BMW Financial Services’ new $1.17 billion auto lease securitization is being launched with one of the highest FICO scores – and lowest hard credit enhancement levels – of almost any recent asset-backed transaction involving luxury auto lease receivables. Including its own recent deals.
The BMW Vehicle Lease Trust 2017-1, the 18th lease receivable transaction for the captive finance firm since 1999, features four classes of senior notes including a $375 million Class A-2 tranche due 2019, a $360 million Class A-3 series due 2020 and a $90 million Class A-4 series of bonds also due 2020. (Unlike the previous lease, BMW is not splitting the senior Class A-2 tranche in two series of fixed- and floating-rate instruments).
All of the multi-year senior notes carry preliminary triple-A structured finance ratings by Fitch Ratings and Moody’s Investors Service. The capital stack also includes a $175 million Class A-1 money-market series rated ‘F-1’ by Fitch and ‘P-1’ by Moody’s.
Also included in the pool is $168.24 million in unrated notes serving as overcollateralization.
Barclays, Citigroup and Credit Agricole are lead underwriters on the offering.
As in most BMW FS lease securitizations, the collateral pool carries high-quality credit characteristics, but none have seemingly matched this first deal for 2017. According to presale reports, the weighted average FICO score of 785 is the highest-ever for BMW FS in a lease deal – and also tops many luxury competitors including lease trusts affiliated with Daimler AG’s Mercedes-Benz and Porsche AG.
Such peer transactions range from 732 to 785. The previous high for a collective pool FICO for BMW itself was 778 in its second U.S. lease transaction conducted in 2016.
The initial CE for BMW 2017-1 is 14.65% - a sharp drop from the initial 16.15% initial CE level in BMW’s prior deal that itself was improvement from the initial 17.05% CE level in BMW’s 2016-1 and 2015-2 lease securitizations. That is also lower than recent lease deals from Mercedes-Benz and Porsche.
The CE level of the new collateral pool is comprised of 14.4% overcollateralization (with a target level of 16.55%); a 0.25% reserve fund and initial expected excess spread of 4.81%.
Fitch has estimated cumulative net losses of 0.8% for the pool, while Moody’s has established its forecast at 0.5%.
For risk retention requirements, BMW's trust plans an eligible horizontal residual interest through certificates representing at least 5% of the fair value of the notes and certificates.
One of the concerns raised by ratings agencies was the concentration of vehicle models and lease maturities in the BMW deal.
Fitch noted that BMW FS has added higher levels of light trucks (SUVs), making up 32.3% of the collateral. But the finance company still has 54.3% of the pool comprised of its 3 Series, 5 Series and 4 Series models, compared to transactions in 2013 when BMW FS kept series concentrations ranging from 37 to 47%.
Almost 80% will end their 31-to-36 month leases within a five-quarter window from the fourth quarter of 2018 through the end of 2019. That is a scenario that Moody’s warns exposes the pool to increase residual value risk should there be a short-term drop in vehicle resale prices.
Uncertainty of wholesale used car prices, while hard to predict well into 2018, is a worrisome prospect for auto loan and lease securitizations, including luxury brands. According to Moody’s, the discounted residual value in BMW’s new deal – as a percentage of the securitization value of the pool – is only 60.8%, lower than its previous 2016-1 and 2015-2 pools.
The residual value estimates are derived from forecasts from TrueCar, Inc. analytics division ALG (or Automotive Lease Guide).