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U.S. Car Rental Bankruptcies May Further Pressure Used Car Prices

June 04, 2020, 09:10 AM
Filed Under: Bankruptcy
Related: Fitch Ratings

The recent bankruptcy filings of Hertz and Advantage Rent A Car could further exacerbate the downward pressure on U.S. used vehicle prices for the remainder of the year and pressure lease residual values and recovery rates on defaulted auto loans, Fitch Ratings says. Further vehicle sales or de-fleeting by rental car companies due to bankruptcies could increase used vehicle supply and pressure prices for used vehicles. Values were already negatively impacted by the still challenging wholesale market and auction conditions, with many auction houses conducting online sales only; these conditions have been exacerbated by significant economic uncertainty and U.S. unemployment in the mid-teens.

Fitch revised its sector outlook for U.S. auto finance companies to negative from stable on March 30, reflecting the potential for meaningfully weaker credit performance in the near term stemming from the effects of the pandemic.

The effects of the pandemic have caused lenders to extend leases and auto manufacturers to increase incentives on new vehicles to stimulate sales. The rental car bankruptcy filings coincide with expected elevated used vehicle supply due to delayed lease returns and a backlog of used vehicles. When coupled with weakened consumer confidence given the unprecedented spike in unemployment and significant economic uncertainty, these factors will exacerbate the already weak outlook for used vehicle prices.

Auction volumes and vehicle prices have begun to recover in recent weeks from the lows experienced in April, but they are still below the levels forecast at the beginning of the year. Also unclear is the extent to which government stimulus is providing support to the market and to what degree a lapse in stimulus payments will negatively impact prices.

Black Book’s Used Vehicle Price Retention Index declined 1.5% in May, an improvement from the notable 5.9% slump in April, a period when used vehicle prices are seasonally strong. Under its baseline scenario, Black Book forecasts wholesale used prices to be 15% below pre-coronavirus expectations on average in 2020, with a slow recovery occurring this fall and into 2021. Black Book projects an additional increase of 250,000 rental vehicles selling in the wholesale market in the next six months in a best-case scenario, or around a 13% increase from pre-coronavirus expectations.

Vehicle age and type will have varying effects on supply/demand dynamics; however, Fitch believes factors driving a decline in used vehicle prices will outweigh those that could mitigate falling prices. Such mitigants include consumers trading down to used vehicles from more expensive new vehicles as a result of greater economic/employment uncertainty, lower fuel prices which typically have a positive impact on SUV and truck sales, and reduced new vehicle supply.

Auto lessors will not be able to offset the negative impact to residual values from increased used vehicle supply in the near term, particularly for leases maturing in 2020, which Black Book estimates to be 4.1 million vehicles. However, if auto lenders provide longer deferments or forbearance on loans or leases and/or defer repossessions, loss severity could be reduced enough for used vehicle prices to begin recovering later this year. Several auto finance companies have announced forbearance programs allowing borrowers to skip one to four months of payments, adding them to the end of the loan term.

Deferrals and/or forbearance could push charge-offs to late 2020/early 2021, which should help recovery values that are expected to be better six months from now than over the summer. While leases tend to be offered to higher quality borrowers relative to retail auto loans, the declines in used vehicle prices could have a more immediate impact on auto finance companies that have greater lease exposure.

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