Concerns about used car prices weigh on auto lease ABS
Concerns about further deterioration in US used car prices are putting pressure on auto lease asset-backed securities, holding down the sector's issuance and keeping spreads at wider levels prior to the Covid-19 market sell-off.
A key factor in value of auto lease ABS, as well as their car rental counterpart, is the residual value of vehicles when the lease expires.
Used vehicle prices - a proxy for residual values - have plunged as Covid-19 social distancing measures since March have abruptly slashed the sales of new and used vehicles.
The widely followed Manheim used car index fell 9.2% in April to its lowest level in three years.
Manufacturers are also offering enticing financing terms to sell brand new cars partly in response to the drop in used car prices.
And there are concerns that a flood of used cars into the market if rental companies Avis and Hertz liquidate some of their fleet to ease their financial pressures may further depress used car prices.
"The biggest risk for car lease ABS is that no one wants to buy used cars," a buyside analyst said.
BMW, Ford, Mercedes and Hyundai, which are regular issuers of car lease ABS, have refrained from bringing ease deals even though some of them have priced prime car loan ABS in recent weeks, a market source said.
"The used car market is essentially shut down. We don't know where residual values will end up," said Geoff Caan, managing director of US public fixed income at SLC Management.
AUTO LEASE SUPPLY JAMMED UP
Car lease ABS have been snared into the morass that car rental ABS has been mired in.
Moody's downgraded Hertz and Avis' car rental ABS earlier this month, citing the companies' deteriorating cash positions as they have seen revenues plunge during the pandemic.
Fitch dropped the ratings of Hertz car rental debt last week, and has put Avis' ABS for possible downgrade.
"The new issue market (for car lease ABS) is pretty quiet. It's been responding to the rating agencies' downgrades," the buyside analyst said.
Auto lease issuance has totaled US$7.7bn since January, down from the US$9.8bn during the same period in 2020, according to J.P. Morgan.
The only car lease deal that hit the market in recent weeks came from American Car Center on April 17, which paid dearly to attract investors to buy its bonds.
The used car dealer priced a US$116m transaction with a junior tranche that cleared at a 13.5% yield, which came in well above the 5.303% yield on a junior note it sold back in November. nL1N2C51YL
GRAPHIC: US auto ABS sector issuancehttps://tmsnrt.rs/2WRK6LA