-sf Defaults increase 10% AA+sf A+sf Defaults increase 25% AA+sf Asf Defaults increase 50% AA-sf A-sf
Source: Fitch
1 These sensitivities only describe the model-implied impact of a change in one of the input variables.
This is designed to provide information about the sensitivity of the rating to model assumptions. It should not be used as an indicator of possible future performance.
Figure 1 Portfolio Characteristics
Current balance AUD573,467,754
Number of receivables
15,495
Average obligor balance
AUD35,210
WA seasoning (months)
11.0
WA current remaining maturity (months)
44.6
WA balloon percentage (% of original balance)
37.6
New vehicles (%) 88.9 Used vehicles (%) 11.1 Consumer loans (%)
34.9
Chattel mortgage (%)
64.7
Hire purchase (%) 0.4 Pool cut-off date 31-Mar-2016
Source: Fitch
Related Research
Auto ABS Index – Australia: The Dinkum Index – 3Q15 (November 2015)
Australia (April 2016)
Structured Finance
Driver Australia Three Trust
April 2016 3
Rating Sensitivity to Reduced Recovery Rates Class A Class B
Original Rating AAAsf AA-sf Recoveries decrease 10% AAAsf A+sf Recoveries decrease 25% AA+sf A+sf Recoveries decrease 50% AA+sf A-sf
Source: Fitch
Rating Sensitivity to Increased Defaults and Reduced Recoveries
Class A Class B
Original Rating AAAsf AA-sf Defaults increase 10%/recoveries decrease 10% AA+sf Asf Defaults increase 25%/recoveries decrease 25% AAsf A-sf Defaults increase 50%/recoveries decrease 50% Asf BBB-sf
Source: Fitch
Fitch, in its analysis, modelled various loss distributions and recovery profiles, as well as
prepayment speeds. Under Fitch’s ‘AAA’ rating, the class A notes can withstand 5.0x the
expected base case loss, plus lower recovery rates than are currently being experienced on the
VWFSA portfolio. For a ‘AA-’ rating, the class B notes can withstand more than 3.7x the
expected base case losses.
Historical Performance
Historical net losses for the Fitch-rated Driver Australia transactions have remained under
0.25%. The portfolio weighted average net loss for previous Driver transactions range between
0.06% and 0.21%.
Delinquencies more than 30 days have traditionally tracked below 1.6% for the VWFSA’s book.
Figure 5 includes all commercial and consumer receivables.
Figure 4
Figure 5
0.00
0.05
0.10
0.15
0.20
0.25
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
(Losses (%))
Cumulative Net Loss (%)
Driver Australia one Driver Australia two
Source: VWFSA & Fitch
(Months from closing)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Ja
n 1
2
Apr
12
Ju
l 12
Oct 12
Ja
n 1
3
Apr
13
Ju
l 13
Oct 13
Ja
n 1
4
Apr
14
Ju
l 14
Oct 14
Ja
n 1
5
Apr
15
Ju
l 15
Oct 15
Ja
n 1
6
(Arrears (%))
30-60 day arrears 61+ day arrears 30+ days ABS Dinkum 60+ days ABS Dinkum
Source: VWFSA & Fitch
VWFSA Portfolio vs. Fitch ABS Dinkum Index
Structured Finance
Driver Australia Three Trust
April 2016 4
Figure 6 Transaction Comparison Table
SMART 2015-4E
Driver Australia
One
Driver Australia
Two
Driver Australia
Three
Closing date Nov 15 Dec 13 Mar 15 Apr 16 Total issuance (AUDm equivalent) 915.0 506 506 580 Final bond structure (%)
c
Class A (All class A notes) 86.0 86.6 87.2 87.2 Class B 2.5 5.2 5.4 5.4 Class C n.a. 6.8 6.0 6.4 Class D n.a. 1.4 1.4 1.0 Class E n.a. n.a. n.a. n.a. Seller 11.5 n.a. n.a. n.a. Liquidity reserve (%) 1.0
a 1.2 1.2 1.2
Liquidity reserve floor (AUD) 300,000 A&B notesb A&B notes
b A&B notes
b
Portfolio Collateral balance (AUDm) 905.8 500.0 500.0 573.5 Number of loans 30,322 16,499 13,049 15,495 Average current balance per borrower (AUD) 30,477 30,305 38,317 35,210 Maximum current balance (AUD) 884,909 305,555 426,912 420,241 WA seasoning (months) 8.5 21.3 11.9 11.0 WA remaining term to maturity (months) 47.8 35.3 44.1 44.6 WA balloon percentage (% of original balance)
16.7 46.2 36.9 37.6
Balloon greater than 40% of receivable balance (% of original balance)
10.8 n.a. n.a. n.a
Used vehicles (%) 41.4 12.3 10.8 11.1 Novated contracts (%) 40.8 n.a. n.a. n.a. Non-novated contracts (%) 59.2 n.a. n.a. n.a. Passenger vehicles (%) 70.4 n.a. n.a. n.a. Light commercial vehicles (%) 21.2 n.a. n.a. n.a. Equipment (%) 4.7 0.0 0.0 0.0 Consumer (%) 29.4 51.3 34.3 34.9 Geographical distribution (%) New South Wales 36.1 45.0 48.4 49.7 Victoria 28.2 24.6 22.3 21.5 Queensland 15.4 13.8 14.0 14.4 Western Australia 10.9 7.2 6.7 6.7 South Australia 4.0 6.0 5.2 3.8 Australian Capital Territory 2.8 3.0 3.1 3.6 Northern Territory 1.3 0.3 0.2 0.1 Tasmania 1.3 0.2 0.2 0.2 a Liquidity reserve: Funded at closing date by over issuance of notes
b The floor is the aggregate balance of the class A & B Notes at the time
c For all Driver transactions, the subordinated loan and collateral loan are shown as the class C and D notes,
respectively. Source: Transaction documents, Fitch
Figure 7 Transaction Parties Role Name Fitch Rating
Issuer Perpetual Corporate Trust Limited as trustee for Driver Australia Three Trust
n.a.
Seller/servicer/originator Volkswagen Financial Services Australia Pty Ltd Not Rated Trust manager Perpetual Nominees Limited Not Rated Lead managers Australia and New Zealand Banking Group (ANZ) AA−/Stable/F1+ The Hongkong and Shanghai Banking
Corporation Limited, Sydney Branch (HSBC) AA-/Stable/F1+
Collateral account holder Australia and New Zealand Banking Group AA−/Stable/F1+ Collection account holder Australia and New Zealand Banking Group AA−/Stable/F1+ Interest rate swap Australia and New Zealand Banking Group AA−/Stable/F1+ Security trustee P.T Limited Not Rated Subordinated lender An affiliate of Volkswagen AG n.a. Sub-trust manager Volkswagen Financial Services Australia Pty Ltd Not Rated
Source: Fitch
Structured Finance
Driver Australia Three Trust
April 2016 5
Asset Analysis
Servicing and Origination
VWFSA is 100%-owned by Volkswagen Financial Services AG, which forms part of the wider
Volkswagen AG (BBB+/Negative/F2). VWFSA’s auto-financing model allows the borrowers to
incorporate the original purchase price of the vehicle with optional extras including upgraded
vehicle componentry. This allows VWFSA greater long-term retention prospects.
