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Fitch Assigns Final First-Time Rating to DPCAFC's Rongfa 2017-1
August 25, 2017 / 6:51 AM / 3 months ago

Fitch Assigns Final First-Time Rating to DPCAFC's Rongfa 2017-1

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, August 25 (Fitch) Fitch Ratings has assigned a final rating to Rongfa 2017-1 Retail Auto Loan Securitization Trust's auto-loan backed floating-rate notes. The issuance consists of notes backed by Chinese automotive loan receivables originated by Dongfeng Peugeot Citroen Auto Finance Co., Ltd. (DPCAFC); a joint venture of Dongfeng Motor Group Company Limited (A/Stable; 50%) and Groupe PSA (50%). This is DPCAFC's first auto-loan ABS transaction rated by Fitch, but the company's second in China. The ratings are as follows: CNY2,500 million Senior notes: 'AAsf'; Outlook Stable CNY500 million Subordinated notes: 'NRsf' The notes are issued by Shanghai International Trust Co., Ltd. in its capacity as trustee of Rongfa 2017-1. At the 31 May 2017 cut-off date, the total collateral pool consisted of 65,905 auto-loan receivables with a total balance of CNY3 billion. KEY RATING DRIVERS Stresses Commensurate with Rating: Fitch expects a lifetime default rate for the DPCAFC portfolio of 1.3%. We applied a stress multiple of 6.0x at 'AAsf' on defaults to take into account the limited history of car finance in China - particularly through an economic cycle - and Fitch's expectation that emerging-market securitised assets are prone to higher stress levels than those in developed markets for the same rating category. Fitch's recovery expectation is limited to 10%, subject to a further 50% haircut at 'AAsf'. Strong Portfolio Characteristics: The weighted-average (WA) loan/value (LTV) ratio is 61.8% as of the cut-off date. The portfolio has a WA original term of 30.8 months and has been seasoned for 9.0 months. The pool is well-diversified - the maximum single obligor concentration had an exposure of less than 0.01% of the outstanding principal balance as of the cut-off date. The portfolio does not have loans subject to refinancing risk for repaying balloon payments; all vehicles are new. Adequate Credit Enhancement and Liquidity: Initial hard credit enhancement (CE) to the senior notes at 16.7% is sufficient to withstand Fitch's rating stresses. The liquidity reserve is funded through the waterfall. Transaction documents stipulate that the required liquidity reserve cannot be less than CNY15 million (0.5% of initial outstanding balance) during the trust's life. Stable Asset Outlook, Rating Cap: We see the asset outlook of this portfolio - based on its characteristics - as stable. Fitch forecasts China's unemployment rate at 4.0% in 2017 and 2018 and GDP growth at 6.7% in 2017 and 6.3% in 2018. The 'AAsf' rating is Fitch's cap on Chinese structured finance transactions due to the early development stage of China's securitisation markets and China's Long-Term Local-Currency Issuer Default Rating of 'A+'. RATING SENSITIVITIES Unexpected increases in default rates and unexpected decreases in recovery rates on defaulted loans could produce loss levels higher than Fitch's base case, which could lead to negative rating action on the notes. Fitch has evaluated the sensitivity of the ratings to increased gross default levels and decreased recovery rates over the life of the transaction. The analysis found that the notes' ratings are susceptible to downgrade in a severe default scenario. The analysis found the senior notes may be downgraded to 'Asf' if the base case default rate were to increase by 100%, assuming all other factors remain constant. The rating on the senior notes is not sensitive to lower recovery rates, even when reduced to zero, assuming all other factors remain constant. USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) disclosed in the offering document that relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated 31 May 2016. DATA ADEQUACY Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis. Prior to transaction closing, Fitch conducted a review of a small targeted sample of DPCAFC's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable. VARIATIONS FROM CRITERIA Fitch's Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria apply where interest-rate risk is a residual risk. The asset and liability benchmark rate reset timing difference presented in this transaction requires additional analysis, which constitutes a variation to criteria. To address the risk arising from this variation, Fitch assumes in the cash flow model that the benchmark rate of all floating-rate assets is reset in January each year, so the reset timing difference between asset and liability benchmark is stressed to 12 months. The model results show that the reset timing difference produces minimal rating impact to the transaction and is therefore not a key rating driver. The interest-rate stresses applied are outlined in Fitch's criteria and the analytical approach is considered adequate to address and test rating sensitivity to the interest-rate reset risk for this transaction. SOURCES OF INFORMATION The information below was used in the analysis: -Pool stratification data provided by DPCAFC as of 31 May 2017 -Loan performance data provided by DPCAFC as at March 2017 -Capital structure and structural features information provided by DPCAFC in June 2017 -Executed transaction documentation provided by King & Wood Mallesons (the transaction counsel) in August 2017 -Executed legal opinion and letter of undertaking provided by DPCAFC in August 2017 The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. Contacts: Primary Analyst Anthony Liu Analyst +852 2263 9968 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Kan Zhou Associate Director +86 21 5097 3051 Committee Chairperson Hilary Tan Senior Director +852 2263 9904 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016) here Fitch's Interest Rate Stress Assumptions for Structured Finance and Covered Bonds - Excel File (pub. 17 Feb 2017) here Global Consumer ABS Rating Criteria (pub. 25 May 2017) here Global Structured Finance Rating Criteria (pub. 03 May 2017) here Structured Finance and Covered Bonds Counterparty Rating Criteria (pub. 23 May 2017) here Structured Finance and Covered Bonds Interest Rate Stresses Rating Criteria (pub. 17 Feb 2017) here Related Research Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions here Rongfa 2017-1 Retail Auto Loan Securitization Trust - Appendix here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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