Used diesel car prices in Germany have continued to fall, although the rate of decline has stabilised this year, Fitch Ratings says. Risks to demand for diesel cars remain, including potential restrictions in more German cities. We think the uncertainty around near-term price trends is accounted for in our auto ABS stress assumptions, and the build-up of credit enhancement in seasoned deals provides some additional protection.
However, the possibility of further restrictions and negative sentiment towards diesel emissions means we will continue to monitor the market to assess whether we need to adjust the asset performance assumptions that govern the current rating-specific stresses (recovery haircuts and market value declines for residual value, or RV).
Testing rating sensitivities to falling used diesel car prices (by assuming an additional 25% price reduction for the entire diesel share in the portfolio on top of our rating stresses, regardless of the EURO standard), demonstrates limited rating impact in some transactions, with potential downgrades almost all limited to one-notch.
Used diesel car prices were about 3.5%-4% lower yoy at end-July, according to Deutsche Automobil Treuhand and Schwacke. Used diesel prices started falling in August 2017 and the pace of the falls accelerated until January, although diesel’s share of used car sales has fluctuated within its historical range of 30%-35%, according to Germany’s Federal Motor Transport Authority (Kraftfahrt-Bundesamt). Prices of used petrol cars have risen moderately in the same period.
Some recent developments may help support prices. Exports of used diesel vehicles to most other European countries rose in 2017, especially to countries with less stringent emissions restrictions, reducing supply in the German market. Diesel’s share of new car sales fell last year but was steady in 1H18. Demand from commercial and fleet customers is showing signs of stabilisation, possibly because diesel cars’ lower total cost of ownership makes them more attractive than petrol vehicles.
However, risks to used diesel car prices remain, including the prospect of additional city-specific restrictions following the Federal Administrative Court’s February ruling that such restrictions are a valid way to reduce emissions. Details of the ruling highlight the court’s view that bans should be proportionate, implying that they would initially apply to older vehicles, and should be considered in conjunction with other measures to reduce air pollution.
This still leaves scope for significant restrictions on diesel use. For example, Stuttgart has finalised plans for a city-wide ban on all diesel cars that do not meet EURO5 emissions standards from next January. This could be extended to EURO5-compliant cars from early 2020 depending on how far emissions are reduced. A local court has ruled that Aachen must implement a ban from January if alternative steps to cut emissions are not taken. On 5 September, another local court (Wiesbaden) will rule on potential bans in four cities in Hesse.
Hurdles to smaller-scale bans, such as that covering two inner-city roads in Hamburg, are lower. Meanwhile, manufacturers’ efforts to reduce diesel emissions by updating vehicle software will take time and may not fully reduce emissions to required levels. A proposal for a compulsory hardware adjustment to be paid for by car manufacturers was recently dismissed by the Federal Council (Bundesrat).
However, the Federal Ministry of Transport has signalled that at least part of the government’s fleet should be updated hardware to reduce emissions.
If obligors can return their vehicle in lieu of final payments, this creates RV risk. If prices were to fall below the contractual RV amounts, this would be negative impact for the performance of auto ABS deals with RV exposure.