Moody's Investors Service will be re-evaluating the assumptions it utilizes to rate auto lease deals that are exposed to EMEA residual value (RV) risk.
RV risk pertains to the risk that a vehicle's realised market value at the end of its lease term will be different from its book value.
This difference could result from adverse movements in used car prices or the RV policy used by the originator.
RV losses on a deal are a function of the number of lessees exercising their option at the contract maturity date to return the vehicle (the turn-in rate) and the severity of loss on the contractual residual value (the loss on turn-in).
Moody's said its re-evaluation has been driven by the volatility in the used car markets across Europe in the past two years. In several sectors, value declines of up to 30% were seen over 2008 and even though values have since recovered, the observed volatility considerably exceeds expectations.
To date, when rating such EMEA transactions, the rating agency has mainly relied on the historical performance data provided by originators.
However, this data is influenced by changes in RV policies and/or does not adequately capture the sudden shifts seen in the used car market.
In forming its revised assessment, the rating agency will put increased emphasis on the current market values of vehicles in the securitized pool. It will also consider third-party forecasts of residual values. Until recently, this data was unavailable to Moody's in Europe.
To enhance its analysis, Moody's has acquired a large data set of historic and current U.K. market values. It is currently acquiring similar data sets for key European jurisdictions. Together with contract level data received by originators, this allows the rating agency to carry out an analysis similar to that detailed in Auto Lease Securitization: Moody's Rating Approach, published in 1998 on U.S. auto ABS.
Preliminary analysis of the data set implies that haircuts of around 50% would be enough toreforecast residual values at the 'Aaa' level.
Considering the RV setting strategy of many originators (who typically set RV levels at 5% to 10% below the breakeven value), a 50% haircut on reforecast RV would translate into a loss assumption of 45% to 40% on the residual value of the securitised portfolio in a Aaa scenario. The haircuts would be lower for lower rating levels.
Moody's is concluding its analysis of the data set, including determining appropriate haircuts at each rating level. The agency's next steps will be to assess the rating impact on all EMEA auto ABS deals that are exposed to RV risk and it will offer an update of the findings of this analysis over the coming weeks.
