A pool of prime retail closed-end leases on BMW cars and sport- and crossover utility vehicles will secure a $1.1 billion transaction from the BMW Vehicle Lease Trust 2023-1.
While the collateral pool benefits from a financially strong manufacturer, a sponsor and servicer with major experience doing these kinds of deals, and a collateral pool consisting of borrowers with strong credit quality, Moody's Investor Service raised concerns about a higher residual value risk on luxury vehicles, the risk of falling used car prices.
BMW Vehicle Lease Trust's collateral has a weighted average (WA) FICO score of 795, a score that Moody's said is the highest when compared with prior BMWLT transactions that it has rated previously, Moody's said.
Moody's estimates a 3.50% credit loss, and a 17.50% residual value loss at the 'Aaa' stress level. The residual value loss is one percentage point higher than the previously rated 2021-2 transaction, due to an increase in the notes' base residual settings, according to Moody's.
This could complicate the credit outlook for the portfolio particularly if used car prices decline noticeably. Since 2009, delinquencies and losses on the issuer's managed portfolio declined mainly because of the stronger used car market, the rating agency said. As a percentage of MSRP, the base residual value percentage for the current deal is 46.8%, higher than the 44.6% in the 2021-2 transaction. If demand for used cars abates and prices decline, falling car prices could expose the transaction to lower recovery rates, higher loss severity and higher net losses.
BofA Securities is the lead underwriter on the transaction, which will issue the notes through a four-class structure and uses overcollateralization of 13.15% and a cash reserve as credit enhancement, according to Moody's.
Moody's intends to assign ratings of 'P-1' to the class A-1 notes; and 'Aaa' to the A-2 through A-4 notes. Also, S&P Global Ratings expects to assign ratings of 'A-1+' to the class A-1 notes; and 'AAA' to the A-2 through A-4 notes.
The notes have legal final maturities that range from Feb. 26, 2024 through June 25, 2026.
