Unicredit, on cruise control - a guide to the european auto abs market

24 July 2012 Credit Research

Credit View

UniCredit Research page 1 See last pages for disclaimer.

On Cruise Control – A Guide to the European Auto ABS Market

Overview ■ From an investor's perspective, the appeal of auto ABS is manifold.

Auto ABS offer diversification for much of an investor's corporate exposure as it involves consumer risk. In fact, it provides transparency by allowing investors to look behind the scenes and to form a view on collateral, which comprises the sole source of repayment for the security. Additionally, the underlying assets, i.e., the auto loans or leases, are fairly straightforward and highly granular, thus leading to further diversification.

■ The sector provides high quality investments from a rating perspective, with the bulk of the market rated AAA. Additional benefits to investors lie in the sector's rating stability. Rating actions have remained fairly limited in number, and concentrated within certain geographic areas.

■ 2012 is shaping up to become one of the best years for European auto ABS. So far, 20 auto ABS transactions have been closed across Europe (against 49 deals in 2011), which translates into a EUR equivalent of EUR 13.8bn, with roughly EUR 6.4bn thereof retained by their originators.

■ Against a background of increasingly lower Bund yields and a dearth of alternatives, the spread pickup has generated renewed interest in the sector. This development has brought spreads down to the lowest levels since late 2007. Investors are still accepting reduced compensation, the consequence being that risk premiums on some AAA-rated auto ABS have declined to the lowest levels since 2007.

■ The market has seen a relatively high number of transactions backed by riskier auto leases. More importantly, some of these auto lease ABS include residual values (RV), which come with higher risk premiums. In addition, there has been a growing number of transactions from less well-known issuers or from those captives deemed to have higher credit risk.

■ The factors speak for themselves: The short weighted-average life (WAL) in most of the transactions, spread pick-up relative to Bunds and other short-term high-quality bonds, rating stability as well as decent liquidity suggest that AAA auto ABS tranches are likely to continue to be considered a veritable safe-haven asset.

Contents On Cruise Control – A Guide to the European Auto ABS Market ________________________________ 1

Overview_________________________________ 11. Why Auto ABS? ___________________________ 22. The European Auto ABS Sector_______________ 4

2.1 A short history of the European auto ABS market42.2 New issuance volumes ___________________ 52.3 Issuance by country _____________________ 62.4 Pricing and spreads _____________________ 72.5 Investors in auto ABS ____________________ 9

3. Auto ABS Issuers __________________________ 93.1 Captives and non-captives ________________ 93.2 Largest Issuers ________________________ 103.3 Funding______________________________ 11

4. Structural and collateral characteristics ________ 144.1 Transaction structure ___________________ 144.2 Credit Enhancement ____________________ 174.3 Collateral Characteristics ________________ 18

5. Fundamental Performance__________________ 225.1 Rating developments ___________________ 225.2 Delinquencies _________________________ 245.3 Defaults and losses ____________________ 245.4 Prepayments__________________________ 265.5 Fundamentals and economic developments__ 27

6. Relative Value and performance outlook _______ 296.1 Relative Value in Auto ABS ______________ 296.2 Fundamental Outlook ___________________ 30

Related Research Securitization Market Watch, 23 July 2012

EUROPEAN AUTO ABS ISSUANCE 1999-YTD

Quarterly issuance volumes

0

1

2

3

4

5

6

7

8

9

EUR

, bn

Public/Private Retained

Author Manuel Trojovsky (UniCredit Bank) Credit Strategy & Structured Credit +49 89 378-14145 [email protected] Bloomberg UCCR Internet www.research.unicreditgroup.eu

https://www.research.unicreditgroup.eu/DocsKey/creditstrategy_docs_2012_127608.ashx?EXT=pdf&KEY=SB2lbiCTHCBdthAW4aD_lSpzWbB4bg5uBr0ejBMw-dXQAUyfCiVxKw==


Credit View

1. Why Auto ABS? Benefits to investors are manifold

The auto industry is a significant provider of credit to the economy in that it - through financing arms - grants loans to customers for the purchase of new or used cars. By issuing auto ABS backed by these loans, auto and consumer financing companies obtain funding which can beused to make new loans. More importantly, the securitization of auto loans provides a widerange of benefits for issuers and investors. From an investor's perspective, the appeal of auto ABS is manifold. Auto ABS, for example, offer diversification for much of an investor'scorporate exposure as it involves consumer risk. In fact, it provides transparency by allowinginvestors to look behind the scenes and to form a view on collateral, which comprises the solesource of repayment for the security. Additionally, the underlying assets, i.e., the auto loans orleases, are fairly straightforward and highly granular, thus leading to further diversification. As for collateral quality, receivables originated in Germany, the largest market, benefit from tightunderwriting standards and a growing number of cash-rich consumers, hence the level of credit risk is limited. Auto ABS backed by assets from other European jurisdictions are attractive as a result of low levels of personal debt or a noticeable deleveraging in the privatesector. Another major appeal of this asset class is its structural characteristic, which canadjust the collateral to meet investors' risk profiles. Auto ABS typically come with a number of performance triggers – covenants if you will – protecting investors against a deterioration in collateral performance. Aside from that, priority of payments is ensured by means of a simplewaterfall structure that establishes a strict hierarchy of cash flow distributions according to theseniority of the tranche. What's more, investors can also achieve a mitigation of event risk, asspreads and ratings are less prone to events that alter the credit metrics of firms. In addition, European auto ABS structural features are far less complex compared to other asset classesin the securitization universe.

High quality securities and ratings stability

Additionally, the sector provides high quality investments from a rating perspective, with the biggest chunk of the market rated AAA. Additional benefits to investors lie in the sector'srating stability. Rating actions have remained fairly limited in number, and concentrated withincertain geographic areas. German transactions did not experience a single downgrade ineither 2011 or 1H 2012. In fact, the deals saw several upgrades of their junior tranches due tosuperior collateral performance or the build-up of credit enhancement. Following the rating agencies' downgrades of various sovereigns, auto ABS have emerged among the few assetclasses with the highest rating in those countries. Similarly, with the vast majority oftransactions rated AAA, the German auto ABS sector nearly enjoys safe-haven status and thus has a strong investor base. Although collateral performance can vary widely amongjurisdictions and originators, senior and, to a lesser extent, subordinated auto ABS classes,provide strong protection in volatile markets, supported by strong collateral performance, particularly in non-peripheral countries, most notably Germany. Thanks to their short durationand generous credit enhancement levels, European auto ABS have registered the lowestprimary market spreads since 2007. Given the sector's strong performance in 1H 2012 and its resilience in volatile markets, it is likely to maintain its strong performance in 2H 2012 andbeyond. German auto ABS in particular have been quite a safe haven despite the structuredfinance meltdown of 2007 and the turmoil of 2011. The sector has become an alternative to sovereigns for cash investments, evolving into an important success story for investors.Compared to one year ago, the European AAA tranches in auto ABS have tightenedsignificantly, suggesting that the sector can not only outperform traditional fixed income sectors but also weather a downturn. In 2011, the sector was a major contributor to thestrength of the European ABS market with record issuance that surpassed even pre-crisis levels.

The primer is organized into six sections. The first section points out the numerous advantages of auto ABS to investors and issuers. The second section provides a broadoverview of the European auto ABS sector and gives an overview over issuance volumes,



Credit View

jurisdictions and spread performance of the sector. The third section introduces the keyparticipants' auto ABS activities and takes a look at their funding costs. The fourth sectionfocuses on structural characteristics and important differences in collateral being securitized. It also deals with the sector's different transaction structures and provides an example ofsome of the features unique to auto ABS. In addition, it compares deal structures and creditenhancements across issuers. The fifth section highlights key variables (performance and macroeconomic) that drive the borrowers' credit behavior and ultimately determine the deal performance. The sixth and final section, we take a brief look at relative value in Auto ABS and provide a look at key developments that are likely to drive the sector in the near future to guide market participants.



Credit View

2. The European Auto ABS Sector

2.1 A short history of the European auto ABS market

Auto ABS volumes more than tripled from 2003 to 2007

Auto loans and leases have formed a mainstay of the consumer ABS market not only in the United States but also in European markets. Securitization of European car loans or leasesstarted to develop in the early 1990s with the first public transactions. In 1996, VCL 1 by VWLeasing marked the first public lease securitization in Germany, which was followed by VCL 2in the same year. In the UK, the first auto ABS transaction took place in 1997 by Ford Credit.The market took off in the late 1990s, albeit still in its infancy compared to current issuance volumes, with transactions from Belgium, Italy and Portugal as well as additional UK andGerman deals. Issuance volumes never exceeded EUR 10bn until 2006, after which themarket benefitted from the heyday of securitization. Volume more than tripled from 2003 to 2007, when it peaked at about EUR 14bn (EUR 16.5bn including retained deals andtranches). In the wake of the financial crisis, public issuance virtually came to a halt, droppingto below EUR 3bn in 2009, with the majority of transactions being privately placed. The 4Q 2008/1Q 2009 primary market standstill in public auto ABS is clearly illustrated by the left chart on the next page depicting quarterly issuance volumes. During the market turmoil of thattime, a wide range of issuers resorted to structuring retained deals which were posted as collateral at the European Central Bank (ECB) to obtain funding, thereby driving retainedvolumes to unprecedented levels. In 2009 alone, retained issuance amounted to EUR12.55bn (85% of total volume in that year), resulting from 25 non-public/non-private transactions. In the following year, non-retained volumes were back to 2005 levels, before reaching a new record high of almost EUR 14.5bn in 2011, albeit through a larger share ofprivate deals. At the same time, originators continued to make extensive use of retaineddeals, particularly in 2H 2011.

Issuance peaked in 2011 but 1H12 is on track to match the previous year's volume

EUROPEAN AUTO ABS ISSUANCE

Public Private Retained

0

5

10

15

20

25

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012YTD

Volu

me

(EU

R, b

n)

Number of transactions

21 1

810 10

19

13

27

2125

32

26

49

2630

20

Source: UniCredit Research



Credit View

QUARTERLY ISSUANCE: A DEEP VALLEY IN 2008/2009 EUROPEAN ABS: OUTSTANDING VOLUME BY COUNTRY


0

1

2

3

4

5

6

7

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9

1Q 1

999

3Q 1

999

1Q 2

000

3Q 2

000

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001

4Q 2

001

2Q 2

002

4Q 2

002

2Q 2

003

4Q 2

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2Q 2

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4Q 2

004

2Q 2

005

4Q 2

005

2Q 2

006

4Q 2

006

2Q 2

007

4Q 2

007

2Q 2

008

4Q 2

008

2Q 2

009

4Q 2

009

2Q 2

010

4Q 2

010

2Q 2

011

4Q 2

011

2Q 2

012

EUR

, bn

Public/Private Retained

0

5

10

15

20

25

May

-00

Nov

-00

May

-01

Nov

-01

May

-02

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May

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Nov

-03

May

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Nov

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May

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Nov

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Nov

-10

May

-11

Nov

-11

May

-12

Out

stan

ding

vol

ume

(EU

R, b

n)

30

35

Other France Germany Italy Netherlands Portugal Spain UK

Source: UniCredit Research, Bloomberg

2.2 New issuance volumes New Issuance peaked in 2011, 2012 issuance is on track to reach similar volumes

2012 is shaping up to become one of the biggest years for European auto ABS. So far, 20auto ABS transactions have been closed across Europe (against a total of 49 deals in 2011), which translates into a EUR equivalent of 13.8bn, with roughly EUR 6.4bn thereof retained bytheir originators. While 1H 2012 new issuance lagged behind 1H 2011 volumes with EUR7.3bn compared to EUR 10.0bn, eurozone woes weighed negatively on the primary market in2H 2011, entailing prolonged and recurring periods of closed issuance windows. As aconsequence of the adverse market conditions, non-retained 2H 2011 volumes amounted to a mere EUR 4.2bn. On the condition that the issuance window stays open for most of 2H 2012,another record of issuance might be within reach.

