When rolling out funding instruments into a new market, VW Financial Services always consider the regulatory environment and market situation as well as the funding needs of the respective subsidiary. In general, every VW Financial Services company should be in a position to cover such requirements through local funding sources within the region it operates.

“For this purpose, we aim to establish a diversified refinancing structure for our affiliated companies that embrace the full range of local capital market instruments and include local asset-backed securities (ABS) transactions,” says VW Financial CFO Frank Fiedler. The main criterion and reason for adopting this strategic refinancing approach is to achieve maximum flexibility in terms of refinancing cost optimization while also assuring the liquidity of the company at all times.

In July 2014, VW Financial tapped the renminbi bond market as it arranged the first fixed rate auto ABS in China amounting to 799 million renminbi (US$129 million). With Volkswagen Finance (China) Company as the originator, the deal represented the first Chinese ABS with international ratings and the first one with international structural features such as target over-collateralization scheme.

“The ABS transaction Driver China One is based on our clearly defined refinancing strategy,” says Fiedler. “It represents an important step in the expansion of our local funding activities in China.”

The deal comprised of 699 million renminbi Class A rated notes with fixed interest rate of 4.80%, 44 million renminbi Class B rated notes with interest rate of 8.08% and 52.57 million renminbi subordinated unrated notes. The transaction was successfully priced and executed amid a volatile market environment and achieved the tightest pricing among all Chinese auto ABS in 2014.

“Much more important than the price in this inaugural transaction was the strategic step that was taken towards a greater diversification of funding in China,” he adds.

	Fiedler

The transaction was part of the ABS pilot programme that allowed captive automobile banks under complete foreign ownership access to the local ABS market for the first time under the supervision of the China Banking Regulatory Commission and the People’s Bank of China. The regulators limited the transaction volume by allocation from this pilot programme. “We would have liked to have securitized and marketed a higher volume, but we also fully understand the pilot nature of the programme,” remarks Fiedler.

In launching the Driver China One transaction, Fiedler says China is a key market for VW Financial and it is becoming increasingly important. Whereas in the US, for example, around 90% of all motor vehicles are financed or leased, and around two-thirds in Germany, the China market is dominated by cash payers – only around two out of 10 customers in China currently resort to financing option.

“That means there is still a great deal of work to be done to raise popular awareness in China about the benefits of a financing solution, such as the predictability of monthly costs and the high degree of flexibility it provides,” explains Fiedler. “And with an expected figure of around 3.5 million vehicles sold by the Volkswagen Group in China during 2014, this opens up considerable growth potential for VW Financial Services.”

Indeed, auto ABS transactions make up a substantial proportion of the diversified refinancing carried out by VW Financial. Within the framework of the strategic tripartite funding – money and capital markets, direct bank deposits and auto ABS – the company would like to further expand auto ABS in the global arena.

In the financial year 2013, the volume of VW Financial refinancing generated by auto ABS transactions amounted to e16 billion (US$20 billion), or about 14% of the company’s total assets.

VW Financial first tapped the Asian debt market in February 2002 when it established a 30 billion yen (US$254 million) commercial paper programme and due to the high acceptance in the market, it was able to raise the volume to 60 billion yen a year later.

Its inaugural unsecured bond issuance was placed in January 2004 amounting to two billion yen for five years at a rate of 1%. In addition to China and Japan, the company has also raised financing in other Asia-Pacific markets such as Australia, India, South Korea and Taiwan.