Fitch Ratings-London/Moscow-22 October 2008: Fitch Ratings today downgraded Ukraine Auto Loan Finance No. 1 Plc and changed the Outlook on Class B to Negative from Stable.
Class A (ISIN XS0364719640) downgraded to 'BB+' from ‘BBB-’ (BBB minus); Outlook remains Negative
Class B (ISIN XS0364720143) downgraded to 'B-' (B minus) from ‘B’; Outlook changed to Negative from Stable.
The actions follow the downgrade of Ukraine’s sovereign rating and Country Ceiling (both downgraded to ‘B+’ on 17 October 2008), both of which are key reference points used in Fitch’s structured finance criteria. Therefore, the downgrade is primarily driven by negative macro trends, rather than by an observed deterioration in the performance of the underlying collateral. However, the agency believes borrowers in the securitised portfolio are likely to face increasing financial difficulties, particularly if current negative macro trends are sustained. As such, the outlook for the Class B notes was changed to Negative from Stable.
The transaction funds a portfolio of auto loans originated within the Ukraine by CJSC Privatbank (rated 'B'/Outlook Stable), the largest privately-owned bank in the country. It closed in May 2008 and is still in its revolving period, allowing additional purchases until May 2009 unless an early amortisation is triggered. Only one reporting period has lapsed since closing, so no clear performance trend can be derived.
The loans funded are denominated and disbursed in USD. This introduces two risks that, in the agency’s view, have increased in recent weeks. First, authorities may disallow or suspend the expatriation of foreign currency leading to a liquidity shock at the issuer level. Structural features including a cash reserve and Transfer & Convertibility insurance support 18 months of interest payments on the Class A notes. In Fitch’s view this supports a three-notch differential above the Country Ceiling. The downgrade on the Class A notes therefore maintains this differential above the new Country Ceiling.
Second, stress in the consumer segment in Ukraine could trigger interference by the authorities with contractually agreed payment obligations. In the event the sovereign is unable to prevent a substantial devaluation of the Ukrainian Hryvna (UHF), obligors will be confronted with rising payment obligations in UHF terms. This could prompt the authorities to re-denominate USD debt into local currency. Depending on the conversion rate used and the subsequent exchange rate movements, such intervention could lead to collections falling short of their expected amounts in USD terms. The transaction has no structural protection against this risk. As of today, it is unclear how the authorities would react if these risks are realised. However, in Fitch’s view, the risk that such measures will be considered, as the ongoing liquidity crisis puts pressure on Ukraine’s economy, has increased. This is reflected in today’s rating action.
The downgrade was also prompted by a revision of the assumptions on the rating default and loss rates, which are tied to the local currency rating of the sovereign. For the Class A notes this means that loss assumptions for the ‘BBB-’ (BBB minus) scenario are now applicable at a ‘BB+’ level to maintain the three-notch distance above the sovereign’s rating. As the available enhancement has not shrunk since closing, the transaction can still withstand these unchanged assumptions as detailed in the new issue report (see “Ukraine Auto Loan Finance No. 1 Plc” published on 12 June 2008) at the new rating level of ‘BB+’.
For the Class B notes, the downgrade on the sovereign has narrowed the rating differential, implying the systemic risk to which the portfolio is exposed has increased. As such, the previous rating of the Class B notes will only be sustainable if the notes could absorb a higher default and loss severity. Fitch deems a cumulative default rate of 14% and a recovery rate of 36.6% to be appropriate for a ‘B’ scenario while the available enhancement is insufficient to support this revised loss expectation. However, according to the agency’s calculation, the Class B notes can withstand a cumulative default rate of 7.7% with a recovery rate of 44%, which Fitch attaches to a ‘B-’ (B minus) rating.
While the transaction’s seasoning is too short to derive meaningful performance information, the agency will continue to monitor surrounding economic developments and their potential impact on the transaction.
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