Analysts Upbeat About Several Aspects of 2013 Lease Market

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.