The supply of used light trucks (SUVs/CUVs/Trucks) will continue to swell in 2018 and into 2019, placing downward pressure on residual values (RV) in auto lease asset-backed securities (ABS), Fitch Ratings says. Auto lease ABS pools have high exposure to these segments, particularly 2016-2018 vintages, given the vehicles’ high popularity and strong sales patterns.
However, we do not expect a material effect on outstanding ABS lease ratings, due to transactions’ structural features, including securitizing mark-to-market Automotive Lease Guide’s RVs and building credit enhancement. Fitch’s through-the-cycle RV loss proxy approach incorporates 2008-2009 RV performance, which was most stressful for light trucks, resulting in lease ABS loss coverage of 27%-34% for all transactions.
RV losses would have to return and be sustained at 2008-2009 stress period levels to have an impact on ABS ratings. Furthermore, vintage losses are weighted by pool composition, thereby, capturing pool shifts between transactions. Lease ABS transactions issued in 2017 had an average light truck concentration of 57% versus 47% in 2016 and 40% in 2015. This shift is more pronounced in pools of mainline vehicles, which had average concentrations of 66% in 2017.
The US auto market witnessed a complexion change in 2015, as consumer demand shifted to light-duty trucks. In 2014 light trucks totalled 54% of all sales, according to WardsAuto. This share then jumped to 61% in 2016 and 65% in 2017. This trend shows no signs of slowing as original equipment manufacturers (OEM) are altering lineups to include more light trucks and fewer sedan offerings.
The catalysts for this transformation were the precipitous decline in gasoline prices of late 2014 and OEM technological advancements in engine fuel efficiency. This coupled with strong consumer demand, affordable financing, sustained low oil prices and record high OEM incentives all boosted sales of light trucks into early 2018.
Light truck used values were stellar over the past two years, as the surge in new light truck sales had not yet reached dealer lots. However, light truck wholesale values are set to abate in 2018, with such strong used supply flooding the market from lease returns. We have witnessed this through April 2018 and light truck values have retreated off their highs observed in 2017.
Compact and full-sized CUV used values were down 1.1% and 4.3% in April 2018 versus 2017, respectively, which outpaced the total market decline of 1.0%, according to Blackbook’s Used Vehicle Value Retention Index. Alternatively compact and full-sized cars improved by 3.4% and 2.4%, respectively.
Fitch’s Auto Lease ABS RV Loss Index measured a gain of 2.78% in March 2018, up from a loss of 0.79% a year earlier. The index could possibly move into low losses with the headwinds expected for these segments. These declines could accelerate if OEMs continue raising vehicle incentives, which negatively affect values and drive loss severity in lease ABS pools.
While unanticipated spikes in gas prices could intensify the value declines further, technological fuel efficiency advances lessen light trucks’ sensitivity to fluctuating gas prices, compared to previous time frames where gas prices were very elevated, such as in 2008, when prices moved through $4 per gallon. The 2017 model year light trucks have, on average, 25% better fuel efficiency than 2007 models, according to US Environmental Protection Agency data. This presents material savings for drivers, which Fitch believes renders demand less tied to gas prices than in the past.