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Fleet Finance Sponsored by Auto Finance Fleet Finance News Fleet lessors becoming alarmed as falling used car prices threaten residuals Published: 15th April 2020 Share The challenge for the Western fleet leasing industry during the Covid-19 pandemic will be to manage the current volatility in the market whilst respecting the fact that there may be no short-term recovery in residual values (RVs). Fleets cannot stop the sale of used vehicles (particularly in a downturn). Whilst run-on strategies may happen, the economics of vehicle fleets mean that de-fleeting cannot stop 100%. Indeed, as leasing and rental companies’ customer demand shrinks, more units are forced to market. In the 2008/9 Great Recession many leasing companies extended contract and ran on vehicles. With the risk that used vehicle prices are suppressed for an extended period of time, an immediate run on vehicles may not be ideal. Even so, vehicles will still need to be remarketed over the downturn. The US auto industry, already suffering from lengthy factory shutdowns and depressed new-vehicle demand, is becoming alarmed at a potential used-car price collapse that could have far-reaching consequences for manufacturers, fleet lessors and rental companies. Used-vehicle auctions are for now virtually paralyzed, much like the rest of the US economy, and used car stock is accumulating at a rapid rate. Bloomberg predicts that if this trend continues and prices drop drastically, it will be immensely detrimental to car manufacturers and their captive finance companies. The latter are likely to write down the value of lease contracts that had assumed vehicles would retain greater value. Rental-car companies also will get less money from selling down their fleet of vehicles, which are sitting idle in the global pandemic that is proving catastrophic for travel. Dale Pollak, an executive vice president of Cox Automotive, which owns North America’s largest auto-auction company, wrote in an open letter to auto dealers last week: “Cars are coming in, but they aren’t selling. Today’s huge supply of wholesale inventory suggests supplies will be even larger in the months ahead.” “Six months from now, there will be huge, if not unprecedented, levels of wholesale supply in the market,” Lease extensions becoming commonplace Car manufacturers are doing what they can to limit the damage. General Motors and Ford Motor’s captive finance companies are already offering customers one-month lease extensions. In addition to relieving pressure on consumers wary of going into showrooms, this aims to delay some of the influx of off-lease vehicles headed to auctions that are for now operating only virtually. But these measures are unlikely to go nearly far enough to address the imbalance between the supply of used vehicles and demand that is unlikely to rebound anytime soon given that almost 17 million Americans sought jobless benefits in just the last three weeks. Residual risk affecting car rental companies Car rental companies appealed to the US Treasury Department and Federal Reserve as a group last month for loans, tax breaks and other forms of support. Hertz Global Holdings, Avis Budget Group, and Enterprise Holdings all are trying to find ways to unload some cars without taking too big a hit. If Avis and Hertz have to sell cars at lower values, it will add to the costs of maintaining their fleets. A big drop in residual values comes straight out of the bottom line and can create liquidity problems. However, Andy Shields, global business unit director of INDICATA, part of Autorola, believes that for rental-car remarketing if there was to be a better time for a major disturbance, this is it. “Had the virus started mid-year, with rental companies at peak leisure market,” he said, “the price impact of mass de-fleets and dropping on-rents would have been painful.” Not that this environment is easy. Rental companies will have contracted the majority of their annual volumes with OEMs by now so will need to re-assess current contracts based on three key factors: volume flexibility; holding period flexibility; and certainty of residual value certainty (i.e. buyback). In many cases contracts will be defaulted on, such is the loss of demand in the rental industry. This will leave OEMs with both a gap in new sales and stock of unregistered (and in some cases registered ready for delivery) new vehicles the rental industry does not want. Andy Shields added: “In addition, de-fleeting will be happening now as rental demand drops. Initially these will be focused at OEM buybacks. Rental companies will try and hold risk vehicles until after the initial social distancing but whilst run on actions can help a rental company to overcome initial supply/demand imbalances – that rarely works in a sustained downturn. “The first hit is the best hit. However, there is and will be significant volatility on demand and significant differences between country markets capacity to absorb stock at any one time.” BVRLA urges support for rental sector The British Vehicle Rental and Leasing Association (BVRLA) has urged policymakers to work with the vehicle rental sector in maintaining the essential movement of goods, people and services during the COVID-19 virus outbreak. As the UK government considers the next stage of its response to the Covid-19 pandemic, the BVRLA has pointed to transport and business restrictions introduced in a number of EU states, where vehicle rental branches have been excluded due to their key role in delivering essential mobility services. The UK vehicle rental industry is already an integral part of the supply chain and operating model for many businesses across the logistics sector, NHS, police, social care, local and central government. Whether it is HGVs, vans, ultra-low emission cars, minibuses or temperature-controlled trucks, BVRLA members provide access to a huge variety of different vehicles at very short notice. “As the government considers the measures it might take to limit the impact of Covid-19, it is vital that it appreciates the role that will be played by rental vehicles in maintaining the essential movement of people, goods and services,” said BVRLA chief executive, Gerry Keaney. “Any plans to restrict business or transport must exclude vehicle rental. We have already seen the sector exempted from such closures in France, Austria and Spain, due to its essential role in providing mobility.” Pragmatic approach to used pricing In terms of values, cap hpi is “monitoring the situation closely and taking the pragmatic approach that for the next three months” as a result used car values and residuals will only be adjusted in line with seasonal variation, not trade data. This measure isn’t purely about ignoring the effect of the pandemic on trading – it’s driven by the lack of data coming from transactions. Should the situation change before that three month period, and enough data be provided, then valuations will reflect the impact of the pandemic accurately. Asset Finance Connect Asset Finance Connect brings you news and updates about UK and European auto, equipment and asset finance providers. Sign up to our newsletter Featured Stories NewsVolkswagen Group hits highest European market share in 3 years NewsAuto Trader predicts growth of new and used car market in 2025 NewsOctober sees modest 1.1% growth in new EU car registrations Auto Finance Fleet Finance