EV credit elimination could contribute to higher losses in ABS deals

Expiration of federal tax credits for new and used electric vehicles could contribute to price volatility, hurting recoveries and leading to larger net losses in auto asset-backed securitization transactions. Moody’s Ratings projects the overall EV adoption rate to reach 25% by 2030, down from its initial forecast of 35% to 40%, largely driven by the tax credit expiration, Nick Monzillo , vice president in structured finance, told Auto Finance News . For the second half of 2025, Moody’s expects the adoption rate to remain at the 7.3% seen in the first half of the year but fall to 6.1% in 2026. “While we do see in the long term, by 2030, improving adoption rates, we see a dip in the near term as a result of the elimination of the tax credit,” he said. “We're expecting, in the short term, EV sales to decline.” A decline in EV sales is likely to translate into fewer battery electric vehicles (BEVs) included in auto asset-backed securitization (ABS) deals in the next few years, Monzillo said, noting that there could also be less support for charging infrastructure as consumer demand wanes. Impact on ABS The inclusion of BEVs in ABS collateral pools affects recovery rates in loan transactions and residual value losses in lease deals, Monzillo said. "To the extent that used EV prices decline as a result of slower demand for these vehicles, you could see recovery rates on EVs that exist currently in pools declining a little bit [and], as a result, net loss rates could increase a little bit,” he said. "To the extent that used EV prices decline ... you could see recovery rates on EVs that exist currently in pools declining." -- Nick Monzillo, Moody's BEVs carry more impact in lease ABS transactions compared with loan deals, which tend to have a lower concentration of BEVs as many consumers opt to lease electric vehicles, Monzillo said. “You're also limited in loan deals to the extent that a borrower has to default for a recovery to be relevant, and EVs tend to be in prime pools,” he said. “So, your exposure to that [EV] price level is low in loan [transactions].” BEV exposure is generally around 10% to 15% in lease ABS deals , depending on the manufacturer , Monzillo said. “There, you’re exposed to residual value risk,” he said. “The main risk in lease deals is exposure to the price level at lease termination. To the extent that EV prices decline in the near to medium term, you could see a bit [weaker] performance for lease deals.” BEV exposure climbs In the short term, the percentage of BEVs included in auto ABS deals could tick up due to a pull-forward in EV sales ahead of the tax credit expiration, Monzillo said. In fact, several recent auto ABS deals had higher concentrations of BEVs as collateral. The deals, according to S&P Global Ratings , include: BMW Vehicle Lease Trust: BEV concentration in the collateral pool in the most recent deal, a $1.3 billion lease issuance in October, was 11.5% compared with 7.9% in the prior lease deal issued in June; Ford Credit Auto Lease Trust: BEV concentration sat at 15% of the base residual value in its latest deal, a $1.3 billion transaction backed by leases issued in July, compared with 9.6% in the lease deal issued in January; Mercedes-Benz Auto Lease Trust: BEV concentration rose to 19.4% of the securitization pool in the $1 billion lease issuance in October compared with 17.9% in the lease deal issued in May; Porsche Financial Auto Securitization Trust: BEV concentration of 6.6% of the collateral pool in the $870 million prime deal issued in October compared with 3% in the December 2024 prime issuance; Volkswagen Auto Lease Trust: The collateral pool consisted of 4.5% of BEVs in the latest $1.5 billion lease deal issued in September compared with 2.6% in the lease deal issued in June. Tesla ’s most recent ABS deal backed by EV leases and issued in September also carried a higher residual value as a percentage of the securitization value at 64.9% compared with 64.4% in the deal issued in October 2024, according to a Sept. 18 Moody’s presale report. The increase indicates that the pool carries a higher exposure to residual value risk. However, “you tend to see higher credit enhancement levels in deals with material EV exposures, so we still think structures are well protected,” Monzillo said.

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