European Auto ABS: Too Much Green Can Add Uncertainty

This commentary outlines our approach to assessing portfolios containing alternatively fuelled vehicles (AFVs), in particular Hybrid-Electric Vehicles (HEVs), Battery-Electric Vehicles (BEVs), and Plug-in HEVs (PHEVs) in European Auto asset-backed securities (ABS).

-- Considering observed depreciation rates and used car price volatility, uncertainty regarding residual values (RVs) for BEVs and PHEVs remains a concern.
-- Exposure to AFVs in European Auto ABS remains limited (but is steadily increasing); fuel-type diversification and prudent RV policies mitigate RV risk.
-- For portfolios concentrated towards BEV and PHEV, we assess the originators' RV setting policy to derive specific embedded losses by fuel type.
-- A combination of high LTVs and high depreciation may pose pressure on secured recoveries in Europe and increase VT risk in the UK and Ireland for certain vintages originated when car prices peaked. These risks may be more pronounced for BEVs.

“We will continue to monitor the transition to AFVs, and as a result of the limited exposure to BEV and PHEV in European Auto ABS portfolios to date, we do not expect any rating action following the analysis,” says Miklos Halasz, Assistant Vice President. “We will also continue to focus on RV setting policies of originators to review if prudent RVs are reflected across the respective fuel types.”