Through a network of dealerships and sales personnel, VWFSA reaches into both the
wholesale and retail market, with its greatest exposure being the retail sector (about 72%). The
sales force is remunerated through commission payments and fully supporting dealerships are
offered additional volume bonuses and wholesale rate discounts. The claw-back of commission
and bonus payments will occur on the early termination of contracts or upon a contract being
put into salvage. The sales force operation is segregated from the credit-decision process,
which is carried out by dedicated business managers.
VWFSA offers finance solutions through three main products:
commercial hire purchase (2% of total book)
commercial chattel mortgage (47% of total book)
consumer loans (45% of total book)
The origination of these products is carried out via VWFSA’s direct channels or primarily
through its supporting dealerships across the country. VWFSA places a particular focus on
retention, and fosters long-term consumer and business relationships through its dealership
network. Both commercial hire purchase and chattel mortgage products that are offered have
lending terms of between 0-60 months, and are provided for business purposes. Lending terms
of 0-84 months are permitted under VWFSA’s current product guidelines for consumer loans.
The commercial hire purchase and chattel mortgage products are offered for business
purposes, and are classified as unregulated, therefore not bound by the National Consumer
Credit Protection Act (NCCP). Only Consumer Loans are bound by the NCCP. The borrowers
that opt for a commercial hire purchase or commercial chattel mortgage product must stipulate
that the vehicle is primarily for business use.
All applications are assessed by VWFSA’s retail credit team using a credit scoring system and
automated checks that are verified against policy. There are two scorecards used by VWFSA:
one that involves the assessment of the individual borrower; the other at the company level, if
applicable. The submission is either auto approved, referred or declined once the scorecard
overlay has been completed. All submissions undergo automated credit risk checks that
include − but are not limited to − employment status, verifying company registration, bureau file
age and activity checks, loan-to-value (LVR), capacity to pay, vehicle age, and fraud. Any
referred applicants, or large transactions, undergo a more rigorous manual review process that
includes further due diligence and may involve reference checks.
All credit officers have delegated lending authority based on position, which is subject to
maximum LVR limits, serviceability thresholds, and total commitment levels. The credit team
consists of eight staff, seven of which are credit officers.
Any large transaction, or any application, which increases the exposure of a customer above a
threshold will automatically undergo a manual assessment, with further detailed verification and
financial analysis required. The settlements team will ensure all supporting documents and
forms of verification match system entries, and that all approval conditions have been satisfied
prior to remitting the finds to the dealership.
Structured Finance
Driver Australia Three Trust
April 2016 6
Servicing
VWFSA’s servicing and collections team (nine staff) is at its head office in Chullora, Sydney.
Daily servicing of the loan receivable portfolio is undertaken in-house through a highly
automated system, with at least 95.7% of all contracts initially electing to pay via electronic
funds direct debit, and 4% paid via BPAY, an electronic bill payment system in Australia. All
collections officers are responsible for accounts up to the repossession stage, while the
customer service team is responsible for loan contract administration. VWFSA uses external
specialist agents for all repossessions. Specialist roles also cover debt recovery after the sale
of an asset, insolvency management, and large high-value ledgers.
All repossessed vehicles are sold via two external auction houses to achieve fair market value,
with one auction house specialising in high-end and luxury vehicles. If necessary, VWFSA will
assess further recovery action on a case-by-case basis to determine the cost benefit of
pursuing the borrower for amounts outstanding.
Portfolio Summary
As of the cut-off date, the pool of eligible receivables consisted of receivables totalling
AUD573m. The receivables were originated by VWFSA during the ordinary course of its
business and through its dealer network. The pool comprises consumer loans, commercial
hire-purchase agreements, and chattel mortgages.
The collateral backing the portfolio is made up of new cars and light commercial vehicles
(88.9%) and used cars and light commercial vehicles (11.1%). Due to the distinct difference in
historical experience, Fitch has applied separate loss and recovery assumptions on new and
used vehicles of the portfolio (see Static Loss Analysis).
All receivables are amortising principal and interest facilities; pay a fixed rate of interest, with
varying balloon amounts payable at maturity and with a maximum receivable remaining term of
82 months. The pool has an average receivable size of AUD37,010 and a maximum
receivable contract balance of AUD420,241. The WA borrower interest rate for the pool is 6.9%.
The WA remaining term of the pool at the cut-off date was 44.6 months. The WA seasoning of
the pool was 11 months; however, Fitch did not give any credit to seasoning.
Geographic Concentration
The portfolio is geographically diversified, with 49.7% of the exposure in New South Wales,
21.5% in Victoria, 14.4% in Queensland, 0.2% in Tasmania, 0.1% in Northern Territory; 3.8%
in South Australia, 6.7% in Western Australia and 3.6% in the Australia Capital Territory. The
diversity partially insulates the portfolio from regional downturns.
Eligibility Criteria
The receivables must adhere to certain conditions to be deemed eligible. The seller represents
and warrants that all receivables in the pool are eligible; should there be a breach of eligibility,
the seller is obligated to take appropriate remedial action within a specified timeframe. All
contracts offered use standardised agreements, and one-off documentation is not permitted.
For a full list of eligibility criteria refer to Appendix B.
Representations and Warranties
APAC ABS transactions typically feature a country-specific standard set of representations and
warranties (R&Ws) with regards to the mortgage collateral provided by the seller. Fitch‘s
analysis is focused on assessing the risk of R&W breaches. Fitch expects an extensive
performance history, a solid R&W track record, or structural protection. Effectively aligned
incentives between originator and investor interests through retention arrangements can be
viewed as an additional mitigant to the potential for R&W breaches.
Structured Finance
Driver Australia Three Trust
April 2016 7
Model, Criteria Application and Data Adequacy
VWFSA provided Fitch with 10 years of static gross and net loss data by monthly originations
for all asset types and products (new and used vehicles, consumer loans, chattel mortgage and
hire purchase). The static pool data were stratified into two sub-segments based on the
collateral type:
new vehicles;
used vehicles.
Fitch converted this data to quarterly loss vintages by new and used vehicles to derive a base-
case default and recovery estimate which was then used to calculate an expected base-case
cumulative net loss (CNL) for each of the static pools. Fitch utilised 120 forecast loss proxies to
determine the initial base-case CNL for each sub-segment.
Fitch has assessed the potential losses through a complete loan receivable maturity cycle.
Fitch projected current losses forward to arrive at a conservative gross loss assumption.
