Fitch Ratings released its global rating methodology for rental fleet ABS. Its criteria addresses and mitigates key risks present in rental fleet ABS deals, which include counterparty risks such as the bankruptcy of the rental fleet firm and of any major manufacturer supplying vehicles to a securitized vehicle fleet.
Aside from counterparty and legal risks, there is also the factor of the vehicle liquidation process and related risks in a bankruptcy as wells as the subsequent liquidation scenario.
The rating agency's analysis assumes that the rental fleet company enters into bankruptcy, which ultimately leads to the liquidation of the securitized rental fleet in a stressed macroeconomic environment and assuming a depressed wholesale vehicle market.
Fitch's approach is aimed at delinking the ABS rating from the financial health of the rental fleet firm. Its expected loss stress for each rating level is calculated based on the rental fleet vehicles' liquidation proceeds under stressed scenarios.
Fitch's analysis looks at the following key analytical areas: counterparty analysis, including a review of rental fleet company/servicer operations; analysis of the collateral characteristics (such as vehicle make, model and segment concentrations, program/non-program mix, age of vehicles, and geographic concentrations); analysis of vehicle value risk; structural analysis;
and legal analysis.
According to the agency, to achieve a certain rating, credit enhancement levels for rental fleet ABS deals should be enough to absorb the expected loss derived under the respective rating stress scenario. This assumes a bankruptcy of the rental fleet firm as well as the collateral's subsequent liquidation.
Fitch therefore developed specific stresses on the following key items in order to derive its cumulative expected loss stress at each rating level: depreciation of vehicles in a prolonged liquidation period; disposition value of the vehicles; losses stemming from casualty vehicles; and
administrative and expected interest costs during bankruptcy; and the collateral liquidation process.
Fitch's expected loss profiles will be different based on certain diversity considerations of the securitized fleet.
This is derived from Fitch's observation that in aggregate, wholesale vehicle values tend to exhibit less price volatility compared with that of single vehicle segments and/or manufacturers.
This is why diverse collateral pools are expected to produce more consistent depreciation rates, which will result in better loss performance in liquidation process, Fitch said.