Credit Suisse analysts said in a Nov. 8, report that lease transactions are increasingly making up a larger portion of auto ABS issuance and offer investors a good alternative to auto loan ABS.
Year-to-date issuance of auto lease securitizations for 2012 is at $12 billion, according to figures reported by the bank.
“New issuers like Mercedes-Benz [Financial Services], Hyundai [Capitlal America] and Porsche have entered the market in search of financing, and their impeccable credit profiles are drawing in investors in search of additional yield,” analysts said in the report. These auto lease transactions on average have offered a 10 basis points to 20 basis points of spread pick-up in comparison to similar prime auto loan ABS.
But, the analysts noted in the report that this asset class is highly exposed to residual values – or the value of a leased vehicle at the end of the scheduled lease period. Losses in auto lease deals stem from vehicle resales, where the sale price falls below the residual value of the vehicle, which is estimated at the time of lease inception.
“The uncertainty with respect to these residual value estimates is really the key difference among the auto lease and loan transactions,” analysts said in the report. “In most instances, they are approximately 60% of total securitized value and these residual value estimates and the consequent residual losses or gains can drive credit performance and bond valuations to a good degree.”
According to the report, the value of securities in auto lease transactions is based on the total securitized value of the leases, which is a combination of the present value of lease payments and the estimated residual values.
Although residual value at the point of sales is hard to estimate, recent offerings have not shown material changes in these residual value projections, Credit Suisse analysts said.