Stresses were then applied to the base-case loss assumptions to determine credit
enhancement for higher investment-grade ratings.
Fitch used its own cash-flow model in its analytical process to simulate stresses to a
transaction and determine the sufficiency of available enhancement for each class. The agency
customised its proprietary cash-flow model to replicate the flow of funds outlined in the
transaction documents, and grouped the loan collateral into representative pools based on the
original and remaining loan-term, seasoning, and balloon amount.
VWFSA has provided Fitch with a comprehensive set of stratification tables, which includes
various data fields generally used in the agency’s analysis of automotive receivables.
Fitch conducted a file review of a sample of 10 loan files, the review focused on the
underwriting procedures conducted by the originators compared with the originators credit
policy at the time of underwriting. No major discrepancies were noted in the underwriting
practices of originators. The file review also checked the accuracy of the data file provided to
Fitch for its rating analysis. The file review reported no significant errors that would have an
impact on Fitch‘s rating analysis. Fitch also reviewed the results of agreed-upon procedures
(AUP) conducted on the portfolio, the AUP checked the accuracy of the data file provided to
Fitch for its rating analysis. The AUP reported no material errors that would have an impact on
Fitch’s rating analysis
Credit Analysis
In addition to an underwriting and servicing review, Fitch analyses portfolio growth, portfolio
performance and expected pool performance, as measured by static data and overall portfolio
characteristics.
Static Loss Analysis
To assess the potential losses through a complete receivable maturity cycle, Fitch analysed the
static pool to determine an expected base-case loss estimate. All quarterly vintages had at
least 24 months seasoning; the projected cumulative gross losses for all receivables originated
by VWFSA are 3.0% for new vehicles, 5.0% for used vehicles of the original balance originated.
Fitch also analysed historical recovery data to arrive at a base-case recovery assumption of
58% for new vehicles, and 45% for used vehicles.
Stresses were then applied to the base-case default assumption and base-case recovery
assumption to determine credit enhancement for higher-investment-grade ratings.
Structured Finance
Driver Australia Three Trust
April 2016 8
Cash Flow Analysis
As mentioned above, Fitch customises its proprietary cash-flow model to replicate the flow of
funds outlined in the documentation. Performance variables − including loss distribution, losses,
prepayment rates, delinquencies, and coupon rates − are modelled to enable Fitch to generate
more realistic collateral cash flows. This results in improved accuracy when determining the
availability of excess spread to cover losses.
From a cash flow perspective, the collateral balance is reduced either through principal
collections or losses, both of which are passed through to investors as either principal
payments or realised losses. Delinquencies, loss frequency and loss severity are increased
under Fitch’s stress scenarios. The transaction, by virtue of the discount rate applied, does not
yield any excess spread and therefore the rated classes will rely upon credit enhancement
provided by the subordinated loan and collateral loan to absorb losses of any shortfall in
principal payments. At final maturity, the balance of the CCA can be applied to cover any
outstanding principal on the rated notes.
Fitch also stressed factors such as the timing of losses and the recovery period. A worst-case
scenario results in more defaults in the early period of the deal and fewer defaults in the later
period. This is in part due the majority of the premium paid for the initial purchase of the pool is
recovered in the first 24 months from closing.
The transaction is reliant on VWFSA to make compensation payments. This has been factored
into our cash-flow analysis at each month and under various prepayment stresses. The loss
amount was deducted from collections at each month under various prepayment stresses
within our cash-flow analysis. Fitch has adjusted its default prepayment assumption within its
cash-flow analysis to account for historical VWFSA prepayment rates.
Recoveries were analysed taking into consideration historical performance. The agency applied
haircuts as a reduction to the base-case recovery assumption in different stress scenarios. The
recent emissions scandal involving the rigging of exhaust gas emissions software by
Volkswagen Group may, at least temporarily, have an impact on used-vehicle prices for
affected vehicles. Fitch has therefore applied a 10% haircut to affected vehicles.
The agency also stressed recovery time; the longer the time to recovery, the greater the strain
on cash flows in the transaction. Fitch assumed a two-month recovery period. Delinquent
interest stresses were applied to account for the portion of interest not collected on collateral
due to non-payment. Full and timely payment of principal and interest was made to each
respective class of notes rated by Fitch in each modelled rating scenario.
Concentration Risk
The underlying pool is made up of 15,495 receivables totalling AUD573m, with the maximum
receivable contract balance being AUD420,241. Concentration risk may arise due to the
inclusion in the structure of a principal pro rata payment method (see Principal Repayment and
the Targeted OC Levels), which ensures that the overcollateralisation available to class A notes
will not exceed 30% prior to the call date, unless a trigger level 2 is breached.
At the call date the aggregate discounted principal balance of the notes will not be more than
AUD50m. Losses on any one loan receivable can at this point form a more significant
proportion of the available subordination than is the case in similar transactions with sequential
paydown structures.
Figure 8 Modelling Assumptions (%)
WA base case gross loss 3.2 Default speed Month 3-9 30.0 Month 10-15 30.0 Month 16-21 20.0 Month 22-27 15.0 Month 28-33 5.0 Month 34-39 0.0 WA recovery rate 56.1 Recovery lag (months) 2.0 Seasoning credit 0.0 Prepayment vector options (average per annum rates)
Fast 23.0 Medium 13.0 Slow 0.0
Source: Fitch
Structured Finance
Driver Australia Three Trust
April 2016 9
Figure 9 Obligor Concentration Rank Cumulative balance (AUD) Pool by balance (%)
1 420,241 0.07 2 818,902 0.14 3 1,162,188 0.20 4 1,500,190 0.26 5 1,838,192 0.32 6 2,173,478 0.38 7 2,496,780 0.44 8 2,790,408 0.49 9 3,071,029 0.54 10 3,348,291 0.58 15 4,611,325 0.80 20 5,814,481 1.01
Source: VWFSA
Structured Finance
Driver Australia Three Trust
April 2016 10
Fitch tested for obligor concentration risk at the call date; the agency’s model takes into
consideration this concentration risk by analysing a default of the largest receivables and its
effect on the rating of the senior notes.
Prepayment Losses
The transaction is reliant on borrowers paying their scheduled obligations because the
receivables are bought by the trust at a premium. The difference between the actual interest
rate and the assumed discount rate will not be received if borrowers whose loans have interest
rates higher than that of the discount rate prepay (an “interest compensation event”). An
interest compensation event occurs on the full discharge of the payment obligations of the
debtor, this also includes the cancellation of a contract by VWFSA or any event where the
customer legitimately terminates or invalidates a contract. The transaction is exposed to the
risk of a shortfall between the interest rate of a prepaid loan and the discount rate for loans with
interest rates above the discount rate (approximately 50% of the portfolio). This shows the
issuer purchased at least half of the loan receivables at a premium to their present value via
the application of the contractual interest rate.
