Correct: Fitch: Crisis May Hit VW Auto ABS Through Used Car Prices
The Volkswagen (VW) scandal may be felt in ABS transactions primarily through its impact on used car values, Fitch Ratings says. Other possible but less likely consequences that have some loss potential include the invalidation of loans or lease contracts or cars being declared not road worthy. The full impact would also depend on the number of affected cars in ABS pools and potential future commercial and regulatory developments for VW. All these factors could result in a higher credit dependency on VW.
Auto ABS transactions are exposed to used car values either directly through residual value or indirectly via recovery proceeds from the sale of the car when a borrower or lessee defaults. Fitch rates 25 VW originated transactions globally; 15 were securitized in EMEA, six in the U.S. and four in APAC. Only five Fitch-rated transactions originated by VW are exposed to residual value risk (one in the U.S. and four in EMEA).
The full impact on car prices remains uncertain. For the affected diesel vehicles, we believe one challenge to prices will come during a likely recall. If the remediation results in lower fuel economy and performance, resale values may decline. In turn, this could bolster owners' civil cases against VW, resulting in longer lasting reputational damage. In addition, more customers may "turn back" their vehicles than anticipated, putting pressure on auction or dealer prices due to higher supply. If VW's brand image is permanently damaged, used car prices of all VW cars could see some impact.
Nevertheless, Fitch does not expect a direct and immediate impact on transaction performance from reduced used car prices due to a variety of factors. Most transactions are only indirectly exposed to used car prices following a borrower or lessee default, and we believe the default risk will not change in the short run. And, unless VWs brand is permanently damaged, the price impact is expected to be largely limited to the affected vehicles. While VW will likely clarify the portion of affected vehicles in each transaction in due course, we expect it to be lower in the U.S. given the lower diesel penetration than in Europe. Also, if the allegations are found to present a breach of the representations and warranties, VW could be obliged to repurchase the affected contracts, mitigating this risk.
Historically, other recalls that have pushed down used car values in the U.S. have been relatively short. Over the last decade, recalls with the strongest impact have resulted in as much as 10%-20% declines in used car values of the affected vehicles in the immediate months after recall before recovering. It remains to be seen whether the impact on used car values could be greater because VW's actions are being thought of as deceptive.
Over the midterm, other possible consequences could be legal challenges to the validity of loan or lease contracts or some jurisdictions with environmental agendas (notably California in the U.S.) taking more aggressive actions against VW. While we believe that transactions would be protected by representations and warranties given by VW or its subsidiaries, the resulting claims against the originator may increase credit exposure to VW.
Fitch expects the company will be able to satisfy its obligations in the ABS transactions. However, implications for VW, its operations and the regulatory response are still developing.