RMB [3,490] million of securities to be rated
Hong Kong, October 27, 2022 — Moody’s Investors Service has assigned provisional (P)Aaa (sf) rating to the Senior Notes to be issued by Toyota Glory 2022 Phase II Retail Auto Loan Credit Asset-backed Securities, a domestic transaction backed by a pool of auto loans originated by Toyota Motor Finance (China) Company Limited (TMF) in China.
The complete rating action is as follows:
Issuer: Toyota Glory 2022 Phase II Retail Auto Loan Credit Asset-backed Securities
….RMB[3,490,000,000] Senior Notes, Assigned (P)Aaa (sf)
The RMB[369,999,892.52] Subordinated Notes are not rated by Moody’s.
RATINGS RATIONALE
The rated notes will be supported by the subordination provided by the Subordinated Notes. There is no liquidity reserve in this transaction at closing. Due to the lack of upfront liquidity reserve, the rating of the Senior Notes is linked to the credit quality of TMF.
When assigning the rating, Moody’s analysis focused, among other factors, on (1) the characteristics of the securitized pool; (2) the macroeconomic environment; (3) the historical performance data; (4) the parental support available to the servicer; (5) the financial disruption risk in the transaction, which refer to the risk of issuer’s cash flow disruption in case of a servicer termination event, and the effectiveness of other structural mechanisms to support timely payments on the rated notes; (6) the protection provided by the credit enhancement against defaults and arrears in the securitized pool; and (7) legal and structural integrity of the transaction.
Moody’s considered, among other things, the transaction’s following key strengths:
(1) Diversified collateral pool composition: The cut-off portfolio consists of 49,811 loans across 31 regions in China, although around 27.71% of the pool is concentrated in Guangdong region.
(2) Favorable pool characteristics: The pool only includes loans to purchase new passenger vehicles. The loans have fully amortizing terms, and payments are made by direct debit from the borrowers’ bank accounts. The pool has a weighted average down-payment rate of 38.06%.
(3) Static structure with fast amortization: This is a static deal with no revolving period. As a result, the transaction is only exposed to the default risk of the loans in the cut-off pool, which have a weighted average remaining tenor of 31.07 months. Furthermore, the issuer will apply loan repayments to repay the rated notes from the first monthly payment date until they are repaid in full.
(4) Experienced originator: The originator, TMF, was established in 2005 and has previous experience of sponsoring Auto ABS transactions since 2014.
(5) Strong credit enhancement: The transaction benefits from two main sources of credit enhancement, including (a) the subordination available to the rated notes; and (b) accelerated repayment of rated notes from excess spread if the cumulative default rate exceeds predefined thresholds.
Moody’s has also considered the following weaknesses and mitigants:
(1) Untested back-up servicing arrangement: No back-up servicing arrangement will be set up at closing. Servicing of the transaction may be subject to disruption if the originator/servicer fails to perform when needed. Any disruption can result in a material impact because the transaction has more than 49,000 obligors located in various parts of China. There is no precedent in China of actual servicing transfers to date, although potential replacement servicers exist because there are several captive finance originators with obligors across the country. Moody’s considers the high likelihood of parental support for the servicer and the short weighted average life of the rated notes as key mitigants to this weakness.
(2) Limited liquidity buffer: The transaction has no liquidity reserve fully funded upfront. Moody’s considered the following mitigants in determining the operational risk in this transaction: (a) the strong parental support available to the servicer; (b) the short tenor of this transaction; and (c) perfection of the trust’s right over the assigned loans through notification to the underlying borrowers after a servicer termination event.
(3) Commingling risk with servicer’s fund: The servicer will auto-debit the borrowers’ bank accounts on each of the loans’ monthly installment dates, and commingle such collections with its own funds. This amount will be subject to commingling risk until the servicer transfers such collections to the issuer’s trust account on the eighth business day before the payment date. Moody’s has considered the credit quality of the servicer and the payment mechanism in this transaction and has modeled for a commingling exposure equal to 1.5 months of collections and a 45% recovery rate on such exposure.
MAIN MODEL ASSUMPTIONS
Moody’s assumed a mean default rate of 0.9% and a portfolio credit enhancement of 5.5% for the securitized pool. A recovery rate of 20% is used as the other main input for Moody’s cash flow model ABSROM. These assumptions are made according to Moody’s analysis of the characteristics of such pools, their historical performance, and the current view of China’s social and macroeconomic conditions and risks as reflected in its country ceiling of Aaa.
RATING METHODOLOGY
The principal methodology used in this rating was “Moody’s Global Approach to Rating Auto Loan- and Lease-Backed ABS” published in July 2022 and available at https://ratings.moodys.com/api/rmc-documents/390478. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Please note that a Request for Comment was published in which Moody’s requested market feedback on potential revisions to one or more of the methodologies used in determining these Credit Ratings. If the revised methodologies are implemented as proposed, it is not currently expected that the Credit Ratings referenced in this press release will be affected.
Request for Comments can be found on the rating methodologies page on https://ratings.moodys.com.
Factors that would lead to an upgrade or downgrade of the rating:
Factors that may cause a downgrade of the rating include : (1) an increase in financial disruption risk; (2) a decline in the overall performance of the pool; (3) a deterioration in the credit profile of the servicer or its parent companies and the absence of the implementation of any mitigating actions for the transaction, and (4) a deterioration in the credit quality of the other transaction counterparties.
The performance expectations for a given variable indicate Moody’s forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range may indicate that the collateral’s credit quality is stronger or weaker than what Moody’s had previously anticipated.
The Company
TMF is 100% owned by Toyota Financial Services Corporation (A1, stable), which is in turn 100% owned by Toyota Motor Corporation (A1/P-1, stable). It is an auto finance company established in January 2005 in China and is licensed under the supervision of the China Banking and Insurance Regulatory Commission (CBIRC).
TMF has both a retail business and wholesaler floor plan financial services business. The retail business provides auto loans to consumers who purchase the vehicles produced or imported by Toyota Motor Corporation and the loans are originated through its dealership network across China. The vehicles include brands such as Toyota and Lexus. The issuer is a newly established special purpose trust incorporated in China.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
Moody’s took into account one or more third party due diligence assessment(s) regarding the underlying assets or financial instruments (the “Due Diligence Assessment(s)”) in this credit rating action and used the Due Diligence Assessment(s) in preparing the rating. This had a neutral impact on the rating.
The Due Diligence Assessment(s) referenced herein were prepared and produced solely by parties other than Moody’s. While Moody’s uses Due Diligence Assessment(s) only to the extent that Moody’s believes them to be reliable for purposes of the intended use, Moody’s does not independently audit or verify the information or procedures used by third-party due-diligence providers in the preparation of the Due Diligence Assessment(s) and makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of the Due Diligence Assessment(s).
The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody’s estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.
Moody’s quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Cecilia Chen
Asst Vice President – Analyst
Structured Finance Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Jerome Cheng
Associate Managing Director
Structured Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
