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Fitch: Used Vehicle Value Declines Won't Dent US Auto Lease ABS

NEW YORK--(BUSINESS WIRE)--Used vehicle values will continue to decline moderately from their recent untenable highs. However, US auto lease ABS will continue to perform within expectations and ratings will be stable, according to Fitch Ratings.

We expect used car values to further weaken as off-lease and fleet volumes rise and sales of new vehicles continue to be strong. Today automakers reported that light vehicles sales rose by 6% in the past 12 months and that the seasonally adjusted annualized selling rate reached its highest level since January 2006.

Fitch also believes the robust loss protection in auto lease ABS (including continued realization of residual gains) will continue to support stable ratings, despite expected market pressure. Securitized residual maturities have been higher in 2014 than any year since the last recession. March marked the highest level of securitized residual maturities ever recorded by the Fitch Index at over $525 million.

As the new vehicle annual sales rate hit its highest level since 2006 this July, vehicle trade-ins entering the secondary market increased. Additionally, incentive spending remains high. Cash, interest rate subvention and longer loan terms providing for lowered payments have fueled sales, making new vehicle purchases more attractive.

Despite these trends, auto lease ABS is still generally producing residual value (RV) gains. Fitch's Auto Lease residual index gained 5.76% through July 2014, down from gains of 8.38% in June and 12.02% a year ago. July marked the fourth consecutive month of declining gains for the index, reflecting the recent softening in used vehicle values. Manheim Consulting's Used Vehicle Value Index has also dropped for three consecutive months. It fell to 122.7 in July, though that reading was above last year's by 1.5% and was the second highest July on record.

Residual retention has been mixed among vehicle segments. Luxury gains in the Fitch RV index declined dramatically in July to 2.77%, down from 17.08% a year ago. Notably, the car segment is experiencing pronounced price pressure, particularly within the luxury space. Wholesale performance of larger vehicles has been much better, particularly for the pickup segment. These trends are expected to continue for the remainder of the year, according to Black Book.

Fitch remains cautious and we expect residual values to decline further in the near term as dealers receive new models and discount older ones in the fall. Fitch expects that pressure to be evident in the coming months and securitized residual maturities coming off lease to remain high through 2015.

Despite some negative trends discussed, ratings performance is not expected to be impacted in 2014. Fitch has upgraded or affirmed all outstanding rated bonds since 2008, when a single class of notes was downgraded. Fitch's ratings assume volatile wholesale market disruptions when transaction credit enhancement grows rapidly and is capable of sustaining stresses well outside of anything historically seen - including well beyond the extraordinary value declines of 2008-2009.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Margaret Rowe, +1 312-368-3167
Director
US Structured Finance
70 West Madison Street
Chicago, IL
or
Bradley Sohl, +1 212-908-0792
Senior Director
US Structured Finance
33 Whitehall Street
New York, NY
or
Eugene Kushnir, +1 212-908-0830
Associate Director
US Structured Finance
or
Rob Rowan, +1 212-908-9159
Senior Director
Fitch Wire
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com