Despite a recent slowdown in global auto sales due to the semiconductor shortage and other supply issues related to COVID-19, we expect electrification to accelerate. We forecast EVs will make up 7%-10% of global light vehicle sales in 2021 and 15%-20% in 2025, with Europe leading the way. The increased uptake of both BEVs and plug-in hybrid electric vehicles (PHEVs) in Europe has resulted from improvements in charging infrastructure and standardization of charging ports, environmental and regulatory requirements, and subsidies for new EV purchases. Additionally, advancing battery technology and dedicated production lines are reducing prices and improving EV quality and usability (see " Related Research"). Below, we dive into our expectations for the new and used EV markets and the implications their growth could have on European auto ABS.
From ICE Vehicles To EVs: An Accelerating Transition
At the recent UN Climate Change Conference (COP26), participants saw the transition to EVs as pivotal in reaching climate-related targets. The European Commission recently proposed a 55% tightening of emissions targets for passenger cars in the EU by 2030, from the current standard of 95 grams of CO2 per kilometer, compared with the previously-agreed target of a 37.5% reduction. Additionally, the 2025 and 2030 tailpipe CO2 emissions regulations and the Euro 7 standards, which should be implemented by 2025, are likely to significantly increase the production cost of ICE vehicles. Furthermore, some European cities have introduced or proposed restrictions on driving ICE vehicles, and several governments and auto manufacturers are setting targets for phasing them out, with numerous manufacturers already committing to deadlines for full EV production. Both regulatory inducements and government subsidies helped make Europe the fastest-growing EV market in 2020, and we expect BEVs and PHEVs to account for over 30% of total European light vehicle sales by 2025, compared with 15%-20% globally (see "Related Research").
Government support for policies that reduce CO2 emissions to combat climate change and enhance energy efficiency will likely set the pace of adoption of EVs, as will emerging technologies that lower the associated costs and increase consumer confidence. Governments, of course, can mandate emissions reductions but they also need to play a role in making EVs more attractive in terms of economics and performance if they are to bring about mass adoption.
While the coming phase out of ICE vehicles initially led to an increase in PHEV sales, we believe that PHEVs represent a transitional technology in the longer-term move to BEVs. The European Automobile Manufacturers' Association (ACEA) reports that BEVs' share of new EU registrations approximately doubled year-over-year in the third quarter of 2021 to 9.8%, exceeding the 9.1% share for PHEVs. We therefore focus on BEVs in the remainder of this article.
Used BEV Sales: Early Trends From A Low Volume And Nuanced Market
For BEVs, there has been a steep growth in new registration share across most of the five major European markets: France, Germany, the U.K., Spain, and Italy (see chart 1).
Even though new BEV registrations have rapidly increased recently, the used BEV market in Europe is still in the early stages of development, and volumes lag behind new BEV sales by at least two to three years. Data from Autovista, for example, show that in third-quarter 2021, BEVs accounted for about 14% of new registrations in Germany, but made up only about 2% of used car sales (see chart 2). Consequently, it remains difficult to reliably assess trends in resale values for used BEVs due to the low sales volumes in the secondary market. Nevertheless, the data we have identify some interesting trends
BEV resale values remain low for now
Based on the limited data that is available, BEVs have typically exhibited greater price depreciation than traditional ICE vehicles. In other words, a BEV's resale value as a percentage of its initial sales price has typically been lower. However, there is considerable variation between countries.
We reviewed BEV and ICE vehicles residual values across the five major European markets over the past four years. To normalize the data, we define a measure of residual value as the used market price of a 36-month-old vehicle with a 60,000 km mileage, expressed as a proportion of the initial new sales price (see charts 3 and 4).
At an aggregate level, without differentiating by vehicle segment or brand, most major markets have recently seen BEV residual values at least 10 percentage points lower than those for ICE vehicles. Chart 5 shows the aggregate residual values for ICE vehicles minus those for BEVs. A positive figure therefore indicates higher typical residual values for ICE vehicles. The U.K. is an exception, where BEV residual values have recently outperformed those of ICE vehicles. Here, there may be unusual short-term factors at play, such as current new vehicle supply shortages and associated unprecedented conditions in the used car market, where prices overall have increased approximately 20% year over year.