As for the total outstanding volumes, the market is seeing a growing balance again after experiencing ultimately negative net issuance for years, as more principal amortized than wasadded through new deals (see upper right chart). In terms of new issuance for the combined European auto ABS sector in 1H 2012, the captive finance companies, which are owned bythe automobile manufacturers (see also section 3), sponsored 51% of that amount, while banks made up the other 49%. The auto loan sector represents about 19% of the total ABSamount issued in Europe, slightly higher than the 18.1% in full-year 2011. Notably, 2012 has seen a changing composition of new issuance in European auto ABS, resulting in a morediverse landscape. Auto leases and leases securitizing residual values increased in number, while dealer floorplan assets re-emerged since appearing in 2005 - all benefitting from investors' demand for yield. A niche within the European auto ABS sector that could seehigher issuance volumes than 2011 would be deals collateralized by leases including residual values (RV). 2011 has already seen record highs in auto lease issuance, a phenomenondriven largely by higher used car prices. Conversely, auto loan securitization is slightly downfrom its levels one year ago. Given the changing composition of 1H 2012, full-year 2012 issuance is likely to be less skewed towards loans than in 2011 (see left chart on the nextpage). Investors should look for new transactions, as a combination of higher vehicle sales in Germany, preference for auto ABS funding by some of the captives or banks specialized in auto financing and an increasingly appealing diversity of collateral types might boost volumesin 2H 2012.


Credit View

ISSUANCE BY COLLATERAL TYPE (ALL TRANSACTIONS) ISSUANCE BY COUNTRY (2006–YTD)

Auto Leases (incl. RV) Auto LeasesAuto Loans Auto Dealer Floorplan

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5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 YTD

EUR

, bn

8.5

0.10.3

9.9

0.90.92.23.32.68.610.6

0.50.60

10

20

30

40

Aust

ria

Finl

and

Fran

ce

Ger

man

y

Italy

Mul

ti

Net

herla

nds

Nor

way

Por

tuga

l

Rus

sia

Spa

in

Switz

erla

nd

Ukr

aine UK

(EU

R, b

n)

59.0

50

60

70 2006 2007 2008 2009 2010 2011 2012 (YTD)


2.3 Issuance by country Primary market activity The majority of European countries that have a well-established securitization market provide

regular auto ABS issuance, with France, Germany and the UK leading the way. Currently, Germany is by far the most active auto ABS market in Europe, churning out new transactionsvirtually every month. Of the 49 public/private transactions from 2010 until the end of June2012, 27 transactions were backed by German collateral. More interesting, 2010 and 2011 issuance alone accounted for more than each of the other jurisdictions' total issuance over thepast six years. France and the United Kingdom are second with six transactions each,followed by the Netherlands (3 deals) and Italy (2 deals). More recently, both captive finance companies and non-captives in France have been particularly active in the securitization ofauto loan receivables, closing four non-retained transactions and significantly contributing to a cross-border transaction in 1H 2012. Conversely, issuance activity slowed down markedly inItaly and Spain over the past few years, largely owing to the impediments arising fromsecuritizing assets domiciled in peripheral countries. What is more, some hitherto less-known securitization jurisdictions made their debut by issuing predominantly privately-placed auto ABS, such as Finland, Norway and Switzerland, whereas other prominent auto ABSjurisdictions famous for their pioneering role including Belgium or Portugal have not seen new transactions in more than five years. As for Portugal, the lack of new transactions might bedue to more limited access to capital markets after the country sought EU help and asignificant drop in new car registrations. However, there have been some public Portuguese consumer ABS including auto receivables besides other collateral.

EUR-denominated tranches dominate

In terms of currencies, the market mostly consists of EUR-denominated tranches – 88% of the total issuance since 1H 2009 falls into this category. Relatively, the share of GBP transactions has been gradually increasing over time, accounting for 8.1% between 2009 and 2H 2012.Unlike in other consumer ABS sectors, especially European credit card ABS which are seeingincreased interest from US investors, the then rare USD-denominated tranches have disappeared altogether in the European auto ABS sector (as shown in the left chart on the next page).

A more diversified landscape The sector is becoming increasingly diversified in terms of domicile of assets and issuers making forays into other jurisdictions. VW, for example, has expanded its securitizationactivities from its home market Germany and more common jurisdictions such as theNetherlands to other European jurisdictions such as Spain and the UK. In addition, the captive lender has started an auto ABS project in France. Similarly, Santander Consumer Financeexpanded its auto ABS projects into Finland and Norway. Likewise, the European ABS sector



Credit View

has seen an increasing number of French issuers coming to the market and stepping up volumes in their local market or by expanding their activities to other jurisdictions. Theseefforts resulted in the highest issuance volume by French originators in years, with non-retained notes amounting to EUR 4.5bn over the past eight months.

ISSUANCE BY CURRENCY (2009-YTD) WHAT GOES UP, MUST COME DOWN: AUTO ABS SPREADS

88.0%

8.1%

3.5% 0.4%

EUR

GBP

NOK CHF

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spre

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European AAA Auto Loans German AAA Auto Loans

German AAA Auto Leases

Spread convergence due to Italian and Spanish tranches dropping out of the 'AAA' bucket.


2.4 Pricing and spreads Auto ABS had a great run in 1H 2012

Looking back to 2006 when the European auto ABS sector experienced rapid growth, secondary market spreads were close to EURIBOR flat, thus considered as a governmentbond substitute that offered some extra yield. At the outset of the US subprime crisis in 2007,markets quickly repriced securitized assets to reflect the riskier credit environment. When credit markets froze in 2008, technical pressure drove spreads wider, regardless of theassets' sound performance. Even though spreads skyrocketed as the demand sideevaporated, selling pressure was fairly limited. Despite the solid high-quality loans, market participants were not sure where loss levels were going or to what extent contagion would impact the auto collateral. Since then, the market has come back significantly, reflected bymuch tighter spreads in the aftermath of the financial crisis. Although European auto ABSissuance levels are not quite back to the levels they once were, they are getting closer andare not anywhere near 1H 2009 levels - subject to a normalization in credit markets.

The spread pickup has generated renewed interest in the sector

One major obstacle to the full-blown return of the market has been the macro background. The uncertainty about the Greek political situation coupled with rising concerns over Spain and its banks repeatedly halted further spread tightening. As of late, more and more investorslooking for yield have been making a tentative return to the market. Against a background of increasingly tighter Bund and Gilt yields and a dearth of alternatives, the spread pickup has generated renewed interest in the sector, from both traditional securitized product participantsand crossover investors focusing on credit. This development is illustrated by the more recenttightening in 1H 2012 (see upper right chart) bringing spreads down to the lowest levels since late 2007. Investors are still accepting reduced compensation, the consequence being thatyields on some AAA-rated auto ABS have declined to about 35bp over 1-month EURIBOR for a weighted average life (WAL) of 1 year, i.e. just 135bp over Bunds with similar maturities, which currently display negative yields (for reasons of comparability, we used the 12-month EURIBOR). The chart also suggests that spreads of European AAA-rated auto loan transactions and AAA German benchmark auto deals converged. This conclusion, though tempting, is almost certainly mistaken. Since Spanish auto deals are no longer rated AAA by S&P, Moody's and Fitch, while Italian transactions can no longer achieve a AAA rating fromeither S&P nor Moody's due to the rating cap imposed on them by their sovereign, transactions from these jurisdictions ceased to be included in the benchmark curve. That said,



Credit View

French auto ABS spreads are trading tighter by the day adding to the yield compression ofoverall AAA auto ABS spreads.

Tighter issuance spreads, lower credit enhancement levels

PRIMARY MARKET: THE BIG TIGHTENING

•


9.7%

8.6%

11.5%

9.8%

13.5%

13.7%

8.5%

9.7%

26.5%

28.1%

9.2%

9.2%

32.0%

9.2%

14.2%

8.9%

8.7%

12.0%

9.5%

13.7%

12.5%

8.2%

20.6%

31.7%

9.3%

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210

Aug-09 Mar-10 Sep-10 Apr-11 Nov-11 May-12

Spre

ad o

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urib

or/L

ibor

(bp)

VCL 11-15 • Driver 7-9 • Bavarian Sky 2-3 • Cars Alliance 2010-1, 2011-1

• Bumper 4, Bumper 5 • Turbo Finance 2011-1, 2012-1 • Auto ABS FCT Comp. 2010-1, 2011-1, 2011-2


The above chart speaks for itself underlining the high demand for the conservative seniorclasses of well-established programs. Clearly, benchmark issuers such as VCL and DRVONattracted the lowest spreads. The development becomes all the more interesting, however,when looking at CE levels, which for the most part are much lower compared to previousyears. This implies that investors are content with less credit protection for receiving loweryields. And yet, as the bottom left chart makes perfectly clear, primary market spreads are far from tightening altogether. While spreads were essentially flat in the run-up to the subprime crisis, they have remained scattered thereafter. The bottom right chart provides someguidance as to what factors might be behind a variation of 50bp or more.

BEFORE AND AFTER: PRIMARY MARKET SPREADS (SENIOR-MOST TRANCHES)

Tightest spreads since 2007 but still highly dispersed Auto lease ABS tend to come with higher credit enhancement (CE)

0

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Feb-00 Mar-02 Apr-04 May-06 Jun-08 Jul-10 Jul-12

Spre

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BSKY 3 AVCL 15 A

RNBAF 2012-1

BSKY 3

ABEST 7

ANORI 2012-1

HIGHW 2012-1BUMP 2012-5

TURBF 2012-1

VCL 15

RNBAG 2012-1TTSOC 2012-1

CAR 2011-G1

SCGA 2011-2

COMP 2011-2

VCL 14

COMP 2011-1

GLDR 2011-AX

DRVES

DRVON 9

TTSOC 2011-1

BUMP 2011-4

VCL 13

VCLM 2011-1

CARS 2011-1

DRVON 8

TURBF 2011-1

COMP 2010-1ECAR 2010-1

ABEST 5

VCL 12

SCGA 2010-1

CAR 2010-1

GLDR 2010-A

DRVON 7

BSKY 2

GLDR 2009-D

VCL 11

30

80

130

180

230

Aug-09 Mar-10 Sep-10 Apr-11 Nov-11 May-12

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ver E

urib

or/L

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(bp)

Auto Lease ABS Auto Loan ABS Bubble size = CE

Source: ConceptABS, UniCredit Research


Credit View

First, the market has seen a relatively high number of transactions backed by auto leases,which tend to be riskier for reasons we elaborate on in the section on collateral. Moreimportantly, some of these auto ABS backed by leases include residual values (RV), whichcome with higher risk premiums. Finally, transactions that stem from less well-known issuers or from those captives deemed to have higher credit risk typically priced at the upper end.

2.5 Investors in auto ABS When taking a look at general investor demand across Europe, buyers can be divided into

five distinct groups geographically (see chart). Surprisingly, German-based investors in public European auto ABS transactions have accounted for less than 15% in 1H 2012. By contrast,their share made up roughly one third last year. This decrease can partly be attributed to thefact that 1H 2012 issuance has been more diverse in terms of issuers, with public transactionsfrom seven jurisdictions and a smaller share of German transactions. Similarly, Frenchinvestors also have picked up a relatively smaller share of about 18% compared toapproximately 20% last year – despite surging securitization of car loans domiciled in Francethis year. Conversely, UK-based investors' share increased to more than 45% compared toabout a third in 2011, largely owing to higher purchases of EUR-denominated transactions.

EUROPEAN AUTO ABS INVESTORS (2009-YTD)

By investor type: banks dominated By geography: a bigger UK share

Insurers 3.8%

Central banks 0.5%

Supras/Sovereigns

3.7%

Banks 53.8%

Funds 41.9%

UK 35.3%

France 19.6%

Germany 26.7%

Other 8.5%

Benelux 9.9%

Source: ConceptABS, UniCredit Research

The portion of auto ABS bought by Benelux investors has remained stable at around 10%.Notably, in terms of geography, European auto ABS attracted a larger investor base fromcountries other than those mentioned above, with their share up 7% to more than 12% in 1H2012. As far as investor types are concerned, banks bought a slightly lower share of European auto ABS so far in 2012 compared to previous years. Note, however, that thesenumbers are merely indicative of current trends since not all breakdowns are available;particularly privately-placed deals are typically not made public.

3. Auto ABS Issuers 3.1 Captives and non-captives A wide range of Issuers Issuers in auto ABS are automakers' financing arms, universal and consumer banks and

leasing companies, among others. While some issuers come to the European market on aregular basis through their well-established programs, other originators limit their securitization activities to jurisdictions outside Europe or tap the market more infrequently.



Credit View

Captives The leading issuers in the European auto ABS market are the captive companies, which act as the financing arm of automakers and support car sales by providing financing for newvehicle purchases on behalf of their parent company – the manufacturer – usually made through a dealership, which is operated under the name of the car company. Their financing arms encourage demand for an automaker's products and allow the companies to collectlending profits that might otherwise go to banks. At times, the automotive financing is subsidized by the automakers themselves, commonly by providing financial support or an up-front payment to the captive. The role of the automakers' own financing companies is then notonly to help customers get financing and other financial services but it also allows them togrant loans or leases to customers at a lower interest rate. The main players here are European car companies such as Volkswagen Financial Services (VW, Audi, Seat, Škoda), Banque PSA Finance (Peugeot, Citroën), RCI Banque (Renault, Nissan, Dacia), FGA Capital(Fiat/Crédit Agricole joint venture) as well as FCE Bank (Ford). Unlike the US, dealer floorplan deals have been relatively rare in Europe, with the previous transaction being placed in 2005. The most recent issue (EMOT 2012-1) is a three-year revolving securitization of dealer floorplan loans extended to auto dealers located in Germany and France. The deal isrelatively non-granular with a top 10 borrower concentration of 15.1%.

