After Chrysler announced filing for Chapter 11, Moody's Investors Service analysts said that this event will have varying implications for the performance and ratings of vehicle-related securitizations.
However, over the past six months the agency has taken several actions to deals related to Chrysler and the most recent rating actions have taken into consideration a high likelihood of a Chapter 11 bankruptcy filing by Chrysler.
Therefore, no further rating actions are being taken on these transactions as a result of the filing. The agency said that several ratings a total of eight tranches issued from six separate transactions will remain under review for possible downgrade. The ratings may come under pressure if the decline in vehicle prices throughout the duration of the bankruptcy is greater than predicted or if the reorganization is unsuccessful and is followed by liquidation.
"We believe that new and used vehicle prices are likely to decline as a consequence of Chrysler's bankruptcy," Moody's said in a statement.
"The manufacturer may be motivated to heavily discount new vehicles to encourage sales; the discounted new vehicles would negatively impact used car resale values. A bankruptcy may also raise concerns over the continuation of existing models." The risk that collateral value, as reflected by used vehicle prices, will decline is a key driver that will magnify losses in both retail auto loan and lease ABS to varying degrees.
"The actions on the ratings of auto loan transactions have been relatively less severe than those on the lease deals," analysts said. "Auto loan ABS account for the majority of Moody's-rated outstanding securitizations sponsored by Chrysler Financial."
In auto loan ABS, generally a limited percentage of the collateral pool is subject to repossession and resale and therefore exposed to market value risk, since only a fraction of the loan pool will default.
However, with respect to auto lease ABS, 80% to 90% of the manufacturer's leased vehicles are turned in at lease termination. Moody's said that turn-in rates are also likely to increase further when car prices decline, as the lessee's purchase option becomes more expensive than prevailing market prices.
"We expect that the administration will take steps to contain the disruption that might be caused by the bankruptcy, including providing government-funded debtor in possession financing during the bankruptcy process," Moody's said. "These government actions may contain the extent of future vehicle price declines to some degree." None of the transactions rated by Moody's in Europe and Asia is directly exposed to the bankruptcy of the manufacturer