BWM’s captive U.K. finance company launched its second-ever offering of bonds backed by auto leases this week. Bavarian Sky UK 2 plc is as yet unsized; the collateral will revolve for one year, during which time more leases can be added to the pool.
The receivables are known as Personal Contract Purchases, which are secured by retention of the title to the vehicle and consist of fixed-rate amortizing instalment payment, with the bulk of the principal returned in a final “balloon” payment. However, at maturity, the obligor can choose to return the vehicle to BMW Financial Services U.K. in lieu of the final payment – assuming it is in acceptable condition and the mileage is within an agreed limit. BMW then undertakes to sell the vehicle and pass the proceeds of the sale to the securitization trust.
Although “voluntary terminations” are still relatively low, they have been rising in recent years, according to Moody’s Investors Service, which cites this as a “credit challenge” in its presale report.
Two tranches of notes will be issued, a tranche of Class A notes provisionally rated Aaa by Moody’s and an tranche of Class B notes. The Class A note will benefit from 24.2% subordination of the Class B notes and a cash reserve account equal to 0.8% of the collateral, for total credit enhancement of 25%. (Moody’s is not giving any credit to the excess spread, or the different between the interest earned on the leases and interest paid out on the notes.)
All of the notes have a legal final maturity of July 2026.
The preliminary portfolio of 21,914 leases totaling £395.8 million consists 70% of new cars and 30% of used cars. The vehicles relate to BMW (65.7%), MINI (21.1%) and non-BMW models (13.2%), according to the presale report. By fuel type, 56% are diesel, 43% run on gasoline, and 1% is “other.”
Moody’s expects 3% of the collateral to default over the life of the transaction, and it expects losses of 50% on defaulted leases. That’s unchanged from the previous U.K. lease transaction, completed in November 2017.
Among the strengths of the deal, according to Moody’s, is the fact that the portfolio of lease is highly granular, with the largest and 20 largest lessees representing 0.03% and 0.45% of the pool, respectively. The portfolio also benefits from good geographic diversification across the U.K.
In addition, the deal benefits from a safeguard that compels BMW U.K. to repurchase vehicles returned upon maturity of the leases or voluntarily returned before the end of the lease in the event that a performance trigger is met. Moreover, BMW U.K.'s ultimate parent, the German automaker, is financially strong.
However, Moody’s is concerned about a recent upward trend across the U.K. leasing market in the number of lessees who are opting to return their vehicles once they have made payments equal to at least one half of the total amount. The risk is that resale value of the vehicles will be worth less than expected when lease payment were set.
This risk is somewhat offset by the fact that recoveries on voluntary terminations tend to be better than for “hostile repossessions” – presumably in the event of default, however.
The risk is also partly offsetting by a conditional guarantee that BMW Financial Services provides to the securitization trust.