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.