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Ford ramps up investor protections in forthcoming $1.4B lease ABS

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Ford Motor Credit is extending additional investor protections for its next $1.4 billion auto-lease securitization, in part to anticipated drains on future vehicle values from short-term economic stresses of the COVID-19 pandemic.

According to presale reports, the captive-finance arm of Ford Motor Co. will provide credit enhancement of 23.2% for Ford Credit Auto Lease Trust 2020-B, compared to 20.15% for Ford’s prior vehicle-lease securitization which priced in January. It is also boosted a reserve account to 1% of the notional value of the deal, up from 0.25% in the previous transaction, to cover cash flow shortfalls into the deal.

One of the risk factors in the deal was the lower base residual value that both agencies placed on the $1.6 billion in vehicle securitization value covering the 60,158 contracts in the pool. Both Moody’s Investors Service and S&P Global Ratings applied lower expected returns on the value of used vehicles being turned in after a lease.

The base residual, which is an estimate of the vehicle’s future value at the end of the leasing period, was 73.24% by S&P and 64.2% by Moody’s. Both figures represent slightly lower residual values assigned to Ford’s prior deals rated by each agency, a slide attributable to the unknown future stresses the COVID-19 pandemic may have on leaseholders’ ability to repay their obligations.

While S&P maintains the expected base-case credit loss of 0.8% of the deal’s securitization value that it had for FCALT 2020-A, Moody’s is increasing its expected credit losses to 0.5% that 0.4% from the most recent Ford lease securitization it rated in 2019.

The credit-quality standards of the deal remain strong, with a weighted average borrower FICO of 755 that Moody’s reports is “among [the] highest of all prior FCALT securitizations.”

Delinquencies in Ford’s $27.38 billion managed lease portfolio remain low at 0.67% for the year through May, compared to 0.65% in the same period a year prior.

The return rate on leased vehicles has been reduced significantly, to 42.12% versus 76.23% last year. But total gains based on a percentage of base residual value has lowered to 4.99% against 6.08% in 2019, according to the ratings agency reports.

The leases are concentrated largely in trucks and crossover/SUV models, which account for 88% of the securitization value of the pool.

The transaction has three classes of senior term notes with preliminary triple-A ratings: a $515 million Class A-2 tranche due December 2022 (to be split between fixed- and floating-rate notes); a $455 million Class A-3 tranche due August 2023; and a $96 million Class A-4 tranche maturing in October 2023.

A $184 million Class A-1 money-market offering has each agency’s highest short-term rating of A-1+ (S&P) and P-1 (Moody’s).

An $86 million Class B bond tranche is also being offered, as is a $65.85 million Class C tranche. In prior Ford lease transactions, Class C notes were retained by the issuer.

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