Non-captive issuers Non-captive issuers, which typically provide used car financing and leasing, also have a keyrole in the European auto ABS universe. These lenders span universal banks (some of whichact through their consumer financing units), consumer banks, and leasing companies, amongothers. Non-captive lenders undertake a more traditional consumer loan activity in that they originate receivables irrespective of a specific make of car. As pointed out by Fitch, somenon-captive companies have started more recently to act as "quasi-captives" for smaller manufacturers that do not have their own direct finance companies. Lenders such as Santander (through its various consumer branches), Société Générale (through subsidiariessuch as CGL or BDK), or LeasePlan fall into that category.

MAIN PLAYERS IN THE EUROPEAN AUTO ABS MARKET

Issuer Total issuance (EUR, bn)

Issuance 2009-YTD (EUR, bn)

Number of placed deals (2009-YTD)

Issuer Type Issuer Rating (S&P, Moody's, Fitch)

VW Financial Services 25.02 9.00 15 Captive A-/A3/-- Santander Consumer 14.23 3.71 6 Non-captive BBB+/Baa2/BBB+ (Spain) Peugeot (PSA Finance) 10.05 2.18 3 Captive BBB/Baa2/-- Renault (RCI Banque) 8.92 2.42 3 Captive BBB/Baa2/-- Ford (FCE Bank) 5.87 1.68 4 Captive BBB-/Baa3/BBB- Fiat (FGA Capital) 5.84 1.80 3 Captive BBB-/Baa3/BBB LeasePlan 4.69 2.79 4 Non-captive BBB+/Baa2/A- BBVA 2.80 - - Non-captive BBB+/Baa3/BBB+ BMW Bank 2.34 1.51 2 Captive NR, A/A2/-- (BMW) Mercedes-Benz Bank 2.29 - - Captive NR, A-/A3/A- (Daimler) Socram Banque 2.11 0.82 2 Non-captive A-/--/-- Société Générale 1.55 1.17 2 Non-captive A/A2/A+ GMAC Bank GmbH 1.37 1.37 3 Captive --/B1/BB- Others 20.80 2.67 7 Non-captive -

NR = not rated Source: UniCredit Research, Bloomberg

3.2 Largest Issuers

Issuance has been dominated by repeat issuers

VW is the largest European originator in auto ABS with total non-retained issuance in excess of EUR 25bn and activities throughout Europe including the DRVON program (Germany, UK,Spain and a project in France), DFM in the Netherlands, VCL in Germany. The captive issuerplaced 15 deals since 2009 totaling roughly a EUR 9bn equivalent (see table). Santander is



Credit View

the next largest issuer, which is acting through its consumer finance branches, placingtransactions backed by auto loans from six different European jurisdictions. Overall, the non-captive originator has closed transactions amounting to a EUR equivalent of 14.2bn when taking into account the lenders it acquired. What is striking, Santander issued the largestvolume in auto loan ABS, which even exceeds those of VW, reflecting the bank's focus onconsumer credit. In the period since 2009, the lender placed six non-retained deals amounting to EUR 3.71bn, which also makes it the second largest issuer in post-crisis auto ABS. French captives RCI Banque and Banque PSA Finance closed three deals each, worth EUR 2.42bnand EUR 2.18bn, respectively. The two lenders' securitizations are backed predominantly byloans domiciled in France, Germany and Italy. Both RCI Banque's Cars Alliance Series andBanque PSA's Auto ABS FCT Compartiment Series are well-established programs in the German market with regular issuance. FCE Bank, Ford's captive financing arm, is another major issuer through its long-standing Globaldrive series that dates back to the end of the1990s, having focused exclusively on securitizing auto loans. The financing company issued four transactions since 2009 totaling about EUR 1.7bn, all of which were backed by Germanassets. Italy-based Fiat closed three non-retained deals over the same period (through FGA, its joint venture with Crédit Agricole), whose assets stem from three different jurisdictions (Germany, Italy and the UK). Dutch LeasePlan Corporation and BMW (through BMW Bank)are the only lenders having issued European transactions solely comprised of leases. Issuingfour transactions backed by assets from Germany, the Netherlands and the UK, LeasePlan, a non-captive full-service leasing provider and 50% owned by VW, was among the biggestissuers after 2009 with volumes amounting to about EUR 2.8bn. BMW, in turn, whichreappeared only recently with its third issue of its Bavarian Sky program, launched EUR 1.51bn of public auto ABS.

LARGEST EUROPEAN AUTO ABS ISSUERS

Issuance volume 1999–1H 2012 (placed deals only) Risk premiums of auto ABS issuers

18.8

1.42.12.32.32.8

4.75.65.8

8.610.1

14.2

24.3

0

5

10

15

20

25

VW

San

tand

er

Peu

geot

Ren

ault

Fiat

Ford

Leas

ePla

n

BB

VA

BMW

Dai

mle

r

Soc

ram

GM

AC

Oth

er

Issu

ance

vol

ume

(EU

R, b

n)

Loans Leases Floorplan

0

200

400

600

800

1,000

1,200

Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12

CD

S sp

read

(bp)

VW Santander UKBanco Santander SA RenaultPeugeot FCE BankFiat BMW


3.3 Funding Auto ABS are a key funding tool

The European auto ABS market is an equally important key funding tool for both captives and non-captives as for independent auto finance companies. Additional benefits from an issuer's perspective include, among others, the reduction of funding costs compared to unsecured borrowing (i.e. by issuing bonds), increased liquidity through a diversification of funding, risktransfer by taking assets off balance sheet and regulatory capital relief available to banks.



Credit View

RATING DEVELOPMENT FOR MAJOR EUROPEAN ISSUERS OF AUTO ABS (AVERAGE RATINGS)


B-B

B+BB-BB

BB+BBB-BBBBBB+

A-A

A+AA-AA

AA+AAA

2006 2007 2008 2009 2010 2011 2012

VW Santander (Spain) RCI Banque FGA CapitalBanque PSA FCE Bank PLC LeasePlan BMW

Sub-Investment Grade

CCC+

Source: Bloomberg, UniCredit Research

Funding through deposits plays an increasingly important role for finance companies

At VW Financial Services, for example, ABS are considered a cornerstone of funding sources besides customer deposits, commercial paper, bank lines and bonds (as of March 2012). Thefinancing arm's funding strategy is highly diversified with ABS amounting to roughly EUR15bn, thus making up 15% of the funding structure. Similarly, at RCI Banque, ABS funding made up 16% (EUR 3.7bn) in 2011. Meanwhile, however, deposits have increasedsubstantially at VW to roughly EUR 24bn and account for nearly 25% of the lender's fundingstructure. In recent years, an increasing number of captives are attracting customers through attractive deposit rates, particularly in Germany, allowing the financing companies to fund abigger share through deposits. Still, ABS issuance remains a cornerstone of the issuer's debtmix and the funding strategies.

The LTRO borrowing spree could have slowed down the auto ABS issuance activity

Currently, auto ABS provide a relatively inexpensive way of funding, in particular for thoseautomakers that have been impacted by the adverse economic environment and thesovereign debt crisis. For some French and Italian automakers, factors such as highunemployment and consumer reluctance have been a drag on car sales, thereby reducingrevenues. This resulted in downgrades due to deteriorating credit metrics, while lowersovereign ratings additionally weighed on Italian carmakers. Funding through ABS allowsthese captives to raise money more cheaply than by issuing unsecured debt. Given thediverging credit default swap (CDS) spreads reflecting the automakers' credit risk, as shownon the previous page, funding conditions have clearly gotten more expensive for French and peripheral originators and their captives. Unsurprisingly, these issuers have experienced negative rating drift, which is depicted in the above chart. Unlike other issuers suffering from poor vehicle sales, German and US-based auto ABS issuers in Europe have shown resilience, which is also reflected by higher ratings, currently suggesting a two-tier system with respect to funding conditions. Even though German carmakers' risk premiums are at record lows, asset-backed financing via term issues in the US and Europe as well as throughconduits is an attractive funding alternative, as in the case of Mercedes-Benz Bank. A temporary funding source for European captives and non-captives alike was the option to borrow from the European Central Bank's (ECB) cheap long-term refinancing operation (LTRO) loans, which were lent at an interest rate of 1%. Captives, for example, had theopportunity to tap the low-interest loans through their in-house financing units, on thecondition they had banking licenses. Issuers such as Banque PSA Finance, Mercedes Bank


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and VW Financial Services were among those borrowing from the LTRO operation, whichallowed them to further diversify their funding strategy. More interestingly, the 3-year loan coincides nicely with the term of an auto loan, representing a convenient maturity match.Though at the highest levels in years, the LTRO measure might have slowed down auto ABSissuance in Europe a tad, as originators are less reliant on securitization. The below table provides an example of captives' funding costs in the bond market and in the auto ABS sector. While German issuers BMW and VW have similar funding costs in both markets, Fiatachieves significantly lower expenses through auto ABS.

RECENT FUNDING EXAMPLES FOR CAPTIVES

Bonds Auto ABS Issuer (Rating) Term, Coupon, Size (mn)

Issue spread (over Mid Swaps)

Current spread

Issue date

Senior class (Rating) WAL, Size(mn)

Issue spread (over 1mE)

Currentspread

Issue date

BMW (A/A2/--) 4Y, 1.25%, EUR 750

+45bp +32bp 7/2012 BSKY 3 A (AAA/--/AAA)1.9Y, EUR 770

+48 +37 6/2012

FIAT (BB-/Ba3/BB) 4.3Y, 7.75%, EUR 600

+677.5bp +788bp 7/2012 ABEST 7 A (AA+) 1.4Y, EUR 314

+230 N/A 6/2012

VW (A-/A3/--) 3.3Y, 1.5%, EUR 1,000

+60bp +43 6/2012 VCL 15 A (AAA/Aaa/--) 1.3Y, EUR 930

+53 +35 3/2012

Source: UniCredit Research, ConceptABS, Bloomberg



Credit View


4. Structural and collateral characteristics 4.1 Transaction structure Auto ABS transactions structure mechanics

The structure chart below shows a simplified auto ABS transaction structure. Although there isno such thing as a standardized structure, the diagram depicts the common features of autoABS structures as set up in today's deals. In a nutshell, the transactions involve the transfer of ownership of the receivables to the issuer (also referred to as the SPV) on the part of theseller, which is termed a "true sale". In order to obtain the highest rating, the issuer needs toprovide bankruptcy remoteness from the seller, which is accomplished by legally segregating the receivables from the seller for the benefit of noteholders. Equally important, an effectivetrue sale allows the credit rating of the senior class to be higher than that of the seller, i.e. theautomaker or its financing arm.

AUTO ABS TRANSACTION STRUCTURE

Issuer

Lender

SwapCounterparty

NoteholdersSeller/Servicer

Subordinated loan/cash reserve

Fixed rateFloating-Rate

PurchasePrice

Receivables/collections Notes

Proceeds

IssuerIssuer

LenderLender

SwapCounterparty

SwapCounterparty

NoteholdersNoteholdersSeller/ServicerSeller/Servicer

Subordinated loan/cash reserveSubordinated loan/cash reserve

Fixed rateFixed rateFloating-RateFloating-Rate

PurchasePrice

PurchasePrice

Receivables/collections

Receivables/collections NotesNotes

ProceedsProceeds


The graph also shows a subordinated loan, which is granted to the issuer, typically to fundinitial cash reserves, which will provide liquidity and will also serve as credit enhancement (see also the following section on credit enhancement). The swap agreement between the issuer and a swap counterparty constitutes another important component to mitigate interestrate risk. Since the vast majority of European auto ABS tranches pay a floating-rate coupon while the underlying auto loans or leases pay fixed-rate interest, issuers are required by the rating agencies to hedge the floating-rate interest expense. To mitigate the fixed-floating mismatch, the issuer will pay a fixed rate to the swap counterparty and receives EURIBOR plus a predetermined spread, whereby the outstanding note balance is the swap's notionalamount.

Fixed-rate auto ABS a trend-setting structure?