This risk is mitigated through VWFSA’s obligation to make a compensation payment at the
point in which the loan is discharged from the pool. This risk would only become relevant if
VWFSA was no longer able to make such payments. This risk within Fitch’s cash-flow analysis
under various stressed scenarios has been considered, including historical VWFSA
prepayment rates.
Impact of Emissions Allegation
The current scandal involving the tampering of exhaust emissions software by the Volkswagen
Group may, at least temporarily, have an impact on resale values of affected vehicles. Fitch
has incorporated into its analysis an additional 10% haircut for affected vehicles, which stands
at 7.4% of the discounted principal balance at closing.
There is limited VW-related risk as provisions in the terms and conditions within individual
contracts ensure all payments must be made in full and free of any set-off, while “hell and high
water” clauses ensure the obligation to pay continues regardless of any defect in, or lack of
performance, of the vehicles. However in the event that a contract is terminated legally, or
there becomes a right of set-off, by the customer, or any breach in warranty for that matter, an
early settlement amount subject to any interest compensation payment will be paid by VWFSA
pursuant to the receivables purchase agreement. Although this mitigates any potential loss for
the transaction, this may also increase the credit dependency on VWFSA to make such early
settlement payments and VW, the manufacturer, to fix affected vehicles.
According to transaction counsel the trust has further protection as it is not a linked credit
provider in relation to the financing contracts and consequently borrowers will have no rights
under the credit linked provisions of the National Credit Code against the trust. Fitch is aware
that all borrowers whose credit is provided on the basis that the vehicle is predominantly used
for business use (non-regulated borrowers) have no rights under the credit linked provisions of
the National Credit Code. A small proportion of affected contracts are regulated borrowers
(2.6% of the discounted principal balance at closing) that may exercise their right under the
linked credit provider provisions of the National Credit Code against VWFSA, the finance
provider, in connection with any loss or damage suffered as a result of any misrepresentation
made by VWFSA.
Transaction and Legal Structure
Legal Structure
Driver Australia Three is a bankruptcy-remote special-purpose vehicle (SPV) created pursuant
to a master trust deed.
Structured Finance
Driver Australia Three Trust
April 2016 11
The master trust deed provides for the creation of an unlimited number of trusts. Each trust is
separate and distinct from any other trusts established under the master trust deed and under
the security trust deed; its assets are only available to meet its related liabilities. The
transaction is governed by the laws of New South Wales.
The trustee’s obligations in respect of the notes are secured under the master trust deed and
the issuer security deed between the trustee and the security trustee, and also by a fixed and
floating charge in favour of the security trustee. Under the receivables purchase agreement, the
seller offers to sell to the issuer the sellers rights, title and interest in the receivables and
insurance rights for a purchase price. In accordance with the issuer security deed, the issuer
appoints the security trustee to act in the fiduciary interest of the noteholders by granting a
security interest in the issuer’s right, title, benefit and interest in all secured property to which
the Personal Property Securities Act (PPSA) applies, and a first-ranking fixed charge over any
secured property to which the PPSA does not apply. In an event of default, the security trustee
can take various action – including taking possession of the assets of Driver Australia Three, to
protect the series’ secured creditors.
Transaction Structure
In summary two classes of notes will be issued: class A and B notes. The class A notes will
rank senior to the class B notes, the subordinated loan and the collateral loan in the priority of
payments. The class A notes will benefit from the initial 14% subordination provided by the
class B notes, the subordinated loan and collateral loan. At maturity, any outstanding cash
collateral balance may be used to repay the notes.
Figure 10
Structure Diagram
Note: This diagram represents Fitch’s interpretation of the transaction structure as represented in the transaction documents
Source: Transaction documents
Class A Floating-Rate Notes
(‘AAAsf’)
Trust Manager
Perpetual Nominees
Limited
Collateral Account Provider
Australia and New Zealand Banking Group Limited
(‘AA-‘/F1+)
Assets
Security Trustee
P.T. Limited
Noteholders
TrusteePerpetual Corporate Trust Limited
IssuerDriver Australia Three Trust
Class B Floating-Rate Notes
(‘AA-sf’)
Subordinated Lender
An Affiliate of Volkswagen AG
Note Interest
and Principal
Proceeds
from the
Issuance of
the Notes
Seller/Servicer Volkswagen Financial
Services Australia Pty. Ltd.
Purchase
Price
Interest Rate Swap Provider
Australia and New Zealand Banking Group Limited
(‘AA-‘/F1+)
Sale of Loan
Receivables/
Collections
(i) Payments in respect of liquidity shortfalls and losses and
(ii) if balance exceeds “Specified Cash Collateral Amount” repayment to
the subordinated lender, followed by collateral loan lender
(ii) at maturity, to repay outstanding principal to the class A and B notes
Payments via Order of Priority
up to Specified Cash Collateral
Amount
Repayment of
Interest and
Principal that is
Subordinated to
Noteholder Claims
Subordinated
Loan Amount
Floating-Rate
Payments
Fixed-Rate
Payments
Collections Account Provider
Australia and New Zealand
Banking Group Limited
(‘AA-‘/F1+)
Issuer Security
Sub-Trust Manager
Volkswagen Financial
Services Australia Pty. Ltd.
Transfer of
Loan
Receivables/
Collections
Collateral Loan Lender
Volkswagen Financial Services Australia Pty. Ltd.Collateral loan
Amount
Structured Finance
Driver Australia Three Trust
April 2016 12
At closing, the issuer’s assets and liabilities are expected as follows:
Figure 11
Driver Australia Three Trust
Asset (AUD) Liabilities (AUD) Size as % of
receivables’ balance
Receivables 573,467,754 Class A 500,000,000 87.2 Class B 31,000,000 5.4
Subordinated loan 36,733,254 6.4
Collateral loan 5,734,500 1.0
Total 573,467,754 573,467,754
Cash collateral amount 6,881,613 1.2
Source: Transaction documents, Fitch
The aggregate proceeds from the issue of the class A and B notes, together with the proceeds
from the subordinated loan and the collateral loan will be used to purchase the receivables, and
to fund the cash collateral amount.
Figure 12 Priority of Payments Pre-Enforcement 1-8. Senior expenses 9. Payments due to the swap counterparty, including termination fees, except where the termination
is attributable to the swap counterparty 10. Accrued and unpaid interest on the class A notes 11. Accrued and unpaid interest on the class B notes 12. Replenishment of the CCA up to the specified CCA balance 13. Reduction of principal on the class A notes down to the targeted class A note balance (see table,
Targeted OC Levels) 14. Reduction of principal on the class B notes down to the targeted class B note balance (see table,
Targeted OC Levels) 15. Amounts payable by the issuer in respect of any penalty payments 16. Following a swap termination attributable to the swap counterparty, all amounts due and payable
under the swap agreement 17. Amounts payable in respect of accrued and unpaid interest on the subordinated loan 18. To the subordinated lender, until the aggregate principal amount of the subordinated loan has
been reduced to zero 19. Amounts payable in respect of accrued and unpaid interest on the collateral loan 20. To the collateral loan lender, until the aggregate principal amount of the collateral loan has been
reduced to zero 21. To VWFSA, until the aggregate principal amount of the issuer subordinated notes has been
reduced to zero 22. Remaining balance to the seller, as the final service fee
Required payments are all payment from sections 1 – 11 in the above interest priority of payments Source: Transaction documents, Fitch
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Principal Repayment and the Targeted OC Levels
The notes start to amortise sequentially from closing until the relevant targeted
overcollateralisation (OC) levels are reached. The class A and the class B notes will amortise
on a pro-rata basis if the relevant OC levels equal the relevant targeted OC level, subject to
cumulative net loss triggers at various points in time (Figure 13).
