S&P Revamps Lease ABS Guidelines

Taking a cue from the mortgage securitization playbook, Standard & Poor’s has revised its methodology for rating auto lease ABS transactions by introducing a “benchmark pool” against which all securitized pools will be compared.

The rating policy change, announced late last year, is part of a broader initiative to create a more transparent and replicable rating process for auto lease ABS, said Mark Risi, a senior director in S&P’s ABS Surveillance group.

The benchmark pool for auto lease ABS is something of an ideal pool, one with a fairly even distribution of residual maturities and a relatively low concentration of model and segment. It’s used as a tool to gauge the level of diversification within a pool, Risi said.

Specifically, the benchmark pool consists of the following concentration parameters:

  • Maturities are limited to 5% in any given month.
  • Individual models are capped at 20% of the pool.
  • Vehicle segments ― like fullsize SUVs, compacts, and hybrids ― are limited to 30% of the pool.
  • New and discontinued models are capped at 10%.

To the extent that securitization pools exceed the preset limits, S&P will assign “haircuts” ― percentage loss on the base residual value ― depending on the transaction’s credit rating.

“The criteria for residual value haircuts was calibrated based on an analysis of residual value loss data for all rated U.S. auto lease ABS transactions that were active between 2007 and 2009, as well as data from various other sources,” according to S&P’s revised ratings guidelines. Other data sources analyzed include ALG Inc., auction companies ADESA Corp. and Manheim, the National Automobile Dealers Association, and the Bureau of Labor Statistics.

Also, lessors may be assessed haircuts based on the health of their affiliated manufacturers. For instance, a carmaker teetering on the brink of bankruptcy would stress residual values.

In addition to the concentration limits, S&P recalibrated stress scenarios to account for the dramatic used-vehicle price declines of 2008.

“We believe the investment-grade auto lease ABS should have sufficient credit enhancement to withstand residual value price declines equal to or greater than those observed in recent periods of financial stress, including mid-2007 to mid-2009,” according to S&P. “The period of time from mid-2007 through mid-2009 included a high level of both macroeconomic and auto industry-specific stress with the highest levels of unemployment since the Great Depression, a used-car market that was adversely affected by record-high gas prices, the threat and eventual bankruptcy of two major manufacturers, and significantly reduced availability of consumer credit.”

S&P also implemented a comparison of historical auction prices to current residual values. For instance, analysis of a 2011 Hyundai Capital America securitization pointed to consumer perceptions that were stronger than anticipated, thereby resulting in too-low residual values. “Historical auction data was not what we thought it should be,” Risi said.

Last year, auto lease ABS volume increased 17% to $9.7 billion, according to S&P.

―Marcie Belles

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