The Toyota Lease Owner Trust is preparing to issue almost $1.2 billion in asset-backed securities (ABS), whose notes have a lower cumulative net loss expectation, because of lower expectations for residual losses on vehicle values throughout almost the entire deal.
In a deal that securitizes lease payments on about 39,848 retail contracts, Moody's Investors Service noted that total losses at the 'Aaa' stress level is 19.50%, a full percentage point less than that of an earlier deal, known as the TLOT 2021-B. The rating agency had lowered the residual value loss a full percentage point, from 17.00% to 16.00%, Moody's said in a pre-sale report.
It did not mention whether it would lower the credit loss expectation, which stands at 3.50%, the rating agency said. Barclays Capital is the lead underwriter on the deal, where Toyota Lease Capital is the depositor.
On average, the leases have a $29,966 remaining lease balance, the rating agency said. A majority of the assets are financing sport utility or crossover utility vehicles and trucks, at 74.7%, cars make up just 25.3% of the vehicles being financed. Also, leases in the 25- to 36-month range account for the majority of the leases, at 74.5%.
Moody's points to several strengths about the deal, including the collateral's strong credit quality. On a weighted average (WA) basis, the leases have an average FICO score of 772, which Moody's describes as among the highest of the recent securitized auto lease pools from comparable sponsors.
Credit enhancement builds up in the transaction as the outstanding balance amortizes. It does have a non-declining overcollateralization amount of 16.25%. Moody's also notes that Toyota Motor Credit Corp. is a highly experienced originator and servicer of auto financing contracts, with a total managed lease portfolio of approximately $27 billion as of the end of 2022.
Although the rating agency lowered the residual value loss notably, Moody's also pointed out that used car prices have softened somewhat in recent months. Supply shortages for new vehicles have softened, taking pressure off of demand as well. Those dynamics expose used car prices to the risk of falling, especially if demand continues to subside as a result of a slowdown in economic activity.
Credit enhancement includes a reserve account, overcollateralization and excess spread.
Moody's expects to assign ratings of 'P-1' to the $117 million, class A-1 notes and 'Aaa' to classes A-2 through A-4.
