February 3, 2017 / 12:07 PM / a year ago

Fitch: Europe Auto ABS Appear Robust to New Emission Allegations

(The following statement was released by the rating agency) LONDON, February 03 (Fitch) The experience of European Volkswagen (VW) ABS suggests that there is little near-term threat to transaction performance from new allegations regarding possible emissions irregularities by other manufacturers, Fitch Ratings says. Nevertheless, it will be important to monitor the potential impact of legal, regulatory and commercial developments. Since VW admitted understating emissions in the US in 2015, other investigations have emerged, although no other manufacturer has been found to be using illegal defeat devices. Last month, the US Environmental Protection Agency (EPA) issued a notice of violation to Fiat Chrysler Automobiles (FCA) for allegedly failing to disclose engine management software in some models. French authorities said in January that they had begun a preliminary investigation into Renault (which says its models conform to laws where they are sold). PSA Group said last year that it had been visited by anti-fraud investigators, but that its vehicles are compliant "in pollutant emissions." Investigations appear to be at an early stage and details are emerging gradually. As far as Fitch is aware, the severity of the allegations concerning other manufacturers seems less than those relating to Volkswagen and the number of affected vehicles is lower. Fitch considers that there are two primary risks for ABS transactions: whether borrowers or lessees have legal claims against dealers or manufacturers that, if not satisfied, could be set-off against payments due under their loan or lease agreement; and the potential impact on car prices and hence recovery rates and residual value sale proceeds. So far, these risks have not crystalised to a material extent in Fitch-rated European VW ABS transactions. VW's stated commitment to repair affected vehicles has limited borrowers' and lessees' desire to make legal claims. Legal analysis presented to Fitch by transaction counsel says that customers in Germany and France have rights against the dealer which sold the vehicle in the first place and not primarily against the originator or issuing SPV. In the UK, buyers using personal contract purchase (PCP) or hire purchase (HP) agreements can make direct claims against the originator. However, the wide-ranging termination rights in applicable UK consumer legislation mean Fitch has always stress-tested the resilience of UK auto ABS transactions to unprecedented termination rates, so any increase would have to be very severe to have a rating impact. VW's repair proposals also appear to have contained any price impact. Fitch has not seen any substantial change in used VW diesel vehicle prices. Our analysis still incorporates a 10% haircut to our base case recovery assumptions for these vehicles, as the majority of cars have yet to be repaired. Strong underlying portfolio performance, stable prices, and the ongoing repair process were reflected in the positive rating actions announced in November 2016 (see 'Fitch Upgrades 6 Tranches of VW ABS; Affirms 10 Tranches '). However, Fitch will continue to monitor developments and whether we need to reconsider our assumptions. Potential legal risks continue to evolve, depending on the outcome of current cases, meaning that the risk of claims which could threaten cash flows in ABS transactions cannot be fully excluded. This would increase credit dependency on VW and dealers. In Germany, customer court proceedings against dealers claim that repairs are taking too long or are incomplete, while a case directly against VW claims that a car was sold without a valid operating permit and should be taken back. In the UK, an application for a Group Litigation Order has been filed, claiming purchasers were misled. The European Commission is investigating whether consumer law was violated. News-flow around emission irregularities is increasing regulatory pressure to encourage a shift away from diesel engines. We think this could eventually hit used car prices, notwithstanding the lack of impact so far. As long as regulatory changes are gradual and not sudden and disruptive, the impact on ABS should remain limited. Contact: Markus Papenroth Senior Director Structured Finance +44 20 3530 1707 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Eberhard Hackel Senior Director Structured Finance +49 69 768076 117 Mark Brown Senior Analyst Fitch Wire +44 20 3530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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