Takata’s ongoing recall of airbags puts bonds backed by auto leases at increased risk of losses, Moody’s Investors Service warns.
Bonds backed by auto loans have only minimal exposure, however.
The unprecedented scope – approximately 34 million vehicles from numerous manufacturers are affected – has resulted in a scarcity of replacement parts. This makes it difficult for remarket cars that are repossessed or returned at the end of a lease. In many cases, the manufacturer (or the securitization trust) must sell the vehicle at a loss.
“In lease transactions, the transaction servicers or sponsors might wait until the fixes are made to remarket vehicles that have been repossessed or turned in, effectively delaying or impairing the residual realizations used to pay the ABS noteholders,” Moody’s stated in a report published this week.
Beginning in 2013, Takata announced that certain auto manufacturers had installed defective Takata airbags that could spontaneously deploy, potentially spewing metal and plastic fragments inside the vehicles. There was a subsequent recall of six different makes of vehicles. Since that time, the recall has continued to grow, with additional vehicles recalled in June 2016 as more manufacturers’ vehicles were discovered to have the defective airbag inflators.
Currently, manufacturers are scheduling recalls based on the location, age and year/model/make combinations, starting with more humid regions and older cars, because the duration of the vehicle exposure to heat and humidity affects airbag safety.
Moody’s currently rate $13.4 billion of auto lease ABS, comprising 24 transactions from nine issuers: Ally, BMW, Ford, GM Financial, Hyundai, Mercedes, Nissan, Volkswagen and World Omni (Toyota vehicles). However, only Volkswagen, BMW and World Omni transactions have sizeable concentrations of securitized collateral subject to the Takata recall.
In the Volkswagen Auto Lease Trust (VALT) 2015-A transaction, vehicles subject to the recall represent approximately 15% of the remaining securitization value. For the BMW Lease Trust (BMWLT) 2015-1 lease transaction, affected vehicles make up 9% of the remaining securitization value, compared with 5% and 3% for the BMWLT 2015-2 and 2016-1 transactions, respectively. In the World Omni 2014-A transaction, vehicles subject to the recall represent 10% of the remaining residual value, and 5.5% and 6% of the World
Omni 2015-A and 2016-A respectively.
Because of the current lack of replacement airbags for recalled vehicles backing VALT 2015-A, VW Credit, Inc. elected to write-off the entire residual value of returned vehicles that are subject to the recall upon lease maturity. As Exhibit 1 shows, VALT 2015-A had a record high 36% residual value loss in July, largely a result of the Takata exposure, but also owing to a significant concentration (7.8% of the remaining securitization value) of leased vehicles with diesel engines that are not in compliance with emissions regulations. The monthly residual value loss in August amounted to 19% of the aggregate securitization value for scheduled terminated vehicles. The proportion of the securitized residuals in VALT 2015-A reached 85.0% of the remaining securitization value in August.
Besides minimal exposure to affected recalls, the effect on auto loan ABS will be low for other reasons, including the fact that recalls have not historically been a defense against loan repayment. Dealer floorplan ABS transactions have some exposure to vehicles affected by the recall, mostly in portfolios backed by used cars; however, the risk of actual portfolio loss is extremely low in these transactions owing to the diverse fleet of vehicles in the pool and the dealers' ability to sell the affected vehicles.
