Leasing company 2017 ratings “stable”

The latest report from Fitch Ratings paints a negative outlook for many consumer and commercial finance and leasing companies (FLCs) for 2017 amid global concerns over asset quality and residual value reversion, but says most have manageable leverage and are positioned for potential interest rate increases, suggesting there will be no major deterioration in ratings.

“Auto lenders/lessors are dealing with a shift towards a higher mix of leasing, used car financings and non-prime borrowers at a time when used car values appear to have peaked, all of which will likely be critical drivers of future credit performance,” said Sean Pattap, senior director, Fitch Ratings.

Among commercial finance subsectors, aircraft leasing remains a bright spot, due to increasing air traffic and ongoing consolidation that enhances larger firms’ negotiating power with customers and manufacturers. Railcar lessors are in the midst of a downturn, particularly in tank cars leased to transporters of crude oil and sand cars that support crude and natural gas drilling.

Fitch views commercial vehicle and truck lessors as having relatively less cyclical business models than other large equipment lessors since they have a greater focus on essential services and benefit from a shorter order-to-delivery cycle, although long-term technology threats such as autonomous vehicles loom.

“The global interest rate environment for FLCs differs by region and while rising rates will ultimately add to FLC funding costs, Fitch believes firms could benefit from higher rates through expanded margins,” added Pattap.

Fitch expects interest rate increases in the US, although monetary policy in other regions such as Europe, certain Latin American countries, and Asia, particularly China and Japan, is expected to remain highly accommodative for the FLC sector.