Figure 13 Target OC Levels (%)a Class A target OC Class B target OC
Initial OC level available 12.8 7.4 No trigger breached 26.0 18.0 Level 1 trigger breached 30.0 21.0 Level 2 trigger breached or asset balance amortised below 10%
b 100.0 100.0
Credit enhancement increase conditions Cumulative net loss ratio
c
Level 1 Level 2 The first 12 months from closing 0.4 n.a. From 13th month until the 24th month from closing 0.8 n.a. From 25th month and any payment date thereafter 1.2 n.a. Any payment date from closing n.a. 1.8 a OC is calculated by deducting the CCA from the credit enhancement levels
b The clean-up call date
c The cumulative net loss ratio is the sum of all written off amounts divided by the aggregate discounted principal balance
at closing Source: Transaction documents, Fitch
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April 2016 14
Discount Rate
All securitised loan receivables in the portfolio are discounted with a single discount rate that is
equal to the aggregate of (i) fixed swap rate (including margins), and (ii) senior expenses and
servicing fees.
Figure 14 Discount Rate Calculation (%)
Swap rate 4.14 Servicing fee 1.03 Senior expenses 0.20 Total 5.36
Source: Transaction documents, Fitch
Determination of Legal Maturity
The legal final maturity date allows for an 18-month foreclosure period after the longest dated
loan in the portfolio.
Clean-Up Call Option
The issuer holds the right to call the remaining notes on issue at any payment date when the
aggregate outstanding discounted principal balance of the receivables is less than 10% of the
aggregate discounted principal balance at closing.
Credit Enhancement
Credit enhancement is provided by the subordination of the junior notes, the subordinate and
collateral loan.
Excess Income
The components include, under the discount method, the exact costs under the servicing
agreement, plus the swap rate; as such, the transaction does not yield any excess spread. As
noted, all losses will be absorbed by firstly the collateral loan, and the subordinated loan, and
then the notes.
Subordination of Notes
Receivables purchased by the proceeds of the subordinated loan − which have an initial share
of 6.4% of the total receivables’ balance − together with the collateral loan (1.0%) and the CCA
(1.2%), provide credit enhancement (CE) to the class B notes of 8.6%. The class A notes have
additional protection by the subordination provided by the class B notes, leading to CE of
14.0%. The CCA provides credit support throughout the deal which will only be utilised at the
maturity date to repay any principal outstanding on the notes to the extent it has not been
utilised as liquidity support. This account has been funded through proceeds of the collateral
loan, together with the proceeds of note issuance and the subordinated loan.
In the event of security being enforced, with respect to all payments of interest and principal,
the available distribution amount will be allocated sequentially toward interest then principal
due to the class A, the B notes, then toward interest and principal due to the subordinated
lender, and collateral loan provider. All collections received will be allocated and paid in
accordance with the order of priority set out in the terms of the issue supplement.
Liquidity Support
Where the available interest collections on any determination date are insufficient to meet the
total required payments for that month, liquidity support will be sought to ensure that trust
obligations are met in a timely manner. Liquidity support will be provided by initially drawing
from the cash collateral account.
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Principal Draws
Although no specific principal draws are made, by virtue of a combined interest and principal
waterfall, principal that makes up part of the available distribution amount may be used initially
to meet required payments.
Cash Collateral Account
If the available distribution amount is insufficient to meet required payments, the CCA is
available to the trustee to fund required payments. It is initially fully funded to AUD6.9m (initial
cash collateral amount) at issuance via the proceeds of the issue and the collateral loan and
subordinated loan, and subsequently will be maintained at the lesser of 1.2% of the aggregate
discounted principal balance of the assets at closing (AUD6.9m) and the aggregate balance of
the class A and B notes at that time (the specified CCA balance).
Draws under the CCA are reimbursed from the available distribution amount in accordance with
the order of priority. If, on any determination date that no credit enhancement triggers or
foreclosure events are subsisting, any excess funds above-specified CCA limit may be
allocated in accordance with the order of priority. This is initially toward the payment of interest
due and unpaid, followed by principal amounts due, to the subordinated loan provider, followed
by the amounts due to the collateral loan lender.
By virtue of the order of priority, the available distribution amount, (the monthly collections) that
includes all interest and principal collections, is initially available to make required payments,
followed by the application of the CCA. The balance of the CCA will be available at maturity to
repay principal on the class A and B notes, if outstanding.
Counterparty Risk
VWFSA
Fitch performed a review of VWFSA’s origination and servicing operations as part of its rating
process, and found them to be acceptable.
Strengths and Weaknesses
Fitch considered several strengths and concerns as part of the operational review. Fitch
believes VWFSA’s strengths include an experienced management team, with many of its
managers being longstanding employees, and all of which have significant industry experience.
VWFSA has well-formed risk management policies, including segregation of duties, with a
robust risk management framework imposed by VWFSA’s parent VW group. In addition, its
underwriting policies are flexible enough to be amended in response to rapidly changing
economic conditions. The underwriting process incorporates a wide range of credit
requirements in an automated process, while referred applicants or large transactions are
assessed manually.
The main concerns included: the slowdown in both global and Australian economic growth; the
exposure to the used-car market; reputational risks associated with model-wide recalls of
emissions-affected vehicles; the decline in liquidity within the Australian economy; and the
effect this may have on the ability of individuals to meet their ongoing receivable payments.
VWFSA’s management was quick to respond to the economic crisis, with an increased focus
on credit, operational, balloon and residual value risk, and added restrictions and enhancement
of credit policy rules. This strategy appears to have been effective in containing arrears and
losses within historical levels.
Arrears Management/Recoveries
The collections function is split into categories: collections; asset repossession; and debt
recovery. The collections team targets accounts that are overdue, with a particular focus on
reducing the volume of accounts that are referred to asset repossession and debt recovery.
The collections process commences when a scheduled payment has not been processed
through the system. Phone contact will be made with the borrower within the first seven days
Structured Finance
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the payment is overdue for higher risk borrowers, with additional follow-ups and reminder
letters sent in accordance with agreed policy.
