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Battery electric vehicles pose additional risks to auto lease investors

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Electric vehicles are starting to show up in pools of collateral for auto leases, and investors need to be aware of the additional risks that they pose, according to Moody’s Investors Service.

That’s because it’s much more difficult to predict what battery electric vehicles, plug-in hybrid electric vehicles and hybrid vehicles will be worth when they come off lease than it is for vehicles that run on internal combustion engines.

Lessors estimate the residual value of a car or truck in order to set lease payments. Should the vehicle fetch less than expected when it comes off lease, their profits could be reduced, or they could potentially face a loss. Likewise, bonds backed by auto leases could see a shortfall in interest or principal payments if vehicles coming off lease are worth less than anticipated.

To date, the risk to auto lease ABS investors is limited, however, since battery electric vehicle have constituted only a small portion of ABS pools. Moody’s expects that proportion will grow, however.

In a report published this week, Moody’s noted that prices of all three types of electric vehicles are all affected by similar factors: Their costs, relative to vehicles with internal combustion engines, and anxiety about running out of power before reaching a charging station. However, the impact of these factors is more amplified for battery electric vehicles, which have a short track record and manufacturer-specific risks.

Sales volumes of battery electric vehicles have been relatively low historically, with sales in the United States slightly exceeding 87,000 units in 2016, or 0.6% of total new vehicle sales of that year. “Hybrids' resale values, which have a longer track record and also move in tandem with gas prices, are as good of a proxy that we have for BEVs' heightened sensitivity to gas prices,” the report stated.

Leases backed by battery electric vehicles from diversified, incumbent manufacturers are less susceptible to event risk because of their financial strength, however. So considerations of residual value risks from specialized manufacturers must account for adverse events that may not affect legacy auto manufacturers as severely.

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