Higher resale values for end-of-lease vehicles is prompting Moody’s Investors Service to upgrade ratings on several classes of auto-lease ABS bonds issued through trusts of GM Financial and regional U.S. Toyota lender World Omni Financial.
According to a release, Moody’s is raising the ratings on eight tranches of notes totaling $331.1 million for five securitizations issued in 2018 and 2019 by the two firms. All of the bonds are backed by pools of auto lease contracts issued by General Motors and Toyota franchise dealers utilizing services from the manufacturer-linked, captive-finance firms.
Moody’s has issued one-notch upgrades to three subordinate note tranches to GM Financial Automobile Leasing Trust 2019-1, and two issued from GM Financial Automobile Leasing Trust 2019-2. It also assigned a higher grade to a Class C tranche of notes for GM Financial’s lone Canadian trust transaction in 2019.
Also getting an upgrade is World Omni Automobile Lease Securitization Trust 2018-B, for a single Class B tranche.
All of the notes were investment-grade before the action.
All of the upgrades stemmed from higher credit enhancement levels on the deals, as well as “strong residual value performance of the underlying lease contracts,” Moody’s report stated.
Residual value is a largest risk factor in auto-lease ABS deals, with the potential for an off-lease vehicle’s resale value to sink below what the estimated value was expected to be at the time the ABS transaction closed. (Forecasting future used-car prices is considered one of the most difficult aspects of assessing lease ABS deals.)
“Although used vehicle prices declined in April 2020 following the coronavirus outbreak, prices have since rebounded, benefiting performance of maturing leases,” Moody’s stated in a release. The residual value gains – or the net sales proceeds in excess of the residual portion of vehicles’ securitization value – ranged between 0.79% to 3.85% in October, and 1% to 4.11% in November for the GMF and World Omni transactions.
Moody’s noted that World Omni (which offers auto loan, lease and dealer floorplan financing to Toyota dealers in five Southeast states) has a large exposure to lease maturities in early 2021, “which will lead to rapid paydown of the notes and buildup in credit enhancement in the coming months as cash collections increase upon lease extensions.”
