Used Auto Supply in U.S. Could Pressure Performance of Asset Backed Securities
Increased supplies of off-lease vehicles coupled with rising inventories and new vehicle production could hurt the wholesale market and auto asset backed securities (ABS) performance metrics over the long term, Fitch Ratings says.
If these trends continue, Fitch expects “decreasing auto loan recoveries and lease residual realizations to contribute to increased loss levels on auto loan and lease ABS.”
According to Ward’s Automotive, day’s supply (the number of days the used car inventory would require to be completely liquidated) at the end of 2013 was 63, up from 59 in 2012. In our view, 63 is within a range that is unlikely to have a negative impact on ABS.
However, in the first weeks of 2014 several auto manufacturers indicated they plan to increase their supply of cars in 2014. That could lead to a decline in prices and the values of cars in existing ABS transactions if additional production exceeds demand.
Increases in supply could also increase competition and reduce pricing through the offering of new incentives. Incentives have increased over the past year, but they are being used within reason to date. More competition has historically driven incentive levels higher. Fitch also expects competition and incentives to develop in some car categories more severely, such as compacts.
In sum, the wholesale market is almost certain to be pressured by a glut of off-lease vehicles and activity in retail leasing in recent years is likely to reduce wholesale values. Lease residual realizations have already started to decline.
More info at: www.fitchratings.com.
Category: General Update
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