Rating action

Scope Ratings GmbH (Scope) has performed the following rating actions after completing a monitoring review on the notes issued by VCL Master Sweden S.A.:

Class A1, up to SEK 2,600,000,000: affirmed at AAA_SF

Class A2, up to SEK 2,600,000,000: affirmed at AAA_SF

Class A3, up to SEK 2,500,000,000: affirmed at AAA_SF

Class A4, up to SEK 500,000,000: affirmed at AAA_SF

Class A5, up to SEK 1,640,250,000: affirmed at AAA_SF

Class A6, up to SEK 1,000,000,000: not rated

Class B1, up to SEK 400,000,000: downgraded to A+_SF from AA-_SF

Class B2, up to SEK 400,000,000: downgraded to A+_SF from AA-_SF

Class B3, up to SEK 110,000,000: not rated

Class B4, up to SEK 350,000,000: downgraded to A+_SF from AA-_SF

Scope’s review was based on servicer, investor and payment reporting as of the February 2024 payment date. 

Transaction overview

The transaction is a Swedish Auto ABS securitisation issued in March 2023. A detailed description of the transaction features and analytical assumptions, at closing, can be found in the transaction´s rating report, available at Scope´s website.

The rating actions follow the execution of an amendment agreement effective as of 19 March 2024 that includes the following changes:

• the extension of the revolving period and legal maturity date of the outstanding class A and class B notes by one year, respectively;
   
• the reduction of targeted overcollateralisation levels for the class A and class B notes;
   
• the reduction of the class A and class B notes’ margins by 5bp each to 95bp and 155bp, respectively;
   
• the implementation of a new collection reserve; and
   
• the increase in the early amortisation threshold for amounts deposited in the transaction’s accumulation account to 15% from 10%

Other transaction features and provisions remain substantially unchanged.

The underlying portfolio of assets is revolving and is set to commence amortisation in March 2025, subject to no renewed prolongation in 2025. The capital structure's tranching provides credit enhancements of 26.05% and 15.73% during the revolving period for class A and class B notes, respectively. During the amortisation period, the credit enhancement is expected to increase to 30.05% and 19.73% for class A and class B notes, respectively.

The non-amortising reserve fund is at 100% of its target level, equivalent to 1.2% of the initial size of the class A and class B notes. Alongside the existing reserve, a new collection reserve supports the rated instruments, replacing the servicer’s prepayment compensation mechanism for interest prepayments from obligors. This supplementary cash reserve provides liquidity for senior expenses and interest and also acts as robust credit enhancement if required. Initially funded by Volkswagen Finans Sverige AB, the new reserve is set at 0.66% of the higher of the targeted aggregate receivables balance for i) class A and ii) class B and will be replenished during the revolving period with available funds after the payment of class B principal. Upon entry into the amortisation period, the reserve ceases to be replenished, and its balance is promptly utilised to amortise the notes to achieve the targeted higher overcollateralisation levels.

The issuer remains primarily exposed to the following counterparties: Volkswagen Finans Sverige AB (VFS) as originator and servicer and Skandinaviska Enskilda Banken AB as issuer account bank. 

Rating rationale

The review addressed a) the observed performance of the collateral as of the January 2024 cut-off date, b) Scope´s forward-looking performance assumptions, in the context of the expected macro-economic environment over the remaining life of the transaction, c) the transaction´s updated asset and liability structure following the March 2024 amendment, and d) the issuer´s exposure to key transaction parties.

Beyond the key rating drivers addressed further below, the main analytical considerations on the transaction are:

Observed collateral performance¹: Overall, the portfolio has performed better than expected by Scope at closing. The following key metrics, as of the reporting cut-off date, reflect the overall portfolio performance: cumulative default rate at 0.2%^a , 90 days-past-due dynamic delinquency rate at 0.02% and cumulative prepayment rate at 3.74%^a.

Credit enhancement²: The class A notes’ credit enhancement, provided by the subordination of class B notes, the subordinated loan and overcollateralisation reduces to 26.05% after the amendment from 27.95% at closing. Class B notes’ credit enhancement provided by the subordinated loan and overcollateralisation reduces to 15.73% after the amendment from 17.90% at closing.

Available excess spread¹: Available excess spread covers realised cumulative defaults since closing . This available excess spread could decrease going forward, for instance from higher servicing fees upon a servicer termination event, increased delinquencies or from the concentration of prepayments or defaults in the higher yielding portfolio buckets.

Liquidity protection²: Available liquidity continues to support the notes’ ratings, in accordance with Scope’s General Structured Finance Rating Methodology. Both the liquidity reserve and the collection reserve adequately cover for scheduled senior expenses and interest payments for the upcoming five monthly payment dates, given the current interest rate environment. This coverage diminishes during the amortisation phase as the collection reserve ceases to be replenished. Nevertheless, the non-amortising nature of the liquidity reserve mitigates this impact over time.

Interest rate risk²: The structure is unhedged against basis and interest rate reset risks arising from differences between the rates payable on the assets and the rates payable on the liabilities. However, the VFS funding rate on the assets is typically higher than the one-month Stibor paid on the notes. In addition, both are resetting monthly with only a short delay. Class A and B notes derive significant benefit from the interest yield generated by the portion of the portfolio that serves as overcollateralisation. The level of excess spread is contingent upon fluctuations in the interest rate. To assess such risks, Scope’s analysis embeds rating-conditional interest rate stresses, which we have updated, considering current and expected market conditions.

Counterparty risk: The key transaction counterparties continue to support the ratings. No rating-change drivers related to counterparty risks have taken place since Scope’s last rating action.

Electric vehicles^1,3. Residual values for electric vehicles have decayed over time explained by the post-pandemic shortage of vehicles subsided and demand for vehicles lined up closer with supply. In addition, manufacturers steadily cut prices of new electric vehicles to boost stuttering demand. At the same time, book values of used electric vehicles are too high since they were based on initially higher prices. Remarketing performance provided by VFS confirms this trend for electric vehicles. As of the January 2024 cut-off date the portfolio is comprised of 39.7% electric vehicles up from 32% at closing. Scope assessed the risk of higher residual value losses from electric vehicles as part of its sensitivity analysis. 

Key rating drivers

The key rating drivers continue to be aligned with those disclosed on Scope’s rating action release dated 27 March 2023, with the following exceptions:

• Overcollateralisation: With the amendment, the class A and B notes benefit from reduced overcollateralisation compared to closing of 26.05% and 15.73%, respectively. During and after the revolving period, overcollateralisation for both classes must increase before remaining funds can be released to the subordinated loan and the originator.
   
• Granular portfolio: The portfolio is granular. Top obligor and industry distributions are in line with those at closing.

None of the key rating factors are ESG related. 

Key rating-change drivers

All else equal, the following factors may constitute upside or downside rating drivers:

• A material deviation of observed transaction performance from Scope´s forward looking performance assumptions.
   
• Material changes in Scope´s forward-looking macro-economic and/or interest rate outlook.

All else equal, the following factors may constitute upside rating drivers:

• The completion of the revolving period with robust portfolio, originator and sovereign performance could lead to a rating upgrade.
   
• Stable levels of portfolio yield, and/or the reduction of servicer termination risk, supporting lower stresses on forward looking excess spread assumptions.

All else equal, the following factors may constitute downside rating drivers:

• Rating downgrade of a transaction´s key counterparty beyond a level which would cease to be compliant with Scope´s Counterparty Methodology.
   
• With regards to the class A notes only, a depletion of the reserve fund beyond a level commensurate with the then current rating of the notes, in accordance with Scope’s General Structured Finance Methodology. 

Quantitative analysis and assumptions

Scope used a proprietary cash flow model to calculate the expected loss and expected weighted average life of each rated tranche, considering the transaction´s assets and liability structure. Asset cash flows are projected based on the securitised portfolio amortisation schedule and on committee-agreed upon performance assumptions, which reflect the characteristics and quality of the portfolio. The model replicates the transaction’s key structural features, including the capital structure, the order of priority of the issuer´s liabilities, and enhancement features such as excess spread and cash reserves.

The key analytical assumptions include the following: an inverse-gaussian distribution of portfolio remaining lifetime defaults, with a mean of 3.2% and a coefficient of variation of 40%; rating-conditional recovery rates ranging from 80% under a B scenario to 48% under a AAA scenario; rating-conditional residual value recovery rates ranging from 80% under a B scenario to 63% under a AAA scenario; high and low constant prepayment rate scenarios of 20% and 0%, respectively; stressed senior fees of 1.25%; a fixed weighted average portfolio yield compression of 0.4% increasing to 0.9% over three years; and rating-conditional interest vectors, which are subject to the base rate payable of on the notes, and which range from 3.5%-4.7%, under a B scenario, and -1%-9% under a AAA scenario. 

Sensitivity analysis

Scope tested the resilience of the credit ratings against deviations in the main input parameters: the portfolio mean default rate and the portfolio recovery rate. This analysis has the sole purpose of illustrating the sensitivity of the ratings to input assumptions and is not indicative of expected or likely scenarios.

• A 50% increase in the mean default rate assumption has a zero-notch quantitative impact on the class A notes and a minus three notches quantitative impact on the class B notes.
   
• A 50% decrease in Scope´s rating-conditional recovery rate assumptions has a zero-notch quantitative impact on the class A notes and a minus three notches quantitative impact on the class B notes.

a. The calculation takes into account initial assets and replenished assets

Rating driver references
1. Investor reporting (Confidential)
2. Transaction documentation (Confidential)
3. VFS Remarketing performance (Confidential)

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like defaults and Credit-Rating-adjusted recoveries, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows. The impact on the rated instruments is weighted by the assumptions of the likelihood of the events in such scenarios occurring.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction with the use of Scope Ratings’ Cash Flow Structured Finance Expected Loss Model Version 1.2 incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for these Credit Ratings, (General Structured Finance Rating Methodology, 6 March 2024; Consumer and Auto ABS Rating Methodology, 4 March 2024; Counterparty Risk Methodology, 13 July 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings is (Cash Flow Structured Finance Expected Loss Model Version 1.2), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit was considered when preparing the Credit Ratings and it has no impact on the Credit Ratings.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Martin Hartmann, Director
Person responsible for approval of the Credit Ratings: Benoit Vasseur, Managing Director
The final Credit Ratings were first released by Scope Ratings on 27 March 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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