As Edmunds.com discussed the potential benefits of “lease pull-ahead” offers, Fitch Ratings believes new-model leasing is poised to benefit from another generally healthy used-vehicle market this year, extending some gains realized as a result of robust residual values for leased cars and trucks seen during the last three years.
Fitch expects lessors to continue to report meaningful gains on sales and to manage residual risk, even as the secondary market begins to normalize and used-vehicle prices continue to soften from historical highs reached in 2011.
After 2008–2009, when U.S. new vehicle demand collapsed during the financial crisis, Fitch pointed out used-vehicle inventories tightened considerably and prices rose. This situation provided opportunities for lessors to book gains on resale values as fleet depreciation rates fell.
For U.S. commercial auto fleet lessors, analysts indicated residual risk remains mitigated by the fact that portfolios are predominantly open-end leases, which subjects the lessee to any residual value loss or gain.
However, Fitch acknowledged lessors may be exposed to the lessee for the repayment of any residual losses in times of stress, which effectively converts residual risk to credit risk.
“To mitigate this risk, commercial fleet lessors have targeted large corporations with strong credit quality or sufficiently set reserves to help limit the probability of losses,” analysts said.
In the case of both truck leasing and daily car rentals, Fitch mentioned depreciation rates have fallen since 2009 as a result of increased used-vehicle prices, better residual values and longer holding periods.
As supply pressures begin to build in the used-vehicle market, analysts projected that depreciation rates are likely to return to more normal levels in 2014 and 2015.
“Vehicle gains are expected to moderate from recent peaks, but are expected to remain strong in 2013 as off-lease vehicle inventories and prices remain in check and as truck buyers continue to avoid the more expensive post-2010 engines,” analysts said.
Fitch recapped that Mannheim’s Used Vehicle Value Index increased modestly during the fourth quarter due in part to supply disruptions related to Hurricane Sandy. However, the index fell by 1.0 percent on an annualized basis last year as used-vehicle prices softened modestly from their 2011 peak.
“Seasonal trends in the Mannheim index last year closely tracked broader U.S. economic indicators, with notable weakness in the second and third quarters, and a rebound late in the year,” Fitch said.
Analysts mentioned Fitch’s Auto Lease Residual Value Loss Index largely mirrored the Mannheim Index last year as residuals declined somewhat from 2011 highs. Still, the index remained strong through November showing gains of 10.29 percent for returned residuals.
“We expect continued normalization in auto lease ABS residual realizations to occur through 2013 as rising new-vehicle sales and retail lease volumes begin to increase used-vehicle inventories and drive prices down in the secondary market,” analysts said.
Fitch expects annualized North American car and light truck sales to grow by 4 percent to approximately 15 million vehicles in 2013. This level falls short of the peak sales period between 1999 and 2006 when average annual sales topped 17 million vehicles.
“Still, as supply pressure builds and inventories of late-model used vehicles begin to increase over the next year, some additional easing in used-car prices is likely,” analysts said.
“The expected pick up in new-vehicle production, together with the impact of higher retail lease penetration, which began to emerge in 2010, should begin to put significant pressure on inventories as soon as the latter half of 2013,” they continued. “Therefore, we expect a more typical supply-demand balance to develop moving into 2014, likely limiting the ability of lessors to realize continuing benefits beyond this year.”
Benefits of ‘Lease Pull-Ahead’ Offers
Edmunds.com said many vehicle lessees may be eligible to upgrade to a newer model and reduce their monthly payments through “lease pull-ahead” offers.
And while these offers aren’t always the best possible deal, Edmunds.com advises anyone scheduled to come off a lease this year to at least explore the option.
“Early lease-return deals can be a win-win for both buyers and sellers,” Edmunds.com senior consumer advice editor Philip Reed said. “Consumers can move on to a newer vehicle sooner than they expected without paying more money, while dealers can reinforce brand loyalty and boost used-car inventories or unload their slower-selling models.”
Reed mentioned there’s evidence to suggest that pull-ahead offers will be more prevalent in 2013 than in recent years.
Edmunds.com projects that there will be about 500,000 more lease returns this year than in 2012, and dealers may use these programs to better manage the influx of customers — and used-vehicle inventory — coming back to the market.
The site indicated that in many cases, automakers and dealers will notify lessees if they qualify for these offers. But interested consumers are also encouraged to reach out to their dealers to see if a deal can be made.
Analysts explained that generally if the trade-in value exceeds the lease buyout price, then a lessee can be in a strong position to negotiate, even for the potential of turning the lease into cash.