DBRS Comments on Potential Impact of Volkswagen Negative Review on European Structured Finance Transactions

DBRS Limited (DBRS) placed the Issuer Rating of Volkswagen AG (VW or the Company) Under Review with Negative Implications on 23 September 2015. DBRS also confirmed the R-1 (low) Commercial Paper rating of Volkswagen Canada Inc. These rating actions follow VW’s recent announcement that, with respect to emissions, some 11 million diesel vehicles worldwide generate noticeable deviations between bench-test results and actual road use. Moreover, the Company also indicated that it plans to take provisions in the amount of approximately EUR 6.5 billion in the forthcoming quarter (ending September 30, 2015) and added that the provisions may be subject to revaluation. For more details, please refer to the press release entitled “DBRS Places Volkswagen Under Review with Negative Implications” at DBRS.com.

Based upon data, information and securitisation performance to date, DBRS believes the structural protections in the VW-sponsored securitisations are likely to be sufficient to insulate investors from any potential loss. Currently, no rating actions are being taken on the European auto securitisations (including placing the transactions Under Review) listed at the end of this press release. While the Company continues to address this matter, DBRS will continue to evaluate the circumstances and update the market as conditions develop.

DBRS highlights the following with regards to VW’s European securitisation transactions:

VW securitisations contain rating downgrade provisions designed to mitigate potential counterparty exposure to VW:

As VW (rated “A,” Under Review with Negative Implications by DBRS) and its subsidiaries act as counterparties in many of the securitisations listed at the end of this press release, a rating downgrade of the Company and/or related entities may breach certain transaction-specific thresholds and trigger structural consequences. DBRS considers the downgrade provisions prescribed in the listed transactions sufficient to mitigate potential counterparty risk exposure to VW.

VW representations and warranties in the transaction documents with respect to receivable contract issues:

Of concern to DBRS is the sale or lease agreements of affected vehicles that may be rendered invalid and result in the cancellation of transaction receivables and the indemnification claims by lessees or borrowers. However, in this scenario, DBRS expects the issuers to be indemnified by VW based on the representations and warranties in the transaction documents and the affected receivables to be repurchased by VW. In the latter case, the risk of loss to investors remains unlikely, but if the support from VW becomes significant, the rating of the securitisation notes could be impacted. DBRS understands that VW is already planning measures to cure potential breaches in advance and thus, such a situation may ultimately be addressed without disruption.

Currently, this matter relates to U.S. regulation where the U.S. Environmental Protection Agency has taken a defined position on VW and its emissions. To date, the European regulators have yet to clarify their position in all of the European countries where VW transaction collateral originates. Investigations are being opened in the U.K., France, Italy, the Netherlands and Germany and there will likely be a Europe-wide probe. The majority of VW transaction collateral is from Germany and DBRS will continue to monitor the position of the European regulators, as well as specifically the German government and regulator as this could have future implications for VW securitisations. However, at this time the issue remains focused upon the U.S. vehicles.

Other structural features, such as performance triggers, exist in the transaction documents that enhance investor protection:

Within the securitisation transactions listed below, there are structural features to mitigate risks that may affect noteholders (e.g., downgrade provisions and indemnification provisions). Furthermore, as described above, DBRS is aware the manufacturer is considering extensive cure measures. DBRS currently considers the risk of loss to investors remote at this point and therefore is not taking any immediate rating actions (including placing such transactions Under Review) on the transactions listed herein.

DBRS incorporates more stressful assumptions within its scenarios at each successively higher rating level in anticipation of unforeseen events:

The developing situation may have an immediate impact on the residual value of diesel vehicles, particularly in the U.K., where the lessees may be more likely to hand back the vehicles, thereby causing an increase in turn-in rate and potentially lower resale proceeds. To the extent such a scenario unfolds, DBRS believes the transactions will be sufficiently insulated from loss as the original DBRS stress assumptions contemplated a high turn-in rate and significant reductions in residual values.

DBRS continues to gather and evaluate data and information as it becomes available and will provide market participants with additional updates as appropriate.

DBRS currently has outstanding ratings on the following 30 VW-related securitization transactions in Europe:

-- Driver France FCT - Compartment 2013-1
-- Driver France FCT - Compartment Driver France Two
-- Driver UK Multi-Compartment S.A. - Compartment Driver UK Two
-- Driver UK Multi-Compartment S.A. - Compartment Driver UK Three
-- Driver UK Master S.A. - Compartment Two
-- Private Driver España 2013-1, FTA
-- VCL Multi-Compartment S.A. - Compartment VCL 17
-- VCL Multi-Compartment S.A. - Compartment VCL 19
-- VCL Multi-Compartment S.A. - Compartment VCL 18
-- VCL Multi-Compartment S.A. - Compartment VCL 20
-- VCL Multi-Compartment S.A. - Compartment VCL 21
-- Driver Ten GmbH
-- Driver Eleven GmbH
-- Driver Twelve GmbH
-- Driver Thirteen UG (haftungsbeschränkt)
-- Private Driver 2015-1 UG (haftungsbeschränkt)
-- Private Driver 2012-1 GmbH
-- Private Driver 2012-2 GmbH
-- Private Driver 2012-3 GmbH
-- Private Driver 2013-1 UG (haftungsbeschränkt)
-- Private Driver 2013-2 UG (haftungsbeschränkt)
-- Private Driver 2014-1 UG (haftungsbeschränkt)
-- Private Driver 2014-2 UG (haftungsbeschränkt)
-- Private Driver 2014-3 UG (haftungsbeschränkt)
-- Driver Master S.A. - Compartment 1
-- Driver Master S.A. - Compartment 2
-- Driver Master S.A. - Compartment 3
-- Driver Master S.A. - Compartment 4
-- Driver Master S.A. - Compartment 5
-- DFM Master S.A.