Following the bulk of downgrades of global banks in recent months, an increasingly smaller number of institutions are eligible as interest-rate swap providers. Banks acting as counterparties for interest rate swaps in auto ABS must maintain a certain minimum creditrating to be eligible. As a result, a growing number of fixed-rate transactions might emerge, such as Swiss Auto Lease 2012-1 GmbH and FCT Cars Alliance Auto Loans France 2012-1,


Credit View


thereby stripping out the need for a swap counterparty. Yet, it remains to be seen whetherincreasing hedging costs and a shrinking number of eligible counterparties will have a sizeable effect on floating-rate transactions.

Structural characteristics In most cases, auto ABS feature strong and simple sequential payment structures thatprioritize senior notes. The below chart outlines VW's DRVON 9 structure, showing the notes on the left side, which constitute the SPV's liabilities, the pool balance and reserve fund onthe right side, which comprise its assets. The chart also shows the relative size of each tranche against the principal balance, along with the size of the reserve fund and the portionproviding overcollateralization. WALs and CE levels are also given, with the senior noteproviding for a shorter WAL and high credit protection. The illustration also depicts the loss allocation which occurs bottom up and the allocation of cash flows received from theunderlying collateral (top-down), according to the priority of payments. The payment structure,which comprises the priority of payments or payment waterfall, performance triggers and CE target levels determines how cash flows generated by the collateral are allocated to pay thevarious expenses, interest and principal on the rated notes and payments to the provider ofthe sub loan. In terms of amortization and prepayments, all cash flows are typically allocated to the most senior and thus shorter maturity class, i.e. Class A, until it is fully repaid. Thiswould constitute a sequential payment structure and applies to the vast majority of EuropeanABS deals, regardless of collateral or jurisdiction. In the case of DRVON 9, however, principalpayments occur in a modified pro rata order to Class A and Class B simultaneously untilrepaid in full. Pro rata structures, which allow the subordinate tranche (Class B in this case) to amortize while the senior class is still outstanding, are otherwise fairly rare in European autoABS. In this context, the timing of losses can have a significant impact on cash flows.Generally, if the CE is structured in that it amortizes before losses materialize, the amount of released CE will no longer be available to cover future losses.

DRIVER NINE GMBH (DRVON 9) TRANSACTION STRUCTURE

Class A (AAA/Aaa/AAA)

(1.8Y, EUR 690mn, 9.2% CE)

92%

Class B (A+/A1/A+)

(2.2Y, EUR 24.4mn, 5.95% CE)3.25%

Sub-Loan (Equity) (NR)

(EUR 31.9mn)4.25%

0.5%

Principal Balance

(EUR 746.3mn)

Overcollateraliz. (EUR 3.75mn)

Reserve Fund (EUR 9mn)1.2%

Notes (Liabilities) Pool Balance/Reserve (Assets)

Priority of Payments

Loss

allocation


(1.8Y, EUR 690mn, 9.2% CE)

92%

Class B (A+/A1/A+)

(2.2Y, EUR 24.4mn, 5.95% CE)3.25%


(EUR 31.9mn)4.25%

0.5%

Principal Balance

(EUR 746.3mn)


Reserve Fund (EUR 9mn)1.2%

Notes (Liabilities) Pool Balance/Reserve (Assets)


(1.8Y, EUR 690mn, 9.2% CE)

92%Class A (AAA/Aaa/AAA)

(1.8Y, EUR 690mn, 9.2% CE)

92%

Class B (A+/A1/A+)

(2.2Y, EUR 24.4mn, 5.95% CE)3.25%

Class B (A+/A1/A+)

(2.2Y, EUR 24.4mn, 5.95% CE)3.25%


(EUR 31.9mn)4.25%


(EUR 31.9mn)4.25%

0.5%

Principal Balance

(EUR 746.3mn)

Overcollateraliz. (EUR 3.75mn)0.5%

Principal Balance

(EUR 746.3mn)


Reserve Fund (EUR 9mn)1.2% Reserve Fund (EUR 9mn)1.2%

Notes (Liabilities)Notes (Liabilities) Pool Balance/Reserve (Assets)Pool Balance/Reserve (Assets)

Priority of PaymentsPriority of Payments

Loss

allocation

Loss

allocation

Source: UniCredit Research, Moody's


Credit View


Paydown structure The following table provides an overview of an auto securitization's paydown structure. For reasons of consistency, we also refer to DRVON 9 from the above illustration.

Priority Payment rule 1 Senior expenses (taxes, trustee, servicer, rating agencies, administration fees,

account bank) 2 Swap payments 3 Accrued and unpaid interest on Class A 4 Accrued and unpaid interest on Class B 5 Cash collateral account until minimum required reserve is reached 6 Principal payments in modified pro rata order (subject to cumulative net loss

triggers) until repaid in full to Class A and Class B 7 After a servicer replacement event to cash collateral account until the account

balance is increased by 0.323% 8 Following a swap termination event, all amounts due and payable under the

swap agreement 9 Reduction of the subordinated loan until complete repayment 10 Remaining excess to originator (final success fee)

Source: Driver Nine GmbH Offering Circular, Moody's

Static versus revolving structures

Unlike DRVON 9, which is a static securitization with a predefined pool, a range of Europeanauto ABS come with revolving or substitution periods. The below chart shows HIGHW 2012-1's amortization structure, which includes a revolving period of 12 months, during which thefinancing company can sell additional collateral to the issuer. Importantly, a revolving period potentially exposes noteholders to additional uncertainty and potential losses for theseadditional portfolios. However, such risk can be partially mitigated by means of replenishmentcriteria and amortization triggers (for details please refer to section 4.3 on collateralcharacteristics).

HIGHWAY 2012-1 AMORTIZATION STRUCTURE (SIMPLIFIED)

0

100

200

300

400

500

600

700

800

May 2012 May 2013 May 2014 May 2015

EUR

, mill

ion

Class AClass B

1Y Revolving Period Amortization Period

Source: UniCredit Research, The Handbook of European Fixed Income Securities


Credit View

4.2 Credit Enhancement Credit enhancement varies across transactions

In terms of European deals, credit enhancement (CE) differs among transactions, andgenerally depends on the expected losses derived from the historical performance ofcollateral as well as on the targeted credit rating sought by the originator, among other factors. Credit enhancement can be created in a variety of ways. Common to all transactionsare subordination and a reserve account (also termed cash reserve). The senior-subordinate structure is a common feature in European Auto ABS. As illustrated in the transaction structure diagram above, the structure designates a certain percentage of the collateral assubordinated to the senior piece. Typically, the lower classes incur losses before the senior-type tranches.

The below table gives an overview of credit enhancement composition in some of the morerecent transactions of well-established programs with assets domiciled in Germany. The tablesuggests that not only does the extent of CE vary widely across transactions, but also its composition. CE available to the AAA class typically comes from various sources, such assubordination, a reserve fund, overcollateralization and excess spread, which make up theoverall level of CE. Strikingly, while VW deals such as DRVON 9 and VCL 15 benefit from overcollateralization, this feature is not used in the other listed deals. Rather, thesetransactions incorporate excess spread, which provides the first layer of CE as well as someliquidity cushion to the transaction. For SCGA 2011-2, CAR 2011-G1, GLDR 2011-AX, COMP 2011-2 and RNBAG 2012-1, the first layer of protection is excess spread in the transaction,which is the difference between the WA interest rate from the underlying pool assets and thecoupon attached to the notes due to the swap counterparty. DRVON 9, in turn, does not create excess spread, which explains the relatively higher level of CE from subordination and overcollateralization.

COMPONENTS CREDTI ENHANCEMENT BY TRANSACTION

Loans Leases

DRVON 9 SCGA 2011-2

CAR 2011-G1

GLDR 2011-AX

COMP 2011-2

RNBAG 2012-1

VCL 15 BSKY 3

AAA Credit Enhancement 9.2% 9.5% 13.7% 14.4% 12.0% 12.3% 8.2% 9.3% Subordination 8.0% 4.5% 12.7% 11.0% 10.0% 11.0% 7.0% 3.8% Reserve Account 1.2% 5% 1.0% 3.4% 2.0% 1.3% 1.2% 5.5% Overcollateralization 0.5% - - - - - 1.2% 3.8% Excess Spread 0% 2.76% 3.03 % 2.5% 3.26% 3.87% 0% 3.0% Form of liquidity RF, CR* ES,RF, P RF, CR ES, RF ES,RF, P ES,RF, P RF, P RF, CR Number of int. payments covered by liquidity

4.2 >12 3 12 6 6 6 22

RF = Reserve Fund, ES = Excess Spread, P = Principal to pay interest mechanism, C = Commingling Reserve

Source: S&P, Moody's, Fitch, UniCredit Research

CE levels in excess of 10% provide adequate protection for senior tranches

Through elevated CE levels (most senior tranches come with or quickly build up levels in excess of 10-15%), senior classes can withstand elevated loss rates in double figures, evenwhen assuming pessimistic recovery rates in the lower range. The large breakeven points are many multiples of current CDRs, affording stronger senior class protection. The above table shows that CE levels at origination already range from 8.2-14.4% and sequential amortization structures continue to build CE. Transactions from less well-known originators provide CE levels of up to 37%. Subordinate enhancement levels, in turn, tend to be far lower.



Credit View

4.3 Collateral Characteristics The underlying collateral is crucial to the pool quality of the auto ABS

Auto ABS are essentially backed by retail collateral, as car finance is ultimately a form of consumer finance. The underlying collateral is crucial to the pool quality of the auto ABS, i.e.the pool characteristics, in turn, depend on such factors as underwriting standards, lendingterms and maturity. While the underwriting standards for European auto ABS are typically strong, recent years have seen fierce competition in the auto loan financing segmentintensified by shrinking sales in some jurisdictions. Accordingly, loan-to-value (LTV) ratioshave increased in a few instances and financings are frequently for a longer period now. Various forms of installment credit have been prime movers of car sales in recent years. Zeroor low effective interest rate (or annual percentage rate, APR) schemes with no downpayments were not uncommon as a result. In most jurisdictions, the majority of vehicles areinstallment-funded rather than bought with consumer equity. Collateral composition can varysignificantly between deals in terms of proportion of retail versus commercial loans, share of new versus used cars, proportion of retail versus commercial borrowers, loan type, granularity(i.e. the number of loans and borrowers in the pool), weighted-average interest rate, geographical diversification, model and make diversification, and seasoning.

Advanced seasoning is a desirable feature

Advanced seasoning is a desirable attribute for a pool of loans in that the portfolio is morelikely to exhibit stable performance than a relatively younger portfolio. This observation arisesfrom the fact that a pool of new receivables typically experiences increasing losses for the first18-24 months after which losses tend to decline and flatten out. This, in turn, is due to the factthat positive selection occurs over time, while the lower quality receivables default and are removed from the pool, leaving the higher quality loans. Recent European deals have seenpools ranging from 6-20 months of seasoning.

Static versus revolving pools In the case of static transactions, whose asset pools remain unchanged over the deals' lifetime, originators will determine specific selection criteria (eligibility criteria) for receivablesto be included, based on the various characteristics listed above. As for transactions withrevolving pools, originators will also determine which assets qualify for substitution such as in the case of prepayments, i.e. define specific replenishment criteria for assets that need to bereplaced. These criteria typically set specific concentration limits, such as requiring loans tobe neither delinquent nor in default. Static pools are generally perceived as less risky butimply a lower weighted-average life.

Unlike some collateral characteristics that vary only slightly between transactions not leastbecause they are subject to certain concentration or exposure limits, others differ fundamentally as to the risks inherent in the assets. This implies that some assets'performance might be impacted more severely than others under certain conditions ofeconomic stress or certain adverse developments specific to the car market, potentially impacting the generation of cash flows. In the following paragraphs, we highlight four keyvariables in which collateral differs substantially across the European auto finance spectrum,namely retail and commercial borrowers, loans and leases, amortizing and balloon loans, new and used cars.

Collateral differences to look out for

■ Borrower type: Most European auto ABS transactions are backed by homogenous andhighly granular pools including tens of thousands of obligors. The proportion of auto loans or leases made to retail or commercial obligors can vary significantly. Loans to privateindividuals have exhibited lower delinquencies and losses than loans to commercialborrowers. By and large, as companies are more likely to go bankrupt while they also tend to finance more than one vehicle, the losses on leases or loans written for commercialcustomers are typically higher than for private customers. This is underlined by the higherlosses to date on the VCL pools, which are backed by VW leases to firms, especially when compared to DRVON, VW’s auto loan securitization program. The distinction between thetwo types of obligors can play a role in the CDR assumptions, i.e. commercial borrowers



Credit View


exhibit higher default rates than private borrowers due to a higher obligor concentration.

