Falling used car prices should not be a concern for auto lease ABS investors, since it is not likely to affect the rate at which leases are prepaid, according to Moody’s Investors Service.
Wholesale priced for used vehicles fell 0.6% on a seasonally adjusted basis in January over December, according to Manheim, a remarketing service. Absent the seasonal adjustment, the decline in vehicle values was half that amount.
January’s Manheim Used Vehicle Value Index reading of 123.4 represented a 1.8% decline from a year ago.
When the January index was released, Manheim said the decline was to be expected, since Hurricane Sandy’s impact on the wholesale market was waning and auction supplies from commercial consignors are rising. Continued strength in the retail market kept the decline in wholesale prices modest, for now, however.
Used car prices can affect prepayment rates on auto lease bonds. When prices are rising, manufacturers (or their finance arms) may offer consumers an incentive to end the lease early in order to sell the vehicle sooner.
However Moody’s said that P-1 tranches of auto lease deals, which have the shortest maturities, have paid off consistently despite periods of decline in used car values. Moody’s expects that they will continue to do so.