Fitch Ratings revised its rating criteria  for  U.S. auto lease ABS to reflect the residual value  volatility seen over much of the last two years. 

The rating agency's criteria specifically places more of a focus on performance in historical downturns instead of the total historical experience in deriving stressed residual loss levels.

Starting late last year, auto lease ABS residual realizations began to improve, which is a trend that has continued into this year. In fact, most ABS portfolios  have exhibited  gains on lease-end vehicle dispositions through 1Q10.

Fitch's criteria report features updates to the existing methodology, including: changes to the residual loss derivation methodology as well as the addition of rating sensitivity analysis.

The updated criteria's inclusion will not have an effect on any of Fitch outstanding auto ABS ratings. It will also not result in credit or residual loss assumptions that are materially different compared with recent practice in most deals.

The residual loss derivation changes are aimed at taking into account the higher residual loss levels seen in recent experience as well as the incremental  risks  that  material  model, segment and residual maturity concentrations  present  to  auto  lease  ABS. 

The current  loss protection  levels on rated deals  are  consistent with those derived under the  new criteria,  which takes into consideration these concentrations, the rating agency said.

Fuel   price   increases,  deteriorating  macroeconomic  conditions  and concerns   relating   to   the   ongoing  viability  of  the  U.S.  auto manufacturers  had  a  severe  impact  on  auto lease ABS residual value performance  in  2008  and early 2009. Across its portfolio of monitored deals, 

Fitch saw rising monthly residual losses in the 10% to 15% range over most of 2008. This monthly loss level peaked over 20%  in  November  2008.  On  an  annualized  (12-month  average) basis, residual  losses for the monitored portfolio peaked at roughly 12% in  early 2009. The rating agency's updated criteria accounts for this experience as the  stressed  residual  loss  derivation  now  focuses  on  periods  of historical stress.

The currently strong performance of auto lease ABS residual realizations can be attributed  to  various  factors. The auto industry's instability led  to limited leasing activity and reduced new vehicle sales in recent  years.  This  has  lessened  the  supply of vehicles to the wholesale  market,  with  a positive impact on prices.

Aside from this, the more conservative residual setting and/or securitizing policies utilized in  2008  and 2009 vintage transactions have served to further limit ABS pools'  exposure  to residual losses. Through the application of Fitch's updated  criteria, these factors would result in lower stressed residual loss  expectations.  However,  because  of the uncertainty of the future used  vehicle  market and the historical volatility observed, the impact of such factors is limited.

Fitch's  current  outlook for asset and rating performance in auto lease ABS is  stable,  which reflects  the  expected  stability  of the wholesale vehicle  environment  in  the near term.

But, considerable changes in automotive market conditions, rapid increases in fuel costs as well as further deterioration in the U.S. economy might affect Fitch's view on the sector.

Furthermore, if these factors were to combine to produce residual losses beyond the historical peaks incorporated into the updated criteria, Fitch's outlook for rating performance could dip.

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