Residual Values Are Risk Factor in BMW Financial’s First Auto Lease ABS of 2018

BMW Financial Services of North America issued its first U.S. auto lease ABS of 2018 backed by a pool of outstanding lease receivables totaling $1.16 billion, according to presale reports.

The new securitization is comprised of 33,670 prime auto lease receivables with an average FICO score of 789 and maximum lease term of 36 months, according to S&P Global Ratings. Passenger cars and crossover utility vehicles account for 57% of the pool, while midsize SUVs make up 43%.

Despite some analysts seeing a pullback in lease ABS this year, prime issuers are still driving the space as investment demand is strong. However, used-vehicle values serve as a significant risk factor.

“This year we see a slight pullback in lease ABS, where in previous years we had a lot more lease ABS,” said Amy Sze, head of U.S. ABS research at JPMorgan Chase, during a panel discussion at ABS East last month. “The reason is due to the concern in residual values.”

Rating agencies concurred with Sze’s comments, noting that the two main risk factors for BMW’s overall strong transaction lie with the risk of residual values with luxury vehicles and falling used-vehicle prices.

The concern comes from BMW Financial’s performance during the Great Recession, as the captive experienced “significant” residual value losses, Moody’s Investors Service noted. Since 2009, delinquencies and losses have declined, but Moody’s attributes the improvement in post-crisis losses to the stronger used vehicle market. However, BMW is confident in the strength of its brand.

“We don’t see any negatives, because we don’t put many transactions out there per year,” said BMW U.S. Capital President Stefan Glebke, during a panel discussion at ABS East. “Investors are looking for our name, our brand, and our performance, so I’d say we don’t see any impact when it comes to the yield, and we always try to optimize our credit spreads. That’s our target.”

Nissan Motor Acceptance Corp. voiced its confidence in the prime securitization market, noting that the number of deals the captive is doing is “robust,” said Treasurer Steve Hetrick. “[NMAC] typically does between five and upwards of seven transactions a year. We are a little behind right now, but [investors] can expect us to do some catching up at the end of this year and the end of our fiscal year.”