Where direct debit arrangements are missed or seven days have elapsed since the initial due
date, a courtesy call and letter requesting payment is made. An SMS is subsequently sent at
10 days overdue. At 14 days overdue, an additional courtesy letter is sent requesting payment,
and a statutory default notice is issued at 21 days overdue. Throughout this time regular phone
contact continues to be made with the borrower. The post-default stage is any account that is
overdue from 21-90 days in arrears in which a further default letter is issued. The customer
service manager must authorise any arrangements to issue the account to recovery agents.
The average timing of repossession sales for VWFSA is one to three months, and is done
through two licensed auctioneers. In some cases, hardship extensions may be granted where it
is identified borrowers are having issues meeting repayments that are likely to be rectified with
temporary relief of payments. The collections team work closely with the borrower to provide
assistance through financial difficulty. The assessment process looks at a range of variables
including the borrowers financial situation, credit bureau information, LVR and capacity to repay.
Risk Management
VWFSA maintains a risk management regime, with hindsight reviews performed on a continual
basis to ensure credit standards. A credit-risk monitoring process is carried out annually. The
results of each review are used to identify systemic or reoccurring weaknesses, which are
reported to management and the monitoring of not only credit risk, but also operational and
residual value risk. The credit-risk review will provide recommendations, where applicable, for
corrective action via a consultation process.
Corrective measures are monitored throughout an implementation process. The process will
review all findings and identify any shortfalls in the current credit policy, and provide further
recommendations where considered appropriate. All processing is carried out in-house; no
third-party involvement ensures complete control over each of the segregated duties within the
financing process − from the business manager, retail credit team, settlements and accounts
payable through to the customer service and collections team.
VWFSA’s business continuity plans (BCP) and its disaster recovery (DR) infrastructure are
based on VWFSA’s enterprise continuity framework. BCP tests are undertaken annually, and
securitisation systems are fully restored using the services of a third-party provider, Interactive
Pty Ltd. An agreement with Interactive provides dedicated server racks in the data centre, and
access to workstations and office space. All critical systems are tested annually with
comprehensive intrusion testing, while external audits are carried out annually on BCP tests.
Back-Up Servicing
There is no named back-up servicer on this transaction. However, under the transaction
documents, in the event of a servicer replacement event the transfer of the servicing
obligations is not complete until a replacement servicer is found.
The agency believes the servicing fee amount is appropriate to take into account the likely
increased cost to the transaction should a servicer-transfer event occur. The amount of the
servicer fee also provides a financial incentive for replacement servicers. This will improve the
prospects of finding a suitable replacement. A comfortable liquidity provision provided by the
cash-collateral account mitigates payment disruption risk in the event of a servicer default that
may cause delays in the servicing and collections processes.
Document Custody
Documents are held on site; then sent off site and stored electronically. VWFSA will act as
custodian of the security documents under the custody agreement. A document custody audit
is conducted annually by a reputable third-party auditor.
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Hedge Provider
The issuer trustee will enter into one or more swap transactions to the extent necessary to
effect an exchange of cash flows that will cause the cash flows from the receivables to satisfy
the payment obligations under each issued note.
The swap provisions are in line with Fitch’s current criteria. For further details of Fitch’s
counterparty criteria, see Counterparty Criteria for Structured Finance and Covered Bonds and
Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum.
Fixed/Floating-Rate Swap
The trustee will enter into a swap arrangement for a fixed/floating-rate swap to hedge the
interest-rate risk between the fixed rate on the underlying loan receivables and the floating-rate
obligations of the trust. The fixed/floating-rate swap operates as follows: on each payment date
the trustee will pay the relevant swap counterparty an amount equal to the notional amount of
the notes multiplied by a fixed-rate margin. In return, the trustee will receive the one-month
bank bill swap rate plus a margin from ANZ, the interest rate swap provider.
Upon a downgrade of the swap provider below ‘A’ and/or ‘F1’, it must, within 14 calendar days
following such a downgrade, cash-collateralise its obligations under the swap, or within 30
calendar days novate its obligations to an entity rated at least ‘F1’ and/or ‘A’, appoint a suitable
guarantor, or take any other action that will not adversely affect the rating of the notes. If the
counterparty is further downgraded below ‘F3’/‘BBB−’, the choice to cash-collateralise will no
longer be available if the rating of the highest rated note is ‘AAAsf’, the swap provider must,
within 30 days, either novate the swap or appoint a suitable guarantor.
Account Bank
The servicer, VWFSA, is an unrated entity. Therefore, in accordance with the transaction
documents, collections will be prepaid twice monthly, to mitigate commingling risk, by using an
advance mechanism to post collateral. All collections will be held on trust for the benefit of the
trustee, while the distribution account will be held by, and in the name of, the trustee. The
account will be held with a counterpart that satisfies Fitch’s counterparty criteria.
Set-Off
Borrowers are not permitted to set-off any credit balances that they may have set-off elsewhere
within the VW group. VWFSA represents and warrants to the issuer in respect of the purchased
receivables that the terms of the receivables contracts are made to the seller free of set-off.
Personal Property Security Act (PPSA)
Compliance with the new PPSA was mandatory for VWFSA from 30 January 2012, in which all
security interests have been registered on the Personal Property Securities Register (PPSR).
The registration of a security interest in the PPSR protects the title holder in the event of
insolvency of the borrower, as failure to do so will result in having no legal claim over the asset.
The registrar replaces many of the existing registrars, such as The ASIC Register of Charges,
and the Register of Encumbered Vehicles (REVs), which is based on legal form and the
holding of title. The PPSA aims to streamline insolvency by moving to a single regime.
Disclaimer
For the avoidance of doubt, Fitch relies in its credit analysis on legal and/or tax opinions
provided by transaction counsel. As Fitch has always made clear, it does not provide legal
and/or tax advice or confirm that the legal and/or tax opinions or any other transaction
documents or any transaction structures are sufficient for any purpose. The disclaimer at the
foot of this report makes it clear that this report does not constitute legal, tax and/or structuring
advice from Fitch, and should not be used or interpreted as legal, tax and/or structuring advice
from Fitch. Should readers of this report need legal, tax and/or structuring advice, they are
urged to contact relevant advisers in the relevant jurisdictions.
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Performance Analytics
Fitch will monitor the transaction regularly. The performance analytics team will receive monthly
investor reports detailing the performance of the portfolio. These reports will provide the basis
for the agency’s surveillance of the transaction’s performance against both base-case
expectations and the performance of the industry as a whole. Where appropriate, the agency
may request to monitor further data from the originator or the servicer. The agency’s structured
finance performance analytics team ensures that the assigned ratings remain, in the agency’s
view, an appropriate reflection of the issued notes’ credit risk.
Details of the transaction’s performance are available at www.fitchratings.com.
Please call the Fitch analysts listed on the first page of this report with any queries regarding
the initial analysis or the ongoing performance.
