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Research: Rating Action: Moody’s assigns provisional ratings to Ford Automotive Finance (China) Limited’s auto loan ABS in China: Fuyuan 2022-3 Retail Auto Mortgage Loan Securitization Trust

RMB[2,700] million of securities to be rated

Hong Kong, September 30, 2022 — Moody’s Investors Service has assigned provisional (P)Aaa (sf) ratings to two classes of senior notes to be issued by Fuyuan 2022-3 Retail Auto Mortgage Loan Securitization Trust, a domestic transaction backed by a pool of auto loans originated by Ford Automotive Finance (China) Limited (FAFC) in China.

The complete rating action is as follows:

Issuer: Fuyuan 2022-3 Retail Auto Mortgage Loan Securitization Trust

….RMB[1,000,000,000] Class A-1 Notes, Assigned (P)Aaa (sf)

….RMB[1,700,000,000] Class A-2 Notes, Assigned (P)Aaa (sf)

The RMB[152,000,000] Subordinated Notes are not rated by Moody’s.

RATINGS RATIONALE

The rated notes will be supported by the subordination provided by the subordinated notes, the over-collateralization of the portfolio, the fully funded liquidity reserve at closing, and any excess spread (if any).

When assigning the ratings, 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 potential for disruption of the issuer’s cash flow in case of a servicer termination event; (6) the protection provided by the credit enhancement against defaults 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 portfolio is highly granular, consisting of 30,473 performing loans selected from the originator’s portfolio, and spread across 31 regions in China.

(2) Favorable pool characteristics: The pool only includes loans to purchase new vehicles, with fully amortizing terms, and payment made by direct debit from the borrowers’ bank accounts. There are no loans with more than 30 consecutive days in arrears at cutoff. The minimum down payment rate of the loans is 20%, except for the loans backed by new energy vehicles which may have a minimum down payment of 15% (loans backed by new energy vehicles contribute to 7.76% of the securitized pool amount, and loans with minimum down payment below 20% contribute to about 3% of the securitized pool amount). The portfolio has a weighted average down payment rate of about 43.4% at loan origination.

(3) Static structure: 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 cutoff pool, which have a weighted average remaining tenor of about 27.19 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) Strong credit enhancement: The transaction benefits from several sources of credit enhancement, including the subordination available to the rated notes, a liquidity reserve that will be fully funded at closing, which will not amortize during the life of the transaction; and increasing over-collateralization over time because of the full turbo payment structure.

(5) Experienced originator: The originator, FAFC, has sponsored 15 auto ABS transactions and has around 17 years of experience in operating in China.

Moody’s has also considered the following weaknesses and mitigants:

(1) Untested backup servicing arrangement: There will be no backup servicing arrangement at closing, and there is no history of such servicing transfer in China. Servicing of the transaction may be subject to disruption if the originator/servicer fails to perform when needed.

(2) Limited liquidity buffer: The trust has a non-amortizing cash liquidity reserve account, which will be fully funded at closing to an amount equal to 1.0% of the initial portfolio principal amount. This amount of liquidity coverage can cover around 4 months of senior fees and rated notes’ interest, calculated according to the closing note balance amount.

(3) Commingling risk with servicer’s fund: The servicer will auto-debit the borrowers’ bank accounts on each of the loan’s monthly installment dates and deposit 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 seven business days before each payment date.

MAIN MODEL ASSUMPTIONS

Moody’s assumed a mean default rate of 0.8% and a portfolio credit enhancement of 5.5% for the securitized pool. A recovery rate of 10% 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.

RATINGS METHODOLOGY

The principal methodology used in these ratings 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 ratings:

Factors that may cause a downgrade of the ratings include: (1) a decline in the overall performance of the pool; (2) 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 (3) a deterioration in the credit quality of the 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

FAFC is a wholly owned subsidiary of Ford Motor Credit Company LLC (Ba2) and is a licensed auto finance company under the supervision of the China Banking and Insurance Regulatory Commission (CBIRC).

FAFC was incorporated in Shanghai in June 2005. It provides auto loans to buyers of cars — which include all Ford automotive brands — sold through Ford dealers in various provinces of 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 ratings. This had a neutral impact on the ratings.

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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Moody’s considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody’s. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody’s with information for the purposes of its ratings process. Please refer to https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody’s Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

For PRC only: Neither MCO nor any of its majority-owned affiliates is a qualified credit rating agency within the PRC. Any rating assigned by MCO or any of its majority-owned affiliates: (1) does not constitute a rating as required under any relevant PRC laws or regulations; (2) cannot be included in any registration statement, offering circular, prospectus or any other documents submitted to the PRC regulatory authorities; and (3) cannot be used within the PRC for any regulatory purpose or for any other purpose which is not permitted under relevant PRC laws or regulations. For the purposes of this paragraph only, “PRC” refers to the mainland of the People’s Republic of China, excluding (i)Hong Kong SAR, China, (ii) Macau SAR, China and (iii) Taiwan, China.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

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.

Joe Wong
VP – Senior Credit Officer
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

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