■ Loans and leases: Broadly speaking, there are two different ways of vehicle financing,each having its own purpose. From an obligor's perspective, a loan is taken out to financethe purchase of a vehicle as opposed to a leasing agreement, which finances the use of avehicle. If a vehicle is financed by means of a loan, the borrower uses the loan amountprovided by the financing company to purchase the car. The borrower is required to makeregular installment payments, typically on a monthly basis, which comprise interest payableon the loan plus principal redemption. The amortization profile of a loan is either fullyamortizing with equal installments throughout the life of the loan, or has lower regular installments and a higher balloon payment due at maturity (see below). Unlike loans,leases are typically aimed at commercial customers. As with loans, leases are commonlyfixed-rate based. Usually, an up-front deposit or down-payment is required, reducing the amount of the leasing installment and also the risk of borrower default. In a lease contract,the finance company is then the registered owner of a vehicle. When leasing it to thelessor, it receives a regular usage fee, usually geared to the expected depreciation of the vehicle over the lease term, plus a finance rate payment from the borrower. After the leaseterm expires, the lessee can simply return the vehicle (at the end of the lease agreement),unless an option to purchase the vehicle is exercised. In case the vehicle is returned to the lessor, it will be put up for sale. In this situation, the lessor bears the full risk that the thenappraised market value of the vehicle is less than initially assumed. If this is the case, itmeans that the lease rate falls below the depreciation of the vehicle, thus not fully coveringit. Put differently, the sum of the lease installments and the residual market value fall shortof the initial purchase price the lessor paid for the vehicle. Therefore, the lessor is exposed to residual value risk (RV) under the lease contract. However, the residual value risk isfrequently transferred to car dealers or sometimes to the lessee on the part of financecompanies. If the originator assumes the RV risk in addition to credit risk, investors will also be exposed to used car market value risk. While the majority of transactions onlysecuritize the portion of the lease installments, such as the German benchmark leasingtransactions, the share of auto lease ABS including residual values has traditionally been small. Yet, over the past years, this niche has grown considerably and is headed for thelargest annual issuance volume since 2006, clearly a sign that risk appetite is increasing(see chart below).

AUTO ABS BY COLLATERAL TYPE (PLACED DEALS ONLY)

0

2

4

6

8

10

12

Auto Loans Auto Leases Auto Leases (incl. RV)

Issu

ance

vol

ume

(EU

R, b

n)

2005 2006 2007 2008 2009 2010 2011 2012 YTD


Credit View


■ Amortizing and balloon loan types: Loans are usually taken out by private borrowers and can take the form of amortizing or balloon (also referred to as bullet) loans. Amortizingloans are structured as scheduled periodic payments of both principal and interest. Whileeach payment is of equal size, principal and interest vary, with the interest portiongradually decreasing and the principal portion decreasing over time. Loans are typically granted for an average of four to five years, while some loan terms are significantly longer.The term of the loan is considered a crucial factor as longer maturity loans come with lowermonthly payments, which will compound the losses suffered by the lender if such a loan defaults early. Compared to amortizing loans, balloon loans have a similar structure withthe exception of a large payment due at maturity (the final "balloon installment") of the totalamount borrowed. Consequently, the regular installments are lower than in the case of fully amortizing loans. In addition, the repayment period of a balloon loan contract is usuallyshorter than the term for a fully amortizing loan. At maturity, the borrower is entitled to settle the final balloon payment either by payment in cash, by selling the financed objectand use the proceeds to pay the balloon payment or refinance the balloon payment bytaking out a new loan with the financing company. Borrowers that choose balloon loans aremore likely to experience a payment shock due to the high remaining loan balance and thepossibility that the borrower may not be able to afford the final balloon payment at the endof the loan term. In this context, borrower credit quality is an important criterion and balloon loans will generally only be granted to borrowers with better creditworthiness. Althoughcompanies frequently ask for a substantial down-payment or a guarantor, balloon loans are considered to be fundamentally more risky than amortized loans. Importantly, balloon loans are a strategic instrument to boost new car sales and increase customer loyalty. Balloonloans occur predominantly in German auto loan securitizations where they have seensignificant growth in their use by captives. Transactions by captive originators with a high concentration in balloon loans and exposure to a single automaker will experiencesignificantly higher borrower defaults if the manufacturer were to default. Finally, balloonloans come with a residual value component similar to leases.

■ New and used cars: The vast majority of pools contain a mix of loans or leases for newand used cars, with captives traditionally having a larger share of new cars. Historically,loans granted for the purpose of purchasing a used car are at greater risk of becoming delinquent or foreclosed than loans issued for the purpose of buying a new vehicle. Thedistinction between used and new cars is important regarding assumptions made on and prepayment rates. A decrease in used car prices, while ultimately depending on the vehicle type, make or model, thus directly impacts the value of the auto ABS notes. From astructural perspective, auto ABS transactions benefit from holding the vehicle title of thepurchased or leased cars contained in the pool. As for Europe, there is no historical data available on used car values. Yet, the extent of decline in average used car values inEurope have been rather limited over the past years, according to Fitch data, with peak-to-through volatility not exceeding 20%. What's more, auto ABS transactions including loans with low down payments, i.e. those with higher loan-to-value ratios as in some amortizing loans, are particularly prone to market value risk. This is due to the fact that the proportionof receivables in the pool dropping into negative equity increases significantly in case of anadverse economic scenario.

Pool characteristics across auto ABS sector type

The pool characteristics across different sub sectors, i.e. loans and leases as well as afloorplan deal, are shown in the table below. It depicts some of the key variables in whichcollateral differs as previously addressed and provides specific quantities. In terms of theweighted-average interest rate (WA interest), borrowers with lower creditworthiness tend to pay higher interest rates. Moreover, captives tend to offer lower rates, especially in caseswhere loans are subsidized by the automakers themselves. The table also suggests a striking



Credit View

link between the portion of new vehicles, weighted-average remaining term and the average loan balance. Consumers with a budget constraint tend to buy the cheaper used cars andtake out loans with longer terms and lower installments that spread out the repayments over alonger period.

POOL CHARACTERISTICS ACROSS DEAL TYPES

Type

Deal Name Issuer WA IR Balloon

Loans (%) Vehicle

type WA term

(remaining) Average

Loan Balance Number of obligors

Loans DRVON 9 VW 3.96% 46.2% 66% new 2.8Y EUR 12,430 60,300 SCGA 2011-2 Santander 5.95% 30.4% 40% new 4.2Y EUR 9,250 63,000 CAR 2011-G1 Renault 4.42% 55.6% 73% new 2.9Y EUR 7,700 242,300. GLDR 2011-AX Ford 3.23% >75.0% 80% new 3.4Y EUR 10,500 48,100 COMP 2011-2 Peugeot 7.20% 51.5% 74% new 3.0Y EUR 7,900 99,750 RNBAG 2012-1 SocGen 6.15% 45.4% 17% new 3.4Y EUR 7,800 96,000 Leases VCL 15 VW N/A 0% 95% new 2.7Y EUR 11,400 51,500 BSKY 3 BMW N/A 0% 92% new 2.3Y EUR11,360 70,400 HIGHW 2012-1 Athlon 4.93% 0% 100% new 2.6Y EUR 191,400 3,216 COMP 2010-1 Peugeot N/A 0% 84% new 1.7 EUR 9,950 68,426 Floorplan EMOT 2012-1 GMAC 6.1% 100% 73% new max. 1.0Y EUR 1,349,000 604

Source: S&P, Moody's, Fitch, UniCredit Research



Credit View

5. Fundamental Performance Key quantitative performance indicators

The two key quantitative performance indicators for analyzing portfolios backed by auto receivables are delinquencies (arrears) and defaults (charge-offs). Additionally, we also lookat prepayments, which influence WALs and excess spread. In a more detailed analysis,especially when modeling transactions, further variables such as the recovery value of vehicles being sold or repossed are typically used, which we will touch on in the section onthe macroeconomic environment and the used car market at the end of the chapter. In the preceding chapter, we give an overview of the deals' performance. It also goes into more detail on the key factors affecting performance. However, before looking at key performance drivers, it is important to set the stage by providing a brief summary of the most recent rating performance numbers.

5.1 Rating developments

High ratings quality and stability

The bulk of auto ABS have maintained their AAA status throughout the crisis since 2007, with the exception of transactions from Italy, Portugal and Spain. Most European auto ABS haveproven their ability to withstand significant economic stress, as depicted in the chart showing original ratings versus current average ratings of public or private transactions launchedbetween 1Q 2006 and 1Q 2012. The vast majority of auto ABS transactions outstanding havebeen upgraded, affirmed or paid in full. The migration of investment-grade securities to sub-investment grade has been minimal. Of the 70 placed tranches launched between 2006 and1Q 2012, only seven are no longer rated AAA, while 23 paid down in full and are thus no longer rated. When leaving aside downgrades triggered by lowered sovereign ratings, onlyone tranche became impaired, that is, investors are expected to received less value with nearcertainty, according to Moody’s. BBVAF 2007-1 C, originally rated (BBB/Baa1/--), was downgraded to CCC/Ca/-- owing to poor collateral performance caused by the rapidmacroeconomic deterioration in Spain, combined with low credit enhancement. As forGerman auto ABS, ratings are not only far from being at risk, but they continue to improve as corroborated by the regular upgrades of mezzanine and junior tranches in seasonedtransactions. The large share of German transactions along with their impeccable ratingperformance, i.e. the absence of downgrades, was the major driver behind the sector's rating stability.

CURRENT RATINGS DISTRIBUTION OF NON-RETAINED TRANCHES LAUNCHED 1Q06-1Q12


orig. curr.

AAA AA A BBB BB B CCC Paid down/

WR AAA 40 5 1 1 0 0 0 23 AA 0 2 1 1 0 0 0 0 A 0 5 11 2 1 0 0 20

BBB 0 0 0 1 0 2 1 9 BB 0 0 0 0 0 0 0 2 B 0 0 0 0 0 0 0 1 C 0 0 0 0 0 0 0 0

All AAA notes have maintained investment grade status

Downgrades mostly involved peripheral countries (Italy, Portugal, Spain) following the knock-on effect of rating agencies' sovereign downgrades. Auto ABS are among the few sectorshaving the highest rating available in these jurisdictions. In 2011 and 1H 2012, rating actionsin the auto ABS sector have been relatively low in number but mostly negative. The exception



Credit View


involves seasoned junior tranches from Germany and France seeing higher average ratingsdue to improved credit enhancement (SCGA 2006-1 B, COMP 2007-1 B, VCL 11 B, DRVON 7 B, DRVON 8 B). Rating actions in 2H 2011 reflected the diverging performance of auto ABS transactions in the sector.

RATING DEVELOPMENTS

Current Ratings distribution by volume (EUR equivalent) Peripheral senior tranches mainly affected by sovereign downgrades

AAA88.5%

AA7.8%

A2.4%

BBB0.8%

BB and lower0.5%

0

1

2

Nov-08 Jun-09 Dec-09 Jul-10 Jan-11 Aug-11 Mar-12 Sep-12

3

4

5

6

7

8BBVAA 2 A CAR 2007-1 A COMP 2007-2 ADRVES 2011-1 A GOLDB 4-2007 A LTR 6 ASANCF 2006-1 A

AAA

AA+

AA

AA-

A+

A

A-


Negative rating drift in peripheral countries is largely caused sovereign by rating changes

Although auto ABS with assets domiciled in Italy and Spain have had long defied the negativerating drift of their sovereigns by maintaining their top-notch ratings, their maximumachievable ratings were lowered to below AAA in 1H 2012 due to lower country ceilings.Nevertheless, the performance in Italian and Spanish transactions has remained intact in most of the transactions affected by downgrades. Securitizations with exposure to Italy (rated BBB+/Baa2/A-) are now limited in their rating to AA+/Aa2/AA+ under rating agencies' non-sovereign ratings criteria, assuming a low country-risk exposure. Likewise, the maximum achievable rating for transactions in Spain (rated BBB+/Baa3/BBB) can be no higher than AA+/Aa2/AA-, while those in Portugal (rated BB/Ba3/-) are confined to A-/Baa1/A. S&P, for example, associates the asset portfolio's geographic diversification with the transaction'ssensitivity to country risk. It classifies as "low" the country risk exposure of transactions backed by consumer assets such as auto loans, among others. In case the country riskexposure is "low", the maximum rating differential between the sovereign and the issuer isthen limited to six notches for investment grade sovereign ratings, but decreases to five notches for countries rated BB+ to B. Were a sovereign to be downgraded to below B, thehighest achievable rating for structured finance transactions with low country risk such as autoABS would be BB+, according to S&P.