Depreciation rates for BEVs may currently be higher than for ICE vehicles due to a faster evolution in their underlying technology, which more quickly reduces the relative appeal of older models. However, regional differences highlight how country specific incentives may also have a material effect on residual value performance. For example, the data suggest that BEV residual values in France are relatively weaker than in other countries across Europe. This is partly explained by high government bonuses of up to €6,000 for buying a new BEV along with, in many cases, substantial manufacturer discounts. These price incentives for new BEV purchases put relative downward pressure on used BEV values for existing vehicles in the secondary market. There are similar schemes for new BEV sales in Germany, with incentives of up to €9,000, comprising potential state subsidies of €6,000 and a further dealer rebate of €3,000. This may partly explain why BEV residual values have remained relatively low over the past two years in these countries. Conversely, government incentives on new BEV purchases are relatively modest in the U.K. which, along with the recent lack of new vehicle supply, may help explain the lower BEV depreciation in the country.
Policy incentives and regulation will continue to influence the demand-supply mechanics
With the pick-up in new BEV sales starting in early 2020, we expect rapidly changing market dynamics for used car prices in 2022 and 2023. Although manufacturers continue to face supply chain challenges, the increasing number of new BEV models indicates technological advancement and a potential gradual decline in manufacturing costs. This is likely to translate into lower prices and running costs for BEVs. At the same time, consumers are becoming more confident in the technology, and the charging infrastructure is being extended and improved, reducing charging anxiety. For example, total charging points increased by approximately 45% in the EU in 2021 from a year prior. However, the figures indicate that in recent years the number of charging points has not kept up with the growth in EV adoption, i.e., the number of EVs per charging point has continued to grow (see chart 6). The "range anxiety" observed for older generation BEVs is also starting to subside and could decline further with more technological improvements.
As the barriers to consumer acceptance of BEVs diminish, we expect a gradual phase out of policies to promote new BEV sales, meaning price dynamics will become driven by more traditional demand-supply factors. Many European governments have also implemented policies to disincentivize individuals from owning and driving ICE vehicles. For example, bans or significant taxes have either been put in place or have been proposed on driving older ICE vehicles in cities such as Madrid, Rome, Amsterdam, Brussels, and Barcelona. Several U.K. cities have also implemented zero- or low-emission zones, increasing the cost of driving certain ICE vehicles in these areas.
We expect this trend to continue, putting medium- to long-term downward pressure on used ICE vehicle prices. This could lead to an inflection point in residual values, potentially before the end of the decade, where the residual values of BEVs could start to trend higher than those of ICE vehicles. However, the timing of this inflection point could vary significantly, depending on the jurisdiction, vehicle type, and brand.
The Future Of European Auto ABS Collateral Pools
Analytical Considerations For Auto ABS Collateral Pools That Include EVs
- We will likely reflect the uncertainty over used EV prices in our residual value analysis, where the share of EVs is more significant than current typical exposures of 10% or below.
- We examine how originators derive residual value forecasts and how their historical residual value forecasts performed against realized sale proceeds.
- Although several manufacturers are repurchasing EVs at contract maturity, at higher rating levels we generally do not give credit to manufacturer support/buybacks when formulating our residual value assumptions.
- We will monitor secondhand values of ICE vehicles if phase out occurs as expected from 2025 onward and adjust as appropriate our residual value assumptions for these vehicles, based on supporting data.
- For auto ABS transactions where issuers self-label use of proceeds as "green," our credit analysis would continue to focus on the collateral pool securing the rated notes, rather than how the seller has committed to use the issuance proceeds.
Limitations to forecasting BEVs' residual value
Residual values for the ICE vehicle market are relatively predictable compared with those for BEVs because the used ICE car market in Europe is highly commoditized. Leaving aside recent developments such as the COVID-19 pandemic and the semiconductor crisis, high volumes and a long history of performance data have helped reduce volatility in used ICE vehicle prices. By contrast, used BEV prices have been more volatile and less predictable, and sales volumes have been significantly lower. As a result, originators have generally set BEV residual values in financing contracts lower than they would for comparable ICE vehicles.
From our research and discussions with originators, we understand that finance providers generally have a higher propensity to offer BEV financing through lease or personal contract purchase (PCP) products, rather than standard amortizing loans. Many captive finance providers of auto manufacturers often also aim to re-lease these vehicles at the end of the term. This allows them greater control on the refinancing and resale strategy for their BEV products. By offering BEVs through leasing/personal contract hire (PCH) or PCP, captive subsidiaries also encourage buyers to allay concerns around technological obsolescence, while benefitting from subsidized purchases.
Given that residual value-setting policy varies between different captives for BEVs, the accuracy of the originators' residual value forecasts and the setting of the residual value compared to their own forecasts are key parameters for our analysis. We therefore closely examine how originators derive residual value forecasts and how the originators' historical residual value forecasts performed against realized sale proceeds, where available.
We expect many manufacturers to introduce new BEV models into their ranges in the near future. Forecasting residual values will therefore continue to be a challenge while historical data is still limited, and because the rapid development of BEV technology requires sophisticated analysis of future used vehicle markets. Over the next few years in particular, it will remain difficult to assess the accuracy of originators' forecasts compared to future used car market prices. However, conservative residual value setting in a financing contract--such as setting the residual value below the originator's own forecast--incorporates a buffer that could at least partially mitigate future residual value losses.
Along with the relatively small volume of used BEV sales generally, low default rates and consequently limited recovery data, and the low return rate within European auto ABS transactions make performance of BEV residual values more difficult to assess on a transaction-specific basis. Most borrowers on leasing/PCH or PCP contracts are opting to keep the vehicle at the end of the term, and some manufacturers are repurchasing them, so direct data on residual value within rated auto ABS transactions is generally limited.
Changing engine-type composition in European auto ABS collateral pools
We have already observed the share of BEVs in securitized pools to increase to above 5% in many transactions, up from less than 1% two years ago, although figures vary. In the near to medium term, EVs in general will likely comprise over 10% of the collateral pools in many new issue European auto ABS transactions, in our view, with a number of recent transactions already reaching this level.
Even in legacy transactions backed by revolving pools of auto loans or leases, originators could increase the share of EVs over time, reflecting rising new BEV registrations. We have observed a broad range of eligibility criteria for revolving pools, ranging from excluding BEVs entirely to having no cap on the share of BEVs in the pool.
At this stage, the effect of BEV-related risks on existing European auto ABS transactions generally remains low due to the still-low proportion of BEVs in the market. However, for pools that contain a more significant share of BEV-backed financing we would likely seek to reflect the uncertainty associated with the used vehicle prices in our ratings analysis. The obligors backing European auto ABS are typically prime borrowers, who are less likely to default in a benign macroeconomic environment. Therefore, for auto loan ABS, where the only exposure to vehicle resale values is via recoveries on defaults, we expect BEVs' faster depreciation to have less of an effect on credit risk.
Furthermore, if the phase-out of ICE vehicles and adoption of BEVs gathers pace as expected, secondary market values for diesel and petrol vehicles could come under pressure, and the remaining uncertainty regarding BEV values could reduce. We will monitor used ICE vehicle values and adjust our assumptions accordingly, if the data supports the view that ICE vehicle residual values are declining on a relative basis.
As we gain a better understanding of BEVs' resale value, originators' residual value-setting policies for BEVs, and the effect on existing and future auto ABS transactions, we may adjust our analysis of residual value risk accordingly.
Green auto ABS
There has been limited issuance of "green" labelled auto ABS to date given the currently low origination volumes of loans and leases financing BEVs. To help support the origination of more energy efficient assets and finance the transition to a lower carbon economy, some market participants are considering labelling auto ABS transactions as "green", based on a "use of proceeds" rationale. In these transactions, the collateral pool would continue to be secured on ICE vehicles, but the seller would commit to originating new BEV-backed loans and/or leases with the proceeds from the issuance.
From a credit rating perspective, an issuer's decision to self-label a "use of proceeds" auto ABS as "green" would not on its own have any material impact on our analysis. Our credit analysis would continue to focus on the collateral pool securing the rated notes, rather than how the seller has committed to use the issuance proceeds. We do not review or monitor the use of proceeds, the process for project evaluation and selection, the management of proceeds, or any ongoing reporting related to the eligible projects in the assignment or surveillance of our credit ratings. Furthermore, in "green" labelled transactions that we've observed to date, failure of the seller to comply with the stated use of proceeds would not constitute a breach nor trigger any consequences under the transaction documents. As a result, we do not believe that this type of "green" designation would alter the transaction's credit risk profile.
- Methodology And Assumptions For European Auto ABS, Oct. 15, 2015
- European Consumer Finance Criteria, March 10, 2000
- Global Auto Sales Forecasts: Supply Disruption Slows Recovery, Oct. 19, 2021
- European Auto ABS Index Report Q2 2021, Sept. 23, 2021
- Industry Top Trends Update: Autos EMEA, July 15, 2021
- High-Flying Battery Makers Have Much To Win And Lose, June 21, 2021
- ESG Industry Report Card: Auto Asset-Backed Securities, March 31, 2021
- Credit FAQ: Questions Over Electric Vehicle Residual Values In European Auto ABS, May 31, 2019
- Will Electric Vehicles Spark Residual Value Risk In European Auto ABS?, June 27, 2017
This report does not constitute a rating action.
|Primary Credit Analyst:||Doug Paterson, London + 44 20 7176 5521;|
|Secondary Contact:||Volker Laeger, Frankfurt + 49 693 399 9302;|
|Research Contributor:||Vidhya Venkatachalam, CFA, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
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