Fitch: US Auto Lease ABS Can Withstand Residual Pressure
Growing credit enhancement and robust loss protection should help US auto lease ABS ratings to remain stable in 2016 despite continued declines in used vehicle residual values (RV) due to increased leasing penetration and a higher supply of off-lease vehicles, Fitch Ratings says.
Gains in RV dipped in 2015 as a function of high new car sales, increased vehicle incentives and higher off- lease and off-fleet supply. The dramatic rise in leasing activity and resulting elevated off-lease volume of vehicles hitting the secondary market will continue to pressure used car prices.
Leased vehicle sales, as well as overall vehicle sales, increased notably in recent years as the economy has improved. Auto manufacturer sales hit a high of 17.5 million vehicles sold in 2015. Leasing volume hit a record of 32.3% (as a portion of new financing) penetration of total sales in February 2016, up from the 28% average in 2015, which was already a record year (according to J.D. Power).
The monthly cost to the consumer of leasing automobiles is often less than financing to buy, allowing lessors to potentially get more car for a lower monthly payment by leasing. Fitch's auto RV lease index, which tracks the amount of lease maturities and return volumes along with RV performance, had nearly $6.9 billion returns (securitized RV amount) in 2015, up from $5.8 billion in 2014. Fitch expects this figure to jump to $8.5 billion coming due in 2016.
As a result, residual gains in Fitch's auto RV lease index declined steadily over the past 12-18 months. The index recorded a gain of 0.51% as of 4Q15, the lowest level since 2009 and down from 3.16% in 3Q15 and 3.91% at year-end 2014. The average yearly gain in 2013 was 8.52%. It decreased to 5.75% in 2014 and dropped further to 3.97% in 2015. The index reports a gain of 1.12% as of February 2016 data. The peak RV gain was 29.21% observed in Q1 2011.
However, auto lease transactions have quickly de-levering structures and ample credit enhancement levels, and therefore Fitch expects ratings to be stable and anticipates upgrades to subordinate classes where appropriate in 2016.
Fitch's base case or 'BBsf' RV loss expectation is determined by isolating only the RV losses an issuer observed during the worst 12-18 month period, typically during the weakest 2008-2009 period. Further haircuts are employed as rating categories increase. This usually amounts to roughly 28-32% in loss protection as a percent of returned residuals for 'AAAsf' ratings, providing ample support even as RVs continue to decline in 2016. Transaction loss levels would have to be magnified above those levels before having a ratings impact.
Fitch's auto lease RV index tracks the performance of 96 US auto lease transactions totaling $27.4 billion of collateral as of February 2016 data issued from 12 auto lease ABS platforms, with data beginning in January 2007.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
US Structured Finance
+1 312 368-3167
US Structured Finance
+1 212 908-0792
+1 212 908-9159
Sandro Scenga, +1-212-908-0278