September 28, 2017 / 12:59 PM / in 23 days

Fitch: Demand, Price Falls Highlight German Used Diesel Car Risk

(The following statement was released by the rating agency) FRANKFURT/LONDON, September 28 (Fitch) The drop in demand for diesel vehicles in the German used car market last month and signs of a weakening in prices underscore the risk from potential regulatory and legal developments, Fitch Ratings says. We will monitor the market closely to ensure the stress assumptions in our auto ABS analysis remain appropriate. Diesel cars' share of German used car sales posted a steeper-than-normal monthly decline in August, dropping below 30% for the first time in nearly four years. Relative demand for used diesel cars regularly peaks in July, but diesel has failed to recapture the share of new car sales it lost in 1Q17, most likely due to falling demand from private individuals due to environmental concerns and the prospect of restrictions on diesel cars. <iframe src="https://e.infogram.com/5189a63d-a546-4927-93e9-799ee2427443?src=embed " title="Diesel Car Sales in Germany" width="622" height="647" scrolling="no" frameborder="0" allowfullscreen="allowfullscreen"> It remains uncertain whether such restrictions will materialise. In August, the National Diesel Forum of federal, regional and local government officials stated that it wanted to "prevent a sweeping ban on diesel-powered vehicles" and manufacturers said they were prepared to equip about 5.3 million diesel cars that comply with existing EURO5 and EURO6 standards with new software to further reduce NO2 emissions. The German Federal Administrative Court is expected to rule early next year on diesel bans in cities, after the Dusseldorf and Stuttgart administrative courts ruled that bans are permissible under the German Road Traffic Act. The NGO Deutsche Umwelthilfe recently said that it would bring more court cases to try to force cities to reduce emissions via bans. Used diesel car prices were unaffected by the possibility of greater restrictions in 1H17 with data from Deutsche Automobiltreuhand (DAT) showing no abnormal price falls. However, Wednesday's DAT price data for August showed a small fall in used diesel vehicle prices, down 0.6% yoy, while used petrol car prices rose 1.6%. We have analysed loan-by-loan information on recoveries from defaulted loan contracts in German ABS deals and found no decline in diesel sales proceeds from one year ago, and no substantial decline relative to gasoline car sales from defaulted accounts. But the recent fall in used diesel car demand is another signal, along with longer selling times, that consumer preferences may be shifting from diesel cars. This could increase pressure on prices (although rebates on new car sales remain within normal ranges). The chief impact on auto ABS transactions would be in deals with residual value (RV) exposure (where obligors can return the vehicle in lieu of final payments) if used diesel car prices fell sharply below that assumed in the contractual RV amount. Transactions with no RV exposure would only be indirectly affected by lower recovery proceeds. If prices do fall, the move is likely to be greater for older models, which are more exposed to diesel restrictions. This would limit the impact on auto ABS deals, which tend to be backed by financing contracts for newer vehicles, while older deals have built up significant credit enhancement as a buffer to price deterioration. We do not currently expect price declines inconsistent with our recovery rate and RV assumptions for outstanding ABS. We already stress transactions for steep price declines caused by unexpected macroeconomic deterioration, changes in consumer preferences, or the risk that a default of the car manufacturer could disrupt vehicle servicing and the supply of used car parts. We also assess sensitivity to a deal's entire diesel exposure, which we believe to be a conservative approach as the potential impact of restrictions on different engine types is unknown. This is in contrast to the VW emissions scandal, where there was greater clarity on which vehicles were affected, and we implemented an additional 10% reduction in our used car price expectations. As information emerges on the timing and scope of any new diesel restrictions, we may review our analytical assumptions more frequently. Contact: Thomas Krug Associate Director, Structured Finance +49 69 768 076 252 Fitch Deutschland GmbH Neue Mainzer Strasse 46-50 60311 Frankfurt am Main Eberhard Hackel Senior Director, