Thus far in 2014, there have been approximately 37.5 million cars recalled globally, well above the prior record of 30.8 million recorded in all of 2004. Steady residual values could keep the pain of the recent recalls limited to the incremental service costs that have already crimped second-quarter earnings reported by firms such as
Fitch sees the values of the recalled cars holding up in the immediate term based on Black Book's recent analysis of depreciation rates on four popular automotive models that have undergone major safety recalls since 2000. The study concluded that depreciation rates generally do not lead to residual values dropping notably below original projections in the months and years following safety recalls, recognizing the effects of used car market seasonality.
The recalls examined in the study included the Toyota Camry (gas pedal/unintended acceleration issue on 2008 and 2009 models), Chevrolet Cobalt (key ignition/unintended shut off on 2005-2007 models), Ford Escape (engine fire risk on 2013 models), and Ford Explorer (Bridgestone-Firestone tire recall on the 2000 model).
The study acknowledged material declines in Toyota's reputation in brand surveys following its recalls, as well as slippage in Toyota's hold of new car sales between 2009 and 2010; yet, monthly depreciation rates on the Camry never exceeded the blended depreciation rates on similar- model, similar-year cohorts. In the Ford and GM cases, the study compared the depreciation rates of both newer and older model years relative to the model years affected by the recalls. Data generally showed no acceleration in valuation declines for any of the model years in the six-month period following the recalls.
Residual values are important factors to consider at the end of the vehicle life, when rental car firms seek to dispose of vehicles that are not returned to auto manufacturers (risk vehicles). Rental car firms currently hold high proportions of risk vehicles in their fleets to provide flexibility in managing fleet levels and to take advantage of the robust used car market in the U.S. through various vehicle disposition channels.
Regardless of recall activity, Fitch expects residual values to come under pressure through the end of 2014 as significantly higher vehicle supply is expected to enter the used car market from vehicles coming off lease and trade-ins.
Fitch's auto asset-backed securities residual value index, which tracks the performance of residual values in ABS transactions, recorded a gain of 5.76% in July, down from a gain of 8.38% the prior month. The index has recorded gains in each month going back to
Expectations of used car market softness are further confirmed by Black Book's used car depreciation rates, which are expected to rise to 13.5% in 2014, up from 12.8% recorded in 2013, but remain below the historical average rate of approximately 15%. Black Book uses two- to six-year-old vehicles in their overall depreciation trend summaries for consistent comparisons.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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