NEW YORK -

Fitch Ratings took another look at the impact rising wholesale supply is having.

This week, analysts explained U.S. auto lease ABS residual performance is still producing gains overall through mid-summer despite rising used-vehicle supplies. However, Fitch indicated further increases in vehicle supply during the second half of this year and into 2017 could lead to pressure on residual values.

Fitch’s quarterly residual value ABS index slowly declined during the past year. The index recorded a residual value gain of 2.51 percent as of the second quarter of this year, down from 4.79 percent in Q2 2015 and 8.39 percent at Q2 2014.

Analysts noted the average yearly gain in 2014 was 5.75 percent, which then slowed to 3.97 percent in 2015 and averaged 2.10 percent for the first half of this year. They also highlighted the peak residual value gain was 29.21 percent observed in Q1 2011.

Fitch’s outlook for auto lease ABS asset performance remains stable for the second half of this year, supported by continual growing credit enhancement levels resulting in healthy levels of loss protection.

Analysts explained the persistent residual value gains, “albeit at a lower level,” are partially due to the conservative establishment of securitized residuals in U.S. auto lease transactions.

Securitized residuals in U.S. auto lease ABS are often defined as the lesser of residual values established by the servicer at lease inception, Automotive Lease Guide’s (ALG) value at inception, or ALG’s mark-to-market value at the time of the transaction's closing.

By securitizing the lowest of these and comparing that value to lease-end sales prices in determining a residual value loss or gain, there is built-in residual value loss protection, according to Fitch

The firm went on to mention that it expects the pace of upgrades to subordinate notes to continue for auto lease ABS in the second half of this year.

Upgrades are driven in large part to delevering transaction structures and growing credit enhancement levels. Further, Fitch’s base case or “BBsf” residual value loss proxy is conservatively determined by isolating only the residual value losses an issuer observed during the worst 12-18 month period, typically during the weakest 2008-2009 period.

Analysts went on to say additional “haircuts” are employed as rating categories increase. This usually amounts to roughly 28 percent to 32 percent in loss protection as a percentage of returned residuals for “AAAsf” ratings, providing “ample” support, according to analysts.

“Even if residual values continue to decline throughout the remainder of 2016 and into early 2017, loss levels would have to be magnified above those levels to have an impact on outstanding transactions,” Fitch said.

“Used-vehicle volumes entering the secondary market increased significantly due to strong lease originations in recent years,” the firm continued. “This led to higher supply of off-lease vehicles and trade-in volumes.

“Higher fleet and rental volumes entering the secondary market have also pressured residual performance,” Fitch went on to say.

Fitch’s auto lease residual value ABS index also tracks the amount of lease maturities and return volumes.

The index recorded nearly $6.9 billion in returns (securitized residual value amount) in 2015, up from $5.8 billion in 2014. In the first half of 2016, the index posted $3.7 billion in return vehicles, with $4.7 billion more expected in the second half, totaling more than $8.4 billion. This figure represents a 22-percent jump in returns this year versus 2015.

“The used vehicle market saw a shift in consumer preferences in recent years,” analysts said. “With sustained low gas prices and increased fuel efficiency, used vehicle prices for trucks, SUVs/CUVs and vans continue to outperform smaller cars. The full-line category is also outperforming luxury.”

Luxury issuers account for approximately a third of residual returns in Fitch’s Index and have averaged 0.45 percent in residual losses in the first half of this year compared with 2.95 percent in residual gains for full line.

Fitch's auto lease residual value index tracks the performance of 39 U.S. outstanding auto lease transactions totaling $28.4 billion of collateral as of June, issued from 12 auto lease ABS platforms with data dating back to January 2007.