Lack of green premium keeps auto ABS portfolios mixed

The automotive industry is facing numerous challenges today and auto ABS portfolios reflect this, explains Guglielmo Panizza, VP European ABS at Morningstar DBRS. He is a panel speaker during the Securitisation Event breakout session: “Navigating Auto ABS in the Age of EVs: Challenges, Opportunities, and Market Dynamics”.

What did last year’s securitisation market look like?

From our point of view, 2024 was marked by various macroeconomic themes. As inflation eased in Europe, central banks gradually reduced their policy interest rates. Modest economic growth saw unemployment lower in Europe and rise slightly in the UK, but overall rates remain low. Meanwhile, the geopolitical outlook remains unsettled. In terms of securitisation, 2024 stood out due to the very high number of investor-placed issuances: levels not seen since the global financial crisis. In 2024, the total European structured finance issuance totaled €251 billion, of which €146 billion was also investor placed, which represents around 58% of total issuance.

What caused this in your view?

Last year’s record year in terms of investor-placed issuances also overtook retained issuance, which marked a trend reversal from previous years. The main drivers were an incremental increase in demand for investor-placed issuances which met a funding need from bank issuers to replace the absence of the longer-term central bank funding programs. And this was also supported by a strong investor participation in this segment of fixed-income markets, predominantly due to the floating-rate exposure of asset-backed securities.

What was the picture in the Netherlands?

In the Netherlands, RMBS continued to be the leading asset class. Dutch RMBS is traditionally one of the best-performing asset classes in European securitisation and last year there were around ten deals. This was followed by auto-lease ABS with three deals and finally one consumer ABS transaction.

Did you observe other market trends?

We noticed a couple of trends, including the emergence of private credit and esoteric assets within the realm of European securitisation markets, like the first public solar ABS transaction, the first data-center related securitisation, and the appearance of European middle-market CLOs. In terms of ABS, we expect continuing growth in esoteric ABS, particularly in emerging asset classes such as solar and data centers, all driven by technological developments from the surge in AI adoption, an increasing reliance on cloud storage and the push towards the energy transition.

You’re going to be speaking at the Securitisation Event on the theme of the EV market and auto ABS. How is the alternative fuel phenomenon influencing auto ABS?

The transition towards alternative fuel vehicles remains one of the most interesting topics in the auto ABS sector. We see that the exposure to battery electric vehicles, within the European auto ABS rated by us, remains limited: in 2024 they represented on average approximately 6% of auto ABS portfolios. In parallel, we see that the share of newly registered battery electric vehicles is plateauing and may slightly decrease in the near future, even if it continues to grow over time. We therefore expect the exposure to battery electric vehicles to remain close to current levels in new auto ABS issuances.

What lies behind this development?

There remains an uncertainty regarding the residual value of battery electric vehicles and plug-in hybrids. Also, we saw residual values in both these types of vehicles suffer the most when used car prices began to decrease from their September 2022 peak. This seems to be a concern for investors and other market participants.

Does this imply a potentially larger residual haircut in your credit analyses for these types of vehicles?

We think that prudent residual value policies when setting the residual values at the contract inception of the lease or loans may well mitigate this market risk. When we analyze transactions with high concentrations of battery electric vehicles and plug-in hybrids, we always do a deep dive into the policies which the originators used to set residual values. This analysis allows us to derive embedded risk by fuel-type.

What have you found using this approach?

Mixed results, to be honest. We have analyzed a limited number of portfolios in the market with material exposure to alternative-fuel vehicles. In one Dutch auto lease transaction, although the number of observations related to electric vehicles was limited, we noted that the realization performance related to hybrid and electric vehicles outperformed vehicles equipped with internal combustion engines because of prudent RV policies.

How was that possible?

One of the main focal points of our analysis is residual value criteria. This is because if this criterium is set conservatively in a portfolio it can mitigate the market risk from higher depreciation rates for battery vehicles and higher observed used car price volatility. By reviewing the basis for the setting of residual values for battery electric vehicles, we deemed the originator had been conservative and considered that the exposure to electric vehicles was a credit positive relevant Environmental factor within our analysis.

What is the future of green assets in the auto industry?

We have seen EV sales stall compared with earlier forecasts. Subsidy levels are declining in several markets, tariffs on Chinese EV imports are increasing, and there is a general sense of unpredictability hanging over the auto industry in general. In securitsation markets we also see limited financial benefits for the issuers of green auto ABS. There does not seem to be a “green premium”. So, today’s market circumstances, coupled with the limited benefits for issuers, act as constraints on green auto ABS. We therefore expect most auto ABS portfolios to be mixed going forward. But this could certainly change in future, and we are watching the market very carefully.