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Research: Rating Action: Moody’s assigns provisional ratings to GAC-SOFINCO Automobile Finance second auto loan ABS transaction for 2022

RMB[3,800] million of securities to be rated

Hong Kong, July 18, 2022 — Moody’s Investors Service has assigned provisional ratings to the Class A1, A2 and B Notes to be issued by HUI JU DA 2022-1 Retail Auto Mortgage Loan Asset-Backed Securities, a domestic transaction backed by a static pool of auto loans originated by GAC-SOFINCO Automobile Finance Co., Ltd. (GAC-SOFINCO AFC) in China.

The complete rating action is as follows:

Issuer: HUI JU DA 2022-1 Retail Auto Mortgage Loan Asset-Backed Securities

….RMB[2,000,000,000] Class A1 Notes, Assigned (P)Aaa (sf)

….RMB[1,480,000,000] Class A2 Notes, Assigned (P)Aaa (sf)

….RMB[320,000,000] Class B Notes, Assigned (P)Aa1 (sf)

The RMB[200,000,000] Subordinated Notes are not rated by Moody’s.

RATINGS RATIONALE

When assigning the ratings, Moody’s analysis focused, among other factors, on (1) the macroeconomic environment; (2) the characteristics of the securitized pool; (3) the historical performance data including monthly scheduled and late collections, prepayment, delinquencies and recoveries on different delinquent loans; (4) the trustee’s authority to appoint a temporary substitute servicer upon the occurrence of servicer termination events till the servicer being terminated; (5) the potential for disruption of the issuer’s cash flow in case of a servicer termination event; (6) the liquidity reserve covering four months of senior notes’ interests and senior fees; (7) the protection provided by credit enhancement against defaults in the securitized pool; and (8) the legal and structural integrity of the transaction. The rating of the Class B Notes is capped at Aa1 (sf) due to the exposure to the account bank.

Moody’s considered, among other things, the transaction’s key strengths:

(1) Diversified collateral pool composition: The cut-off portfolio consists of 65,483 obligors’ loans with a good level of geographic diversification across 31 regions in China. Typically, a more granular pool exhibits less volatile performance.

(2) Favorable pool characteristics: All loans in the portfolio are granted to individuals for the purchase of new passenger vehicles and have fully amortizing repayment terms with a minimum down payment of 20%. The portfolio has a weighted average down payment rate of 39.6% at loan origination.

(3) Experienced originator: GAC-SOFINCO AFC has sponsored 12 auto ABS transactions prior to this proposed transaction.

(4) 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. The issuer will apply all loan interest and principal repayments in accordance with its priority of payment, including repaying the Class A1 Notes up to its scheduled principal payment on each note’s payment date. The remaining collection will be used to repay the Class A2 Notes until they are repaid in full, and subsequently, and any further remaining collections will be used to repay the Class A1 Notes until being repaid in full and then repay the Class B Notes until being repaid in full.

(5) Strong credit enhancement: The transaction benefits from three main sources of credit enhancement: subordination, over-collateralization and a fully funded liquidity reserve to the required amount on the first trust allocation date. The over-collateralization amount is equal to 4.1% of the initial outstadning pool balance. The required liquidity reserve amount at each trust allocation date is the higher of (i) 1.2% of current outstanding pool balance at the end of each relevant collection period, and (ii) 0.5% of the initial outstanding pool balance.

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 may result in a significant impact because the transaction has more than 65,000 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 (i) the trustee’s authority to appoint a temporary substitute servicer to take over the servicing and continue the services upon the occurrence of servicer termination events till the servicer being terminated, (ii) the short weighted average life of the rated notes, and (iii) the likelihood of support from the auto manufacturer parent for the servicer, as key mitigants to this weakness.

(2) Limited liquidity buffer: The transaction has a liquidity reserve to be fully funded to the required amount on the first trust allocation date. The liquidity reserve can cover payments of senior notes’ interests and senior fees for around four months in case of a collection disruption due to operational risk.

(3) Commingling risk: The servicer collects payments and recoveries from the underlying loans on each of their monthly payment dates and will deposit such collections with its own funds for a maximum of approximately two weeks before transferring to the issuer’s account. As the collections are kept in the general account of the servicer, they are subject to commingling risk. Moody’s has considered (1) the credit quality of the servicer; and (2) the payment mechanism in this transaction. Moody’s has conservatively modeled for a commingling exposure equal to one month of collections and a 45% recovery rate on such exposure.

MAIN MODEL ASSUMPTIONS

Moody’s assumed a mean default rate of 1.4% and a Aaa portfolio credit enhancement of 7.5% for the securitized pool. A recovery rate of 25% 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 the securitized pool, 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.

Factors that would lead to an upgrade or downgrade of the ratings:

Factors that may cause an upgrade of Class B Notes rating include: (1) a significant deleveraging of the underlying portfolio with Class A1 and A2 Notes being paid down, and (2) an improvement in the credit quality of the account bank.

Factors that may cause a downgrade of the ratings include: (1) a decline in the overall performance of the pool; (2) a significant deterioration in the credit profile of the originator and the absence of the implementation of any mitigating actions for the transaction, and (3) 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

GAC-SOFINCO AFC is 50% owned by Crédit Agricole Consumer Finance Co., Ltd. (unrated), a subsidiary of Crédit Agricole S.A. (Aa3 stable) and 50% owned by Guangzhou Automobile Group Co., Ltd. (unrated). It was established in 2010 and is licensed under the supervision of the China Banking and Insurance Regulatory Commission (CBIRC). The loans are originated through its dealership network across China.

The issuer is a newly established special purpose trust incorporated in the 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.

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