New rating collateral rules for auto ABS used in Eurosystem operations announced at the end of June

Recently, the ECB announced additional measures to broaden the scope of collateralavailability by easing collateral rules for ABS through a reduction of the rating threshold and by amending the eligibility requirements for certain securitizations, including auto ABS. Goingforward, auto ABS with a second-best rating of at least A-/A3/A-/AL (S&P/Moody’s/Fitch/DBRS) at issuance and subsequently thereof will be considered eligible, while subject to a valuation haircut of at least 16%. The ECB will also accept auto ABS with a second-best rating of at least BBB-/Baa3/BBB-/BBB subject to a valuation haircut of 26%. Starting from 1 March 2011, the requirement to have two-ratings and the second best-rule will be applied to all ABS regardless of their issuance date. The second best-rule means that not only the best, but also the second-best available credit assessment by the four rating agencies must comply with the credit quality threshold for ABS.


Credit View


5.2 Delinquencies Performance outlook Delinquencies remain low in the auto ABS sector, with most originators registering average

60-plus-day delinquencies below 1.5%. By and large, 60-plus-day delinquency levels are fairly low for Germany, France and Italy, ranging from 0.45%-1.1%. However, delinquencies in the periphery have trended up again in the 1Q 2012 after they came down gradually from their2009 peaks (see chart). In terms of 90-day arrears, a subset of 60-plus-day delinquencies concerning the more severe delinquencies, Iberian transactions, such as BBVAA 1 (2.82%),BBVAA 2 (2.51%), BBVAF 2007-1 (4.09%) and LTR 6 (5.58%) have the highest levels among non-retained transactions, according to Moody's data, while the vast majority of the remaining transactions report levels below 1%. In comparison, the relative increase in Portuguese andSpanish delinquencies in the more recent past translated into rising losses in these countries.

For German transactions, which make up the lion’s share of the sector, a more favorableemployment situation, stronger used vehicle prices and tighter underwriting standards havebeen supportive for performance. The fundamental performance in 2011 improved,particularly in the German auto ABS sector, following an impressive showing in 2010. Dealsbacked by collateral in Germany have also shown strong improvement so far in 2012.Through the first four months of the year, 60-plus-day delinquencies are down to 0.45% versus 0.64% in April 2011, according to Moody's data. Yet, on a less positive note, 90-plus-day delinquencies remain far above the average in Portugal (1.55%) and in Spain (2.4%),according to S&P.

60-PLUS-DAY DELINQUENCIES POINT TO A MORE CHALLENGING ECONOMIC ENVIRONMENT

0

1

2

3

4

5

Feb-04 Apr-05 Jun-06 Aug-07 Oct-08 Dec-09 Feb-11 Apr-12

% o

f cur

rent

bal 6

7

8

9

ance

France Germany Italy Netherlands Portugal Spain

Source: Moody's, UniCredit Research

5.3 Defaults and losses Relatively higher losses in the periphery

The monthly default curves for auto ABS transactions in certain jurisdictions (based on aMoody’s sample) are shown in the bottom left chart. Worryingly, surging cumulative defaults in Portugal in excess of 7% have decoupled from other European jurisdictions, resulting in apoor rating performance, especially for some junior tranches. Spanish defaults are also on therise, approaching the 4% level, but differ by originator. Cumulative losses in France (2.6%)and Italy (1.4%) deteriorated as well, albeit from a very low performance number.


Credit View


Consequently, when considering credit enhancement levels of about 10% or higher, it has notbeen a concerning factor. German collateral performs best among the observed jurisdictions. When broken down by originator, as in the bottom right chart, Santander, Ford and BanquePSA exhibit the lowest defaults, while historical information on defaults is not reported bycertain issuers such as VW.

CUMULATIVE DEFAULTS

0

1

2

3

4

5

6

7

8

Jan-04 Mar-05 May-06 Jul-07 Sep-08 Nov-09 Jan-11 Mar-12

% o

f cur

rent

bal

ance

France Germany Italy Portugal Spain

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

Months since closing

% o

f cur

rent

bal

ance

Banque PSA FCE BankGermany GMAC BankMercedes-Benz Bank RCI BanqueSantander Consumer Bank


Typical CDR patterns The Constant Default Rate (CDR) is the annual ratio of loans on which borrowers or lesseesdefault on their contracts as a percentage of the total asset pool. Typically, losses are fairly low for the first 12 months from origination, after which there is a significant increase lasting 6to 18 months, i.e., 18 to 24 months after origination. The two key variables for default ratesare collateral composition and seasoning. The below chart shows current defaults since theclosing of SCGA 2006-1.

SCGA 2006-1 CURRENT DEFAULTS

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67

Months since origination

Cur

rent

def

aults

(EU

R, m

n)

Source: Investor Reports, Bloomberg, UniCredit Research


Credit View


Vintage cumulative losses Each finance company has individual underwriting and servicing standards. These standards essentially determine the net loss rate in the originated assets. It is vital to consider theperformance in the context of the economic cycle, as this will affect collateral performance.Changes in underwriting standards can also bring about a change in the performance ofcollateral. Most issuers provide the static data for cumulative losses, i.e., after recoveries andforeclosures on cars.

CUMULATIVE LOSSES

0.00%0 10 20 30 40 50 60 70 80 90

Age (months)

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

Cum

ulat

ive

Loss

es

Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

Source: Driver Nine GmbH Offering Circular, UniCredit Research

The chart shows the vintage curve for loans originated by VW between 2004 and 2011, whichhelps us to illustrate the impact of a changing economic environment and possiblyunderwriting standards on defaults. The numerous lines in the chart represent cumulative defaults according to the month since origination. Each line stands for loans that were madein a certain month, so the longer the line, the older their age from origination. Cumulative losses in the first 60 months of seasoning have historically ranged between 0.7% and 1.6%, depending on the originator. It becomes evident that the 2007 and 2008 vintages have thehighest cumulative loss curves. Some of these vintages crossed the 0.6% line of cumulativedefaults at a much earlier stage than others. The vintages in question have been adversely impacted by a relatively weak economic environment post issuance and, to some extent,weaker underwriting standards. One needs to point out, however, that the deterioration tookplace at a very low level, thus having no impact on the affected transactions. In addition, the more recent vintages are closely tracking the 2004/2005 vintages. The majority of originatorsprovide the static data for cumulative losses, that is, losses after foreclosures and recoveries on vehicles, while current default rates are often not available.

5.4 Prepayments CPR assumptions determine the original WAL and available excess spread

The Constant Prepayment Rate (CPR) is the annual rate at which loans in a pool prepay prior to scheduled amortization, stated as the share of the current balance. In the case of autoABS, prepayments mainly occur because of changes in the borrowers’ financial situation,which is influenced by three main factors: unemployment, the availability of credit and disposable income. Auto receivables typically have fairly short maturities and lower principalbalances, prepayment speeds are therefore relatively unaffected by prevailing interest rates


Credit View

as rate refinancing is rare. Conversely, the loan term has a significant impact on prepayments. Voluntary prepayment rates on loans with shorter terms tend to be much higherthan prepayment rates on loans with longer maturities. This can be attributed to the fact thatborrowers with longer loan terms have little financial flexibility. Usually, prepayments of auto loans result from vehicles being sold or traded in, or from payments for defaulted loans whichwere recovered. The amount of excess spread to support a pool is subject to the prepaymentrate. Prepayments entail an unscheduled termination of the contract before maturity,whereupon the excess spread cannot be drawn on any longer. Additionally, excess spread isreduced in case of involuntary termination, or more precisely, repossession, which is affected by the delinquency rate. Since the collateral is amortizing, the non-retained notes are priced assuming a prepayment speed, e.g. a weighted-average of 1.5Y could be based on 7.5 CPR.

Large variability in CPRs between jurisdictions

The left chart suggests that there is large variability in CPRs between jurisdictions. Assumingthat, going forward, the availability of credit and disposable income will decrease for squeezedconsumers in Italy, Portugal and Spain, prepayments could trend down further in these jurisdictions. However, historical data show that CPRs are not likely to drop below 2%.Accordingly, these CPR variations are reflected in the following deals, which arerepresentative for each domicile of assets. While, for example, BBVAF 1 (Spain), COMP 2007-2 (Italy) and LTR 6 (Portugal) register lower CPRs of only 4.35%, 5.82% 8.77% inMay/June 2012, German transactions such as DRVON 7, DRVON 8 and SCGA 2011-1 exhibit elevated CPR levels of 15.88%, 13.02% and 10.56%. The bottom right chart shows prepayment curves for four deals from various jurisdictions (Germany, Portugal, Spain) thatdiffer greatly in terms of loan characteristics, especially with respect to weighted-average remaining term. DRVON 6, which has the shortest WA remaining term (36 months) displays a constantly rising CPR during its life, as opposed to SCGA 2006-1 (48 months), which increases only at the end, and LTR 6 (53 months) and BBVAF 1 (84 months), whose CPR curves are essentially flat. Besides, SCGA 2006-1 is a revolving securitization of mostly used cars with assets domiciled in Germany which did not start to amortize until March 2010.

CONSTANT PREPAYMENT RATES VARY WIDELY

CPR (3M Moving Average) by jurisdiction CPRs for transactions differing in jurisdiction and loan type

0

2

4

6

8

10

12

14

16

18

20

Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12

CP

R (%

)

Germany Italy Portugal Spain

0%

5%

10%

15%

20%

25%

30%

35%

Aug-06 Jun-07 Apr-08 Feb-09 Dec-09 Sep-10 Jul-11 May-12

CP

R (%

)

LTR 6 DRVON 6 BBVAF 1 SCGA 2006-1

paid down


5.5 Fundamentals and economic developments The fundamental performance in auto ABS is largely determined by macroeconomic

developments as well by the state of the automobile industry. For example, vehicle salesinfluence residual values, while unemployment and consumer debt levels drive defaults.



Credit View

New car registrations are resilient in Germany but experience a sharp decline in France, Italy and Spain in 1H 2012

Most recent figures confirm the downward trend in new car registrations in the EU 27 by 2.8% yoy in June after having declined markedly so far throughout 2012 (see bottom left chart). While 1H 2012 yoy car sales have held up well in Germany (+0.7%) and the UK (+2.7%),significant declines could be observed for France (-14.5%), Italy (-20.0%) and Spain (-8.2%), according to national sources. The right chart shows that Germany is by far the largest marketfor new car registrations, also illustrating the variation in car sales over the past few years. Oncloser inspection, the bar chart also reflects a sharp drop in new car registrations in2008/2009. Car sales had started faltering in 2H08 as a consequence of the financial crisis.This set the stage for car scrapping schemes, i.e., government support programs to encourage buyers to purchase new cars and scrap their old ones, which were introduced by alarge number of European countries to prop up their ailing automakers or manufacturingfacilities. At 0.2% of GDP, Germany's program exceeded the cost of any other European country relative to the size of the economy; for example, France, Italy and Scandinavia wheresubsidies were much lower. That said, European countries also provided other forms offinancial aid to their auto industry to boost car sales, such as loan guarantees, credit lines, subsidies, special loans for the carmakers' financing arms as well as tax incentives. Statesupport in any form is credit positive for Auto ABS (and pushes issuance levels), e.g., carscrapping schemes introduced in 2009 helped to revitalize the auto loan sector in Europe. On a macro level, it is obvious that a full blown economic recession, relatively higherunemployment and harsh austerity measures in periphery countries are credit negative forfundamental consumer loan performance including auto loans. Such developments willinfluence the demand for cars, both for new as well as used cars, and impact residual valuesas well as delinquencies and defaults.

THE EUROPEAN CAR MARKET

New car registrations, yoy Largest eurozone members: car sales

Jun-12Dec-10Jun-09Dec-07Jun-06Dec-04

% c

hang

e

-30

-20

-10

0

10

20

30

Introduction of car scrapping scheme in France/GermanyIntroduction of car scrapping scheme in the UKEU 27 New Passenger Car Registrations

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

France Germany Italy Spain UK

Thou

sand

s

2006 2007 2008

2009 2010 2011

2012 YTD

Source: Bloomberg, UniCredit Research

Regional deviation and outlook: the European car market is likely to remain under pressure in 2H 2012

Consequently, it is conceivable that lower vehicle sales could lift used car values, as consumers switch from purchasing new to used vehicles and hold on to used cars forprolonged periods of time, thereby increasing recovery values. This development, in turn,results in greater vehicle values. The factors influencing the market for used cars are manifold. By and large, used car values in Europe continue to show resilience given morebudget-conscious car buyers in the wake of consumer deleveraging. Likewise, increasingdemand from overseas such as Africa and the Middle East contributes to bolstering used car values.



Credit View

6. Relative Value and performance outlook

Demand for Auto ABS from the investor side is high and tranches are generallyoversubscribed in most cases of public issuance. The success of the asset class isremarkable, particularly if one considers that structured finance was once the center of thestorm of the financial crisis. European auto ABS performed well and are very likely to continuethe sound performance from a credit risk/fundamental point of view. Even though spreads have generally tightened, the sector remains attractive from a relative value perspective, andwill continue to appeal to investors going forward.

6.1 Relative Value in Auto ABS Less well-known issuers offer value

The below chart combines three factors for senior tranches: the current spread over one-month EURIBOR, the current WAL as well as current CE. Those tranches with shorterremaining lives of five months or less can be found in the bottom left corner, with some ofthem having built up strong CE levels through amortization. The biggest number of tranches is located in the 1.0-1.5Y WAL area, offering modest yields and below-average CE. Most of these tranches stem from captives' benchmark deals and are well seasoned. On the otherhand, the upper right corner includes the less well-known issuers and the riskier RV leasing deals, respectively, which clearly stand out. These senior classes can withstand fairly highloss rates given CE levels ranging from 13% (TTSOC 2012-1 A) to 37% (HIGHW 2012-1 A) at origination. Although these structures come with more risk factors that should under nocircumstances be taken lightly, such as concentrated portfolios, RV risk, limited historicalinformation or replenishment periods, CE levels are many multiples of current CDRs for those countries affording stronger senior class protection.

SENIOR TRANCHES: LESS WELL-KNOWN ISSUERS OFFER VALUE

Current spread, current WAL and current credit enhancement (CE)

VCL 15 A

COMP 2011-1 A

VCL 14 A

DRVON 9 A

TTSOC 2012-1 A

DRVON 8 A

RNBAG 2012-1 A

DRVON 7 A

VCL 13 A

VCL 12 A

TTSOC 2011-1 ACAR 2010-G1 A1

SCGA 2010-1 A

GLDR 2011-AX AVCL 11 AGLDR 2010-A A

ECAR 2010-1 AANORI 2012-1 A

ABEST 5 A

SCGA 2006-1 A

BUMP 2012-5 A1BUMP 2011-4 ACOMP 2010-1 A

HIGHW 2012-1 A

BSKY 2 A

CARS 2011-1 A20

20

40

60

80

100

120

0.0 0.5 1.0 1.5 2.0 2.5

Current WAL (Years)

Cur

rent

spr

ead

over

1m

E (b

p)

Bubble size = CE


AAA auto ABS tranches are likely to continue to be considered a veritable safe-haven asset

The factors speak for themselves. The short WAL in some transactions, spread pick-up relative to Bunds and other short-term high-quality bonds, rating stability as well as decent liquidity suggest that AAA auto ABS tranches are likely to continue to be considered a



Credit View


veritable safe-haven asset. Yet, investors are likely to add the most value in this sector byanalyzing the lower end of the capital structure. Most subordinate spreads come with asubstantial pick-up over seniors and are adequately protected. Santander Germany's SCGA2006-1 B (--/Aa2/AA-) offers current CE levels of 5% at 0.8Y WAL, yielding 1mE+148bp, whilecumulative defaults are below 1% of the outstanding balance. Similarly, Banque PSA's COMP 2007-1 B (AA/Aa3/--), which yields 3mE+136bp, also seems well protected, given a currentCE level of 7.7% at 0.8Y current WAL, with cumulative losses slightly above 2%. More risky,for example, is the Spanish BBVAF 1 B (BB/Ba3wn/--) offering current CE to the tune of 16% at 1.6Y current WAL, yielding 3mE+148bp, albeit with much lower liquidity. However, the transaction's performance has been rapidly decreasing, which is indicated by cumulativedefaults standing at 6.1% of the original balance. On the other hand, exploring traditionally wider subsectors in the auto ABS segment might also be worthwhile, particularly with respectto more recent transactions backed by leases including residual values or exposure to theperiphery, such as HIGHW 2012-1 (1mE+110bp), at 1.92Y WAL, rated AAA/Aaa and ABEST 7 (1mE+230bp), at 1.4Y WAL, rated AA+ by S&P.

6.2 Fundamental Outlook Fundamentals: A cloudy sky over periphery… but no reason for concern.

We remain constructive regarding pool performance. The weakening economies in manyeurozone countries will continue to be the strongest driver of rating movements andfundamental weakening in auto ABS in the coming quarters. Certainly, the divergence offundamentals and ratings between core European exposure (UK, France, Germany) and the periphery will advance further, e.g., when comparing Spanish and Italian Auto ABS bondswith German ones. Periphery transactions remain under fundamental pressure even thoughwe do not expect further immediate defaults on outstanding exposure thanks to relatively well-sized credit enhancement levels and advanced seasoning of European auto ABStransactions. Therefore, we expect the vast majority of auto ABS transactions to remain asafe-haven asset due to the solid loan pool performance and structural protection/CE levels.

Neither from a default perspective, nor from collateral value side or ...

We do not see an immediate threat of a large-scaled downturn of collateral-/residual values in the automobile sector, which provides comfort given the relatively short WAL of auto ABS bonds. For 2012, the European car market is poised to shrink in terms of sales volumes, withthe Italian, French and Spanish markets hit the hardest. Hence, the trend of broad increasesin collateral values seen in prior months has faded. In addition, recessionary scenarios in theperiphery do negatively influence the demand side, albeit not remotely comparable to thesevere downturns seen globally in 2007-2009. Car prices should not decline materially despite stagnating or declining sales perspectives. Only if the economic environment inEurope should weaken significantly further (deflation, etc.) could collateral values drop moreseverely, particularly in the periphery and related to certain makes of cars.

...regarding the automobile industry.

We continue to maintain a sound outlook for German originators, particularly captives.Regarding French and Italian issuers, negative rating pressure should resume (particularlyafter the 2Q 2012 earnings release season, while the financial and competitive situation in the automobile industry will remain challenging. The latter is also the case for GM/Opel.Nevertheless, we do not see immediate risks of potential defaults in dealer networks or anyother adverse threats from the carmakers’ side to immediately impact auto ABS transactions.It remains to be seen whether potentially lowered underwriting standards will push losseshigher next year regarding newly-originated transactions, especially as some automakers remain under severe pressure in light of declining sales.

Of course, as is the case in other sectors, any unforeseen tail event with respect to thesovereign debt crisis could accelerate risks related to loan fundamentals, collateral values aswell as originators.


Credit View

Disclaimer Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and accuracy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. We reserve the right to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice. 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No. 195, Büyükdere Plaza Kat. 5, 34394 Levent, Istanbul, Turkey. Regulatory authority: Sermaye Piyasası Kurulu – Capital Markets Board of Turkey, Eskişehir Yolu 8.Km No:156, 06530 Ankara, Turkey e) UniCredit CAIB Securities Romania (UniCredit Romania), Str. Nicolae Caramfil nr. 25, Etaj 5, Sector 1, Bucharest, Romania. Regulatory authority: CNVM, Romanian National Securities Commission, Foisurului street, no. 2, sector 3, Bucharest, Romania f) Zagrebačka banka, Paromlinska 2, HR-10000 Zagreb, Croatia. Regulatory authority: Croatian Agency for Supervision of Financial Services, Miramarska 24B, 10000 Zagreb, Croatia g) UniCredit Bulbank, Sveta Nedelya Sq. 7, BG-1000 Sofia, Bulgaria. Regulatory authority: Financial Supervision Commission (FSC), 33 Shar Planina str.,1303 Sofia, Bulgaria

This report may contain excerpts sourced from UniCredit Bank Russia, UniCredit Tiriac Bank, Bank Pekao or Yapi Kredi all members of the UniCredit group. If so, the pieces and the contents have not been materially altered. POTENTIAL CONFLICTS OF INTERESTS Company Key aaa 1, 2, 3, 4, 5, 6, 7

Key 1a: UniCredit Bank AG, UniCredit Bank AG London Branch, CJSC UniCredit Securities Russia, UniCredit Menkul Değerler A.Ş., Zagrebačka banka, UniCredit CAIB Securities Romania S.A., UniCredit Bulbank, UniCredit Bank Czech Republic, UniCredit Bank Slovakia, UniCredit CAIB Romania and/or a company affiliated with it (pursuant to relevant domestic law) owns at least 2% of the capital stock of the company. Key 1b: The analyzed company owns at least 2% of the capital stock of UniCredit Bank AG, UniCredit Bank AG London Branch, CJSC UniCredit Securities Russia, UniCredit Menkul Değerler A.Ş., Zagrebačka banka, UniCredit CAIB Securities Romania S.A., UniCredit Bulbank, UniCredit Bank Czech Republic, UniCredit Bank Slovakia and UniCredit CAIB Romania and/or a company affiliated with it (pursuant to relevant domestic law). Key 2: UniCredit Bank AG, UniCredit Bank AG London Branch, CJSC UniCredit Securities Russia, UniCredit Menkul Değerler A.Ş., Zagrebačka banka, UniCredit CAIB Securities Romania S.A., UniCredit Bulbank, UniCredit Bank Czech Republic, UniCredit Bank Slovakia and UniCredit CAIB Romania and/or a company affiliated with it (pursuant to relevant domestic law) belonged to a syndicate that has acquired securities or any related derivatives of the analyzed company within the twelve months preceding publication, in connection with any publicly disclosed offer of securities of the analyzed company, or in any related derivatives. Key 3: UniCredit Bank AG, UniCredit Bank AG London Branch, CJSC UniCredit Securities Russia, UniCredit Menkul Değerler A.Ş., Zagrebačka banka, UniCredit CAIB Securities Romania S.A., UniCredit Bulbank, UniCredit Bank Czech Republic, UniCredit Bank Slovakia and UniCredit CAIB Romania and/or a company affiliated (pursuant to relevant domestic law) administers the securities issued by the analyzed company on the stock exchange or on the market by quoting bid and ask prices (i.e. acts as a market maker or liquidity provider in the securities of the analyzed company or in any related derivatives). Key 4: The analyzed company and UniCredit Bank AG, UniCredit Bank AG London Branch, CJSC UniCredit Securities Russia, UniCredit Menkul Değerler A.Ş., Zagrebačka banka, UniCredit CAIB Securities Romania S.A., UniCredit Bulbank, UniCredit Bank Czech Republic, UniCredit Bank Slovakia and UniCredit CAIB Romania and/or a company affiliated (pursuant to relevant domestic law) concluded an agreement on services in connection with investment banking transactions in the last 12 months, in return for which the Bank received a consideration or promise of consideration. Key 5: The analyzed company and UniCredit Bank AG, UniCredit Bank AG London Branch, CJSC UniCredit Securities Russia, UniCredit Menkul Değerler A.Ş., Zagrebačka banka, UniCredit CAIB Securities Romania S.A. , UniCredit Bulbank, UniCredit Bank Czech Republic, UniCredit Bank Slovakia, UniCredit CAIB Romania and/or a company affiliated (pursuant to relevant domestic law) have concluded an agreement on the preparation of analyses. Key 6a: Employees of UniCredit Bank AG Milan Branch and/or members of the Board of Directors of UniCredit (pursuant to relevant domestic law) are members of the Board of Directors of the Issuer. Members of the Board of Directors of the Issuer hold office in the Board of Directors of UniCredit (pursuant to relevant domestic law). Key 6b: The analyst is on the supervisory/management board of the company they cover. Key 7: UniCredit Bank AG Milan Branch and/or other Italian banks belonging to the UniCredit Group (pursuant to relevant domestic law) extended significant amounts of credit facilities to the Issuer. RECOMMENDATIONS, RATINGS AND EVALUATION METHODOLOGY Company Date Rating Currency Target price

Overview of our ratings You will find the history of rating regarding recommendation changes as well as an overview of the breakdown in absolute and relative terms of our investment ratings on our websites www.research.unicreditgroup.eu and www.cib-unicredit.com/research-disclaimer under the heading “Disclaimer.” Note on what the evaluation of equities is based:

UniCredit Research page 31


Credit View

We currently use a three-tier recommendation system for the stocks in our formal coverage: Buy, Hold, or Sell (see definitions below): A Buy is applied when the expected total return over the next twelve months is higher than the stock's cost of equity. A Hold is applied when the expected total return over the next twelve months is lower than its cost of equity but higher than zero. A Sell is applied when the stock's expected total return over the next twelve months is negative. We employ three further categorizations for stocks in our coverage: Restricted: A rating and/or financial forecasts and/or target price is not disclosed owing to compliance or other regulatory considerations such as blackout period or conflict of interest. Coverage in transition: Due to changes in the research team, the disclosure of a stock's rating and/or target price and/or financial information are temporarily suspended. The stock remains in the research universe and disclosures of relevant information will be resumed in due course. Not rated: Suspension of coverage. Company valuations are based on the following valuation methods: Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA), peer-group comparisons, historical valuation approaches, discount models (DCF, DVMA, DDM), break-up value approaches or asset-based evaluation methods. Furthermore, recommendations are also based on the Economic profit approach. Valuation models are dependent on macroeconomic factors, such as interest rates, exchange rates, raw materials, and on assumptions about the economy. Furthermore, market sentiment affects the valuation of companies. The valuation is also based on expectations that might change rapidly and without notice, depending on developments specific to individual industries. Our recommendations and target prices derived from the models might therefore change accordingly. The investment ratings generally relate to a 12-month horizon. They are, however, also subject to market conditions and can only represent a snapshot. The ratings may in fact be achieved more quickly or slowly than expected, or need to be revised upward or downward. Note on the bases of evaluation for interest-bearing securities: Our investment ratings are in principle judgments relative to an index as a benchmark. Issuer level: Marketweight: We recommend having the same portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR HY index for sub-investment grade names). Overweight: We recommend having a higher portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR HY index for sub-investment grade names). Underweight: We recommend having a lower portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR HY index for sub-investment grade names). Instrument level: Core hold: We recommend holding the respective instrument for investors who already have exposure. Sell: We recommend selling the respective instrument for investors who already have exposure. Buy: We recommend buying the respective instrument for investors who already have exposure. Trading recommendations for fixed-interest securities mostly focus on the credit spread (yield difference between the fixed-interest security and the relevant government bond or swap rate) and on the rating views and methodologies of recognized agencies (S&P, Moody’s, Fitch). Depending on the type of investor, investment ratings may refer to a short period or to a 6 to 9-month horizon. Please note that the provision of securities services may be subject to restrictions in certain jurisdictions. You are required to acquaint yourself with local laws and restrictions on the usage and the availability of any services described herein. The information is not intended for distribution to or use by any person or entity in any jurisdiction where such distribution would be contrary to the applicable law or provisions. The prices used in the analysis are the closing prices of the appropriate local trading system or the closing prices on the relevant local stock exchanges available on the day after the mentioned date at 2:00 GMT, unless otherwise specified. In the case of unlisted stocks, the average market prices based on various major broker sources (OTC market) on the day after the mentioned date at 2:00 GMT, are used, unless otherwise specified. The exact closing time depends where the stock is traded: Bulgaria 13:00 GMT, Croatia 14:00 GMT, Czech Republic 14:00 GMT, Hungary 15:10 GMT, Kazakhstan 11:00 GMT, Poland 15:35 GMT, Romania 13:30 GMT, Russia 15:45 GMT, Serbia 11:00 GMT, Slovenia 11:00 GMT, Turkey 12:30 GMT, Ukraine 15:35 GMT, United Kingdom 16:30 GMT and United States 20:00 GMT. The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by UniCredit Bank AG. Coverage Policy A list of the companies covered by UniCredit Bank, UniCredit Bank London, UniCredit Securities, UniCredit Menkul, UniCredit Romania, Zagrebačka banka and UniCredit Bulbank is available upon request. Frequency of reports and updates It is intended that each of these companies be covered at least once a year, in the event of key operations and/or changes in the recommendation. SIGNIFICANT FINANCIAL INTEREST: UniCredit Bank, UniCredit Bank London, UniCredit Securities, UniCredit Menkul, UniCredit Romania, Zagrebačka banka and UniCredit Bulbank and/or a company affiliated (pursuant to relevant national German, Italian, Austrian, UK, Russian and Turkish law) with them regularly trade shares of the analyzed company. UniCredit Bank, UniCredit Bank London, UniCredit Securities, UniCredit Menkul, UniCredit Romania, Zagrebačka banka and UniCredit Bulbank may hold significant open derivative positions on the stocks of the company which are not delta-neutral. Analyses may refer to one or several companies and to the securities issued by them. In some cases, the analyzed issuers have actively supplied information for this analysis. ANALYST DECLARATION The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly. ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST To prevent or remedy conflicts of interest, UniCredit Bank, UniCredit Bank London, UniCredit Securities, UniCredit Menkul, UniCredit Romania, Zagrebačka banka and UniCredit Bulbank have established the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by its compliance department. Conflicts of interest arising are managed by legal and physical and non-physical barriers (collectively referred to as “Chinese Walls”) designed to restrict the flow of information between one area/department of UniCredit Bank, UniCredit Bank London, UniCredit Securities, UniCredit Menkul, UniCredit Romania, Zagrebačka banka and UniCredit Bulbank and another. In particular, Investment Banking units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries from Markets Units, as well as the research department. Disclosure of publicly available conflicts of interest and other material interests is made in the research. Analysts are supervised and managed on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate finance activities, or other activities other than the sale of securities to clients. ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED Notice to Australian investors This publication is intended for wholesale clients in Australia subject to the following: UniCredit Bank AG and its branches do not hold an Australian Financial Services licence but are exempt from the requirement to hold a licence under the Act in respect of the financial services to wholesale clients. UniCredit Bank AG and its branches are regulated by BaFin under German laws, which differ from Australian laws. This document is only for distribution to wholesale clients as defined in Section 761G of the Corporations Act. UniCredit Bank AG and its branches are not Authorised Deposit Taking Institutions under the Banking Act 1959 and are not authorised to conduct a banking business in Australia.



Credit View

Notice to Austrian investors This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. This document is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in whole or part, for any purpose. Notice to Czech investors This report is intended for clients of UniCredit Bank, UniCredit Bank London, UniCredit Securities, UniCredit Menkul, UniCredit Romania, Zagrebačka banka and UniCredit Bulbank in the Czech Republic and may not be used or relied upon by any other person for any purpose. Notice to Italian investors This document is not for distribution to retail clients as defined in article 26, paragraph 1(e) of Regulation n. 16190 approved by CONSOB on 29 October 2007. In the case of a short note, we invite the investors to read the related company report that can be found on UniCredit Research website www.research.unicreditgroup.eu. Notice to Japanese investors This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Notice to Polish investors This document is intended solely for professional clients as defined in Art. 3 39b of the Trading in Financial Instruments Act of 29 July 2005. The publisher and distributor of the recommendation certifies that it has acted with due care and diligence in preparing the recommendation, however, assumes no liability for its completeness and accuracy. Notice to Russian investors As far as we are aware, not all of the financial instruments referred to in this analysis have been registered under the federal law of the Russian Federation "On the Securities Market" dated 22 April 1996, as amended (the "Law"), and are not being offered, sold, delivered or advertised in the Russian Federation. This analysis is intended for qualified investors, as defined by the Law, and shall not be distributed or disseminated to a general public and to any person, who is not a qualified investor. Notice to Turkish investors Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities. Investment advisory services are provided in accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the clients. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely on the information stated here may not result in consequences that meet your expectations. Notice to UK investors This communication is directed only at clients of UniCredit Bank, UniCredit Bank London, UniCredit Securities, UniCredit Menkul, UniCredit Romania, Zagrebačka banka and UniCredit Bulbank who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. Notice to U.S. investors This report is being furnished to U.S. recipients in reliance on Rule 15a-6 ("Rule 15a-6") under the U.S. Securities Exchange Act of 1934, as amended. Each U.S. recipient of this report represents and agrees, by virtue of its acceptance thereof, that it is such a "major U.S. institutional investor" (as such term is defined in Rule 15a-6) and that it understands the risks involved in executing transactions in such securities. Any U.S. recipient of this report that wishes to discuss or receive additional information regarding any security or issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of UniCredit Capital Markets, LLC. Any transaction by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through UniCredit Capital Markets. The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. reporting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and reporting standards as U.S. issuers. The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose. Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain investors depending on their specific investment objectives, risk tolerance and financial position. In jurisdictions where UniCredit Capital Markets is not registered or licensed to trade in securities, commodities or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to jurisdiction and which may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements. The information in this publication is based on carefully selected sources believed to be reliable, but UniCredit Capital Markets does not make any representation with respect to its completeness or accuracy. All opinions expressed herein reflect the author’s judgment at the original time of publication, without regard to the date on which you may receive such information, and are subject to change without notice. UniCredit Capital Markets may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. These publications reflect the different assumptions, views and analytical methods of the analysts who prepared them. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is provided in relation to future performance. UniCredit Capital Markets and any company affiliated with it may, with respect to any securities discussed herein: (a) take a long or short position and buy or sell such securities; (b) act as investment and/or commercial bankers for issuers of such securities; (c) act as market makers for such securities; (d) serve on the board of any issuer of such securities; and (e) act as paid consultant or advisor to any issuer. The information contained herein may include forward-looking statements within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors that could cause a company’s actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic conditions that adversely affect the level of demand for the company’s products or services, changes in foreign exchange markets, changes in international and domestic financial markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement. This document may not be distributed in Canada.



Credit View


UniCredit Research* Michael Baptista Global Head of Research +44 207 826-1328 [email protected]

Dr. Ingo Heimig Head of Research Operations +49 89 378-13952 [email protected]

Credit Research

Luis Maglanoc, CFA, Head +49 89 378-12708 [email protected]

Credit Strategy & Structured Credit Research Dr. Philip Gisdakis, Head Credit Strategy +49 89 378-13228 [email protected]

Dr. Tim Brunne Quantitative Credit Strategy +49 89 378-13521 [email protected]

Markus Ernst Credit Strategy & Structured Credit +49 89 378-14213 [email protected]

Dr. Stefan Kolek EEMEA Corporate Credits & Strategy +49 89 378-12495 [email protected]

Manuel Trojovsky Credit Strategy & Structured Credit +49 89 378-14145 [email protected]

Dr. Christian Weber, CFA Credit Strategy +49 89 378-12250 [email protected]

Financials Credit Research Franz Rudolf, CEFA, Head Covered Bonds +49 89 378-12449 [email protected]

Alexander Plenk, CFA, Deputy Head Banks +49 89 378-12429 [email protected]

Amey Dyckmans Sub-Sovereigns & Agencies +49 89 378-12004 [email protected]

Florian Hillenbrand, CFA Covered Bonds +49 89 378-12961 [email protected]

Dr. Tilo Höpker Banks +49 89 378-12960 [email protected]

Luis Maglanoc, CFA Regulatory & Accounting Service +49 89 378-12708 [email protected]

Valentina Stadler Sub-Sovereigns & Agencies +49 89 378-16296 [email protected]

Natalie Tehrani Monfared Regulatory & Accounting Service +49 89 378-12242 [email protected]

Emanuel Teuber Banks, Financial Services, Insurance +49 89 378-14245 [email protected]

Corporate Credit Research Stephan Haber, CFA, Co-Head Telecoms, Media, Technology +49 89 378-15192 [email protected]

Dr. Sven Kreitmair, CFA, Co-Head Automotive & Mobility +49 89 378-13246 [email protected]

Jana Arndt, CFA Basic Resources, Industrial G&S, Construction & Materials +49 89 378-13211 [email protected]

Christian Aust, CFA Industrial Transportation, Media, Pulp & Paper +49 89 378-12806 [email protected]

Dr. Manuel Herold Oil & Gas, Travel & Leisure +49 89 378-12650 [email protected]

Max Huefner Chemicals, Aerospace & Defense, Packaging +49 89 378-13212 [email protected]

Susanne Reichhuber Utilities +49 89 378-13247 [email protected]

Rocco Schilling, CFA Consumers, Healthcare +49 89 378-15449 [email protected]

Kai Zirwes Industrial Transportation, Media, Pulp & Paper +49 89 378-11962 [email protected]

Publication Address

UniCredit Research Corporate & Investment Banking UniCredit Bank AG Arabellastrasse 12 D-81925 Munich Tel. +49 89 378-18927

Bloomberg UCCR Internet www.research.unicreditgroup.eu

*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit Bank AG London Branch (UniCredit Bank London), UniCredit Bank AG Milan Branch (UniCredit Bank Milan), UniCredit Bank AG Vienna Branch (UniCredit Bank Vienna), UniCredit CAIB Securities Romania (UniCredit Romania), UniCredit Bulbank, Zagrebačka banka, UniCredit Bank Czech Republic (UniCredit Bank Czechia), Bank Pekao, ZAO UniCredit Bank Russia (UniCredit Russia), UniCredit Bank Slovakia a.s. (UniCredit Slovakia), UniCredit Tiriac Bank (UniCredit Tiriac) and ATF Bank.

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