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Appendix A: Outlook
Sovereign
Australia’s Long-Term Foreign-Currency and Local-Currency IDRs of ‘AAA’ reflect the country’s
fundamental credit strengths, including a strongly developed, high-income and flexible
economy, supported by a credible policy framework and effective political and social institutions.
This provides a high degree of resiliency to shocks.
Australia faces an ageing demographic profile and the end of the mining investment boom. Its
commodity dependence coupled with its relatively high external debt load, suggests that debt
tolerance may be lower than for some other high-grade sovereigns.
Australia’s real GDP growth has outperformed the median of ‘AAA’-rated peers, with the
average real GDP growth rate 2.7% over the past five years. Fitch expects real GDP growth
was 2.3% for 2015, and will rise to 2.7% for 2016 and 3.0% for 2017.
The Reserve Bank of Australia (RBA) views a pick-up in the housing market as important to the
transmission of the accommodative monetary policy. House prices increased by about 8% in
2014 nationwide, and 7.8% in 2015. Credit growth has picked up in 2015, increasing by 6.6%,
with housing credit growth rising by 7.5%. A sustained housing market boom may, nonetheless,
lead to a build-up of vulnerabilities, which could at some stage have an impact on GDP growth
and bank balance sheets. The RBA has maintained the cash rate at its record low of 2.0% after
a 25bp cut in May 2015. The unemployment rate was 5.8% in 4Q15, 0.3% lower than a year
earlier. Rising services exports, boosted by a weaker exchange rate, have helped to boost job
growth and offset some of the impact from slowing mining investment
Financial Institutions
The Australian banking system is generally robust. A significant downturn in the region,
particularly China, is likely to result in significant asset-quality deterioration for the banks.
However, this is not Fitch’s base case; rather, we expect a modest slowdown in China.
Strengthened capitalisation and recently tightened underwriting standards are expected to
offset slower profit growth and modest asset-quality pressure in 2016. Profit growth is likely to
slow due to ongoing asset competition, potentially higher funding costs, and an increase in
loan-impairment charges.
Credit standards are likely to improve following the Australian Prudential Regulatory Authority
(APRA) review in early 2015. APRA has indicated that underwriting standards had weakened
as a result of strong competition in the mortgage market. Banks made significant changes in
borrower-serviceability assessment, and limited annual growth in investor mortgages.
The system remains reliant on wholesale funding (including that from offshore markets), which
leaves it susceptible to any prolonged dislocation in funding markets. However, the risks
associated with this funding mix are generally well managed, and there is a continued shift
toward more stable forms of funding (retail deposits and long-term wholesale) at the expense of
short-term wholesale funding.
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Appendix B: Eligibility Criteria
The securitised loan receivable, inter alia, must satisfy the following criteria:
a) no consent to the sale of the purchased receivables or notice of that sale is required to be
given by or to any person, including without limitation, the relevant debtors and the
purchased receivables are assignable;
b) the obligations of the relevant debtors under the receivables contracts relating to the
purchased receivables and other related documents to which they are parties relating to
the purchased receivables are legal, valid, binding and enforceable against it in
accordance with their terms (subject to insolvency laws and equitable principles affecting
creditors generally);
c) at the time each receivables contract was entered into, the purchased receivable was
approved and originated by the Seller in the ordinary course of the Seller's business;
d) at the time each receivables contract was entered into, the Seller had not received any
notice of insolvency or the bankruptcy of the relevant debtor in relation to that Purchased
Receivable, or notice that such debtor did not have the legal capacity to enter into the
relevant receivables contract or other related documents;
e) immediately prior to the sale to the Issuer, the seller is the sole legal and beneficial owner
of the purchased receivables and any financed objects and no prior ranking security
interest has been granted by it to any person (other than the Issuer) in relation to its right,
title and interest in the purchased receivables or any financed objects;
f) the servicing standards require that the seller's interest in any security in relation to the
purchased receivable has been duly registered on the PPS Register;
g) the seller’s interest in any security interest in relation to the purchased receivable is
perfected by registration on the PPS Register and to the best of the seller’s knowledge no
prior ranking security interest exists;
h) in relation to each purchased receivable arising under or pursuant to a chattel mortgage
contract or consumer loan contract, the relevant debtor has fully drawn down the credit
limit available under that chattel mortgage contract or consumer loan contract and the
seller has no obligation to make any further advance under that chattel mortgage contract
or consumer loan contract;
i) each receivables contract together with the related documents which are required to be
stamped in an Australian state or territory have been or will be stamped with all applicable
duty;
j) each purchased receivable has not been satisfied, cancelled, discharged or rescinded;
k) the seller holds, in accordance with the servicing standards all documents which it should
hold to enforce the provisions of, and security created by, the securities relating to the
purchased receivables and to recover in full the purchased receivables ;
l) other than the receivables contracts relating to the purchased receivables, related
documents and documents entered into in accordance with the servicing standards, there
are no documents entered into by the seller and the debtors or any other relevant party in
relation to the purchased receivables which would qualify or vary the terms of the
purchased receivables ;
m) under each receivables contract, the relevant debtor is required by the seller to maintain
insurance in respect of the financed object against loss, damage, destruction and any other
risks that the seller requires and for an amount acceptable to the seller;
n) the terms of the receivables contracts relating to the purchased receivables require
payments in respect of the purchased receivable to be made to the seller free of set-off;
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Driver Australia Three Trust
April 2016 21
o) the receivables contracts and other related documents, which in each case relate to the
purchased receivables , are governed by the laws of one of the following Australian states
or territories: New South Wales, Victoria, Queensland, South Australia, Tasmania, Western
Australia, the Northern Territory or the Australian Capital Territory;
p) each debtor in respect of a purchased receivable is a corporation or a registrable
Australian body which has an Australian company number or Australian business number,
a registered scheme with an Australian registered service number, an entity otherwise
established under Australian law (including a partnership, association or Government
Agency), a permanent resident or citizen of Australia or a citizen of New Zealand, or a
person residing in Australia on a work visa basis whose work entitlements have been
verified and whose application for the provision of credit by the seller under the relevant
receivables contract has been assessed under considerations of internal guidelines, which
include special consideration of, inter alia, the loan term relative to the remaining visa term,
the deposit or trade and the inclusion of a residual or balloon payment;
q) under the terms of the relevant receivables contracts, each purchased receivable will
mature no earlier than 3 months after the cut-off date and no later than 84 months of the
date of origination of the relevant receivables contracts;
r) the total outstanding amount of the purchased receivables resulting from the receivables
contracts with any one debtor does not exceed A$500,000;
s) and other related documents complied in all material respects with all applicable laws
(including the Consumer Credit Laws);
t) the purchased receivable is denominated and payable in Australian dollars in Australia;
u) the purchased receivable arises from the financing of new or used financed objects;
v) the purchased receivable is not in arrears;
w) on the cut-off date at least two instalments have been paid in respect of each of the
purchased receivables and the related receivables contracts require substantially equal
monthly payments to be made within eighty four (84) months of the date of origination of
the receivables contract and may also provide for a final balloon payment;
x) the purchased receivable is subject to the seller's standard terms and conditions;
y) the date of the origination of the purchased receivable is on or after 1 January 2006; and
z) each purchased receivable has been serviced in accordance with the servicing standards
in all material respects since the purchased receivable was originated.
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Appendix C: Transaction Summary
Driver Australia Three Trust ABS/Australia Figure 15 Capital Structure
Class Rating Outlook Size (%) Size (AUDm) CE (%)a Interest rate PMT freq. Maturity Margin ISIN
A AAAsf Stable 87.2 500.0 14.0 1M BBSW + margin Monthly May 2024 1.70% AU3FN0030474 B AA-sf Stable 5.4 31.0 8.6 1M BBSW + margin Monthly May 2024 2.65% AU3FN0030482 Subordinated Loan NRsf n.a. 6.4 36.7 n.a. 1M BBSW + margin Monthly May 2024 Undisclosed n.a Collateral Loan NRsf n.a. 1.0 5.7 n.a. 1M BBSW + margin Monthly May 2024 Undisclosed n.a Total 573.5 Cash collateral account 1.2% 6.9m First interest payment date: 23 May 2016 Clean-up call: 10% of pool a Credit enhancement – includes the 1.2% cash collateral account that is available to repay principal on the class A and B notes at final maturity
Source: Fitch
Key Information Closing date 28 April 2016 Parties
Country of assets Australia Seller/servicer/sub-trust manager/collateral loan lender Volkswagen Financial Services Australia Pty Ltd Country of SPV Australia Issuer Perpetual Corporate Trust Limited as trustee for Driver Australia Three Trust Structure Pass-through Security trustee P.T Limited Listing n.a. Lead manager Australia and New Zealand Banking Group
Hongkong and Shanghai Banking Corporation Limited, Sydney Branch Collateral account holder Australia and New Zealand Banking Group Analysts Collection account holder Australia and New Zealand Banking Group Spencer Wilson +61 2 8256 0320 Interest rate swap counterparty Australia and New Zealand Banking Group Ben Newey +61 2 8256 0341 Subordinated lender An affiliate of Volkswagen AG
Source: Fitch
Summary Rating drivers
Credit Support: The class A and B notes benefit from credit enhancement (CE) of 14.0% and 8.6%, respectively, provided by the subordinated loan and overcollateralisation via the collateral loan. A cash collateral account (CCA) will be fully funded at closing to cover any potential interest shortfalls on the rated notes. Any amounts outstanding in the account at final maturity are available to cover any principal shortfalls on the notes.
Discounted Assets: The aggregate nominal amount of the notes, plus the
subordinated loan and overcollateralisation via the collateral loan, equals the present value of the purchased receivables discounted at issuance using the discount rate. The transaction, therefore, yields no excess income to cover losses, or to reimburse losses.
VWFSA Risk: There is no back-up servicer, and the transaction is dependent on
VWFSA’s operational and credit assessment capabilities. VWFSA is an unrated entity; and, as such, an advance mechanism is in place so that collections are prepaid and segregated from VWFSA’s own funds. The transaction is reliant on VWFSA making compensation payments to cover interest shortfalls if borrowers on interest rates higher than that of the discount rate prepay. This risk has been included within Fitch’s cash-flow analysis under various stressed scenarios.
Balloon Loans within Portfolio: Obligors that are subject to balloon payments are
required to make such payments if balloon payments cannot be refinanced. The pool, by balance, contains 56.8% that are subject to balloon payments, which is higher than peer transactions. Fitch expects higher default risk if limited refinancing options exist within the market. This could be the case under more severe economic stress. Fitch has incorporated this risk in its analysis.
Impact of Emissions Allegation: In accordance with the transaction documents, any
legally permissible reduction of instalments, or termination, of contracts by obligors would be a breach of warranty made to the issuer by the seller. Fitch has also considered higher price declines for 7.4% of the discounted portfolio balance that are affected vehicles.
Source: Fitch
Credit Enhancement Levels
(%) Gross loss Recovery rate Net loss Current hard CE a
AAAsf 16.1 28.1 11.7 14.0 AA-sf 11.8 35.6 7.7 8.6 a Current Hard CE; current subordination provided by the lower notes/loans and the CCA (1.2%)
Source: Fitch
Base-Case Loss & Recovery Summary (%) Pool Gross loss Recovery rate Net loss
New cars 88.9 3.0 57.6 1.3 Used cars 11.1 5.0 44.6 2.8 Portfolio weighted 100.0 3.2 56.1 1.4
Source: Fitch
Collateral Summary Pool characteristics (as of 31 January 2016)
Number of receivables 15,495 Geographical distribution (%) Total receivables pool balance (AUD) 573,467,754 New South Wales 49.7 Average receivable size (AUD) 35,210 Victoria 21.5 Maximum current balance (AUD) 420,241 Queensland 14.4 Weighted-average seasoning (months) 11.0 Western Australia 6.7 Weighted-average term to maturity (months) 44.6 South Australia 3.8 New motor vehicles (%) 88.9 Australian Capital Territory 3.6 Used motor vehicles (%) 11.1 Northern Territory 0.1 Consumer loans (%) 34.9 Tasmania 0.2 Chattel Mortgage (%) 64.7 Hire Purchase (%) 0.4 Payments Weighted-average balloon payment (% of original balance) 37.6 Performing contracts (%) 100 Vehicles affected by emissions allegations 7.4 Payment method Direct debit or BPAY
Source: VWFSA, Fitch
Simplified Structure Diagram
Class A Floating-Rate Notes
(‘AAAsf’)
Trust Manager
Perpetual Nominees
Limited
Collateral Account Provider
Australia and New Zealand Banking
Group Limited (‘AA-‘/F1+)
Assets
Security Trustee
P.T. Limited
Noteholders
TrusteePerpetual Corporate Trust
Limited
IssuerDriver Australia Three Trust
Class B Floating-Rate Notes
(‘AA-sf’)
Subordinated Lender
An Affiliate of Volkswagen AG
Seller/Servicer Volkswagen Financial Services Australia Pty.
Ltd.
Interest Rate Swap Provider
Australia and New Zealand Banking Group
Limited (‘AA-‘/F1+)
Collections Account
Provider
Australia and New
Zealand Banking Group
Limited (‘AA-‘/F1+)
Sub-Trust Manager
Volkswagen Financial
Services Australia Pty. Ltd.
Collateral Loan Lender
Volkswagen Financial Services Australia Pty. Ltd.
Note: This diagram represents Fitch’s interpretation of the transaction structure as represented in the transaction documents
Source: Transaction documents
Structured Finance
Driver Australia Three Trust
April 2016 23
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