BEIJING, September 29, 2021- S&P Global (China) Ratings has assigned its preliminary rating AAA_spc(sf) to the Bavarian Sky China 2021-3 Retail Auto Loan Asset Backed Notes (BSC 2021-3) senior notes (Senior Notes) to be issued by China Foreign Economy and Trade Trust. The notes are backed by auto loans that were originated BMW AFC.

We assigned the preliminary ratings based on information as of September 15, 2021. We expect to assign and publish our final ratings when the trust becomes effective.

The preliminary ratings reflect our analysis of five pillars under S&P Ratings China--Structured Finance Methodology.

Credit Quality of the Securitized Assets: We analyzed the originator's operational framework, risk management and track record, historical static and dynamic pool data, aggregated and securitized assets, and other qualitative and quantitative factors to derive our base-case assumptions which are further refined by forward-looking considerations. We have formed a base-case assumption of a default rate (1.10%) and recovery rate (10.00%). After applying the specific stress multiple and recovery haircut, the stressed default and recovery rate are 6.05% and 5.00% under our AAA_spc(sf) rating stress scenario.

Payment Structure and Cash Flow Mechanics: We model various combinations under default timing assumptions, prepayment rate assumptions, different triggers and payment structures, tax, fees and expenses assumptions. The Senior Notes are expected to be able to withstand stresses commensurate with the ratings assigned to the notes, and still meet payment obligations in a timely manner. We estimated the final S&P Global (China) Ratings CE buffer to be greater than 0%.  

Operational and Administrative Risk: The direct debit payment mechanism will reduce BMW AFC’s operational risk to some extent. Although there is no back-up servicer, the upfront cash reserve can provide liquidity support to the transaction. We believe the participants in this transaction are capable of fulfilling the duties and responsibilities stipulated in the agreement given their experience and past track record.

Counterparty Risk: Our assessment of counterparty risk takes into account payment interruption risk, account bank risk, commingling risk and set off risk etc. The transaction documents have incorporated various credit quality triggers to mitigate the payment interruption risk and account bank risk. However, we believe commingling risk is not sufficiently mitigated, so we apply additional pressure on commingling risk in our rating analysis.

Legal and Regulatory Risk: This transaction is structured in accordance with China's Trust Law and China Asset Securitization scheme. We believe the legal structure of the special purpose trust (SPT) meets the principle of true sale and bankruptcy remoteness in securitization. Through our legal analysis, borrower notification, collateral re-registration and other legal risks have been mitigated by the arrangements stipulated in the transaction documents. 

List of Preliminary Ratings:

Senior: AAA_spc(sf)

Methodology Applied:

S&P Ratings China--Structured Finance Methodology

Related Research:

Commentary: Understanding Our Approach to China Consumer Asset-Backed Securities
The Road to Recovery: China Corporate Mid-Year Outlook 2021
The Journey Ahead: A Look At China’s Auto ABS Sector 2021 Edition

Models Applied:

SPG China Ratings Structured Finance Cash Flow Engine

Media Contacts:

Sharon Tang, Beijing, (86)10-6569-2988; sharon.tang@spgchinaratings.cn 

Analyst Contacts:

Enjie Zhang, Beijing; enjie.zhang@spgchinaratings.cn

Kaiyan Li, Beijing; kaye.li@spgchinaratings.cn

Jieqiong Du, Beijing; jieqiong.du@spgchinaratings.cn