European Auto Lease ABS: Select Legal Aspects of Residual Value

In securitisation transactions backed by lease contracts across Europe, it can be difficult to assign and securitise the underlying asset's residual value (RV) because of legal constraints. In this commentary, we explore some legal considerations around the assignment (and legal isolation) of the RV to a special-purpose entity (SPE) and the relevant credit considerations in our credit rating analysis. We also provide a few examples of auto lease transactions we have rated in the past few years where the RV has been isolated in favour of the SPE under the applicable law.

Key highlights include the following:
-- The RV receivable comes into existence only when the borrower has resolved to acquire the asset or the asset is otherwise disposed of. Hence, this aspect could weaken or void the RV's assignability.
-- In a few jurisdictions, the legal and regulatory framework provides an effective way to transfer the RV of auto lease contracts to an SPE in the form of an ordinary receivable assigned in a true sale way. In such cases, any risk related to RV is also transferred to the SPE.
-- In any structure, we assess the RV's treatment in case of the originator's insolvency to determine its isolation (or lack thereof), including whether any of the issuer's security interest may be affected in an originator's insolvency scenarios.

"The point of assessing RV from a structural and legal perspective is to determine whether the credit rights arising from the residual can be isolated from the lessor's insolvency estate, and, hence, whether the revenues from the RV instalment can be applied to the issuer's exclusive benefit towards the repayment of the notes in the event of the lessor's default", said Lorenzo Simonte, Assistant Vice President.