The UK’s PCP market is under pressure from a rise in voluntary terminations (VTs), rating agencies Moody’s and DBRS have said in separate notes.
Moody’s said this week it expects VTs – afforded to lessees under the 1974 Consumer Credit Act, once half of total payments have been made – to increase on diesel vehicles, due to consumers’ uncertainty on residual values (RVs).
On Monday, DBRS separately published research showing a 5% rate of voluntary termination around month 37, when the 50% repayment threshold is usually reached on a four-year PCP. The rate was half as much for terminations around month 22.
“VT wxposure to the lender is almost doubled under a four year PCP compared to a three-year PCP when deposit and interest rate variables remain constant,” which could only be offset by a higher initial deposit, DBRS said.
It added: “As four-year PCP agreements have become the norm, DBRS has observed increased cumulative VT rates for UK auto ABS transactions that it rates.
“An increase in VTs typically results in a lower recovery rate compared a PCP at maturity, while also denying the transaction additional cashflows and yield.”
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Next to the VT issue, Moody’s highlighted a shift in the composition of loan and lease pools for securitisation, due to investors’ concerns around diesel.
“Most captives have already started to lower their RV forecasts and contractual settings for diesel vehicles, especially for older engine types that currently form a small part of captive ABS pools.
“The timely adjustment of RV forecasts is the first level of protection against RV risk for new ABS transactions,” the agency said.
It noted that although the diesel crisis had not affected ABS performance so far, some captives had started introducing RV guarantees for investors.
For future securitisation operations, Moody’s forecast pool composition to reflect shifting demand towards petrol and alternatively-fuelled vehicle (AFVs).
It said securitised AFV contracts would initially suffer from a lack of historical RV performance data, but this would change as the market matures.
It added that because of their links on the manufacturing side, captives “have a head start over non-captives in terms of knowing how technological advancements will develop and so can adjust their RVs accordingly”.