Residual value uncertainty bogs down Tesla lease ABS

Tesla Model 3 (via Tesla press kit)

Tesla Finance brought $940 million to market with its first securitization of the year backed by retail auto lease contracts, according to a Moody’s Investors Service presale report.

The weighted average Fico score for the transaction was 790, according to Moody’s. While high credit quality of the lessees was marked as a credit strength, limited residual value performance, “exacerbated by Tesla’s tight control of the resale channel,” was noted as a credit challenge in the report. Residual value risk is a typically bigger risk than the credit risk for auto lease ABS pools, Moody’s noted.

Tesla has limited resale data on used Model S and Model X vehicles, and almost no data on used Model 3 vehicles, which account for 42% of the collateral pool. This is because Tesla controls the remarketing process for off-lease vehicles and only a small amount of Tesla vehicles were sold at auction. Therefore, most of the performance data uses retail used-vehicle values, as opposed to wholesale auction values.

Further, the pool consists exclusively of battery-electric vehicles (BEV), which have higher residual value uncertainty than internal combustion-engine vehicles. Also, the 2019-A transaction is the first to include leases for Model 3 vehicles, which adds variability due to a lack of vehicle performance history.

The collateral pool consists primarily of 18,305 auto lease receivables with 36-month leases, according to Moody’s. The transaction is slated to close Nov. 26.

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