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Recovering Residual Truck Values Tied to Auto ABS Ratings

March 19, 2009

TORONTO — The recovery of used auction prices across several vehicle segments — especially trucks and SUVs — is a positive development for auto ABS, according to international ratings agency DBRS.

The agency recently analyzed the performance of auto loan and lease ABS in relation to vehicle residual values. In 2008, the performance of auto loan and lease ABS came under close scrutiny because of a concern with vehicle residual values, a critical component of auto ABS rating criteria.

One significant concern for investors and rating agencies was the ability of vehicles’ expected residual values to hold up over the duration of the transactions. The focus was mainly on the portions of collateral pools consisting of trucks and

SUVs. The primary cause for concern was that rising gasoline prices made these vehicles less desirable, thus driving down their residual value at auction, be it following repossession or lease turn-in.

However, in September and October 2008, gas prices fell precipitously and production cuts of trucks and SUVs began to have their effect on dealer inventories. These factors, combined with the weak U.S. economy driving many would-be new-car buyers to the used-car market, resulted in used auction prices for trucks and SUVs rebounding beginning in November 2008.

Since mid-November, gas prices have stabilized at relatively low levels, production levels have stayed low and the economy has

continued to struggle – leading to an increase in used auction prices approaching a level reflective of the pre-summer run up in gas prices.

DBRS believes that although the recovery of this market may not yet signal a long-term trend, the recovery supports the idea that because of the cyclical nature of the auto market, the

ratings approach to auto ABS must look "through the cycle" and not be over-reactive to short-term market fluctuations.

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