Fitch Ratings has assigned AMAG Leasing AG’s (ALAG) first auto covered bonds an expected rating of ‘AAA(EXP)’ with a Stable Outlook. The programme is the first covered bond backed by auto lease receivables rated by Fitch, and is based on similar issuance templates as other Swiss covered bonds.
The bonds will be backed by a cover pool of Swiss auto lease receivables (including residual value (RV)) and will have a conditional pass-through feature, with a maturity extension of seven years, longer than the maximum tenor of five years for the eligible assets.
Fitch has assumed for its analysis that the first issue is denominated in Swiss francs at fixed rates with a 3.25-year maturity. The covered bonds will be issued under a contractual framework under Swiss law. They will constitute senior unsecured obligations of ALAG, guaranteed by AMAG Leasing Auto Covered Bond AG, a special purpose entity that will be granted security of the cover assets.
The assignment of the final rating is contingent upon receipt of final documents and legal opinions conforming to the information already received.
Key rating drivers
The ‘AAA(EXP)’ conditional pass-through auto covered bonds rating is notched up from ALAG’s private Long-Term Issuer Default Rating (IDR), as the auto covered bonds benefit from liquidity protection in the form of a seven-year conditional pass-through maturity extension and a dedicated liquidity reserve that covers three months of senior costs and interest payments, and high recoveries given default. The expected rating is based on the asset percentage (AP) of 79.0% that will be applied in the contractual asset coverage test (ACT) at inception.
This is lower than Fitch’s ‘AAA'(EXP) break-even AP of 80.5% which is predominantly driven by the credit quality of the cover pool, notably the RV risk. The buffer against a downgrade of ALAG’s IDR supports a Stable Outlook on the covered bond rating.
ALAG has originated several ABS transactions backed by assets similar to those in the cover pool, all of them rated by Fitch.
Uplifts
ALAG’s auto covered bond programme is set up on a contractual basis, and its covered bonds are issued under the SPE guarantor template. Contractual provisions present in the programme include mandatory over-collateralisation (OC), rules in place to disregard delinquent leases in the ACT, as well as the existence and role of an independent asset monitor. Fitch therefore believes the risk of under-collateralisation is low.
However, as ALAG is not directly subject to prudential regulation by FINMA, and covered bonds issued under the programme would not be subject to any bank resolution regime/ bail-in tool. As such, we do not expect resolution to be applied in case of a default of ALAG.
The PCU reflects the strength of the liquidity protection under the conditional pass-through liability profile with a seven-year principal maturity extension that goes beyond the maximum tenor of the cover assets (five years). The programme also includes interest-protection provisions, a liquidity reserve fund held at the SPE’s account bank, that covers the higher of (i) three months’ interest payments on the outstanding covered bonds and senior expenses and (ii) accrued interest and senior expenses.
None of the other factors influencing payment continuity analysed by Fitch represents a high risk, which in our view would otherwise be reflected in a PCU reduction.
Fitch has assigned a recovery uplift to the covered bonds. This reflects our view that, in the event of a covered bonds default, the cover pool, which comprises standard Swiss auto lease receivables, should allow for outstanding recoveries on the covered bond. The recovery uplift takes into account that no material downside risk to recovery expectation have been identified by Fitch. The covered bond issue will be in Swiss francs, the same currency as the assets.
‘AAA(EXP)’ Break-even AP
The ‘AAA(EXP)’ break-even AP of 80.5%, corresponding to a minimum OC of 24.2%, supports timely payments on the bonds in a stress scenario and recoveries given default to support a ‘AAA'(EXP) rating under Fitch’s criteria.
The credit loss component of 26.9% is the main driver of the ‘AAA’ break-even OC. The credit loss component represents the RV loss, the credit loss and upfront losses. The ALM loss, which in this programme reduces the break-even OC, reflects the excess spread from the comparatively higher interest earned on the assets than that of the liabilities.
OC Protection
In its analysis, Fitch gives credit to the AP used in the ACT, to be disclosed in the investor report, which is 79.0% at inception. This provides protection greater than Fitch’s ‘AAA’ break-even AP of 80.5%.
Cover Pool Credit Quality
The provisional portfolio consists of auto lease receivables originated in Switzerland by ALAG and granted to private and commercial customers. The lease contracts do not include any other product or services such as insurance or maintenance. All leases include an RV component. The provisional cover pool is randomly selected based on eligible, non-encumbered auto-lease receivables originated by ALAG.
Given the nature of the assets, Fitch analysed the portfolio using the framework applicable in its “Consumer ABS Rating Criteria” and “Consumer ABS Rating Criteria – Residual Value Addendum”.
The auto lease receivables in the pool include RV at contract maturity. As no covenant will be set, the RV portion can increase substantially, due to the effect of portfolio seasoning and the characteristics of new assets being added to the cover pool, which will be driven by any changes to ALAG’s RV-setting policy.
We assume an increase of the RV up to 72% (from 61% in the preliminary portfolio). Car dealers are bound to pay the contractual RV to ALAG, but a dealer default or customer prepayments could expose ALAG to the risk of RV losses if used-vehicle prices decline. Fitch assumes market value losses from RV and prepayments of 22.2% when calculating the ‘AAA(EXP)’ break-even AP. In its analysis, Fitch used the multi-asset cash flow model (MACFM), which constitutes a variation to the covered bonds rating criteria, to model the RV risk (see Criteria Variation below). No rating impact is linked to this variation.
Credit losses on originator’s book have been limited, and have not been affected by the coronavirus pandemic. Macro-economic conditions in Switzerland remain strong, and its 2.5% GDP contraction in 2020 was much less pronounced than in other European countries. Fitch has assigned a weighted average (WA) default base case of 1.2% to the stressed cover pool, after taking into account a potential migration to more stressful characteristics given the absence of covenants. Fitch accounted for a possible increase in defaults in a stressed environment by assigning a higher-than-range WA multiple of 7.1x at ‘AAA’. Overall losses from the instalment portion of the pool are 4.9% at ‘AAA’.
Rating sensitivities
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The covered bonds’ rating is ‘AAA(EXP)’ is the highest level on Fitch’s scale and therefore cannot be upgraded.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The covered bonds’ ‘AAA(EXP)’ rating could be downgraded if the AP Fitch relies on increases to above the ‘AAA’ break-even AP of 80.5%. The covered bonds’ ‘AAA(EXP)’ rating could also be downgraded if ALAG is downgraded below a certain level. The break-even AP to support the ‘AAA(EXP)’ rating may decrease if ALAG is downgraded but this would depend on the combination of timely payment rating level and recovery uplift used to support the rating.
Best/worse case rating scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
Criteria variation
Fitch applied a variation to the Covered Bond Rating Criteria, and used the MACFM as opposed to the covered bond cash flow model in its cash flow analysis. Although conditional pass-through programmes should yield the same results in both models, MACFM was used to better capture RV risk, which is a key risk of the programme. This variation has no rating impact on the programme.
References for substantially material source cited as key driver of rating
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public ratings with credit linkage to other ratings
The covered bonds’ rating is driven by the credit risk of ALAG as measured by its Long-Term IDR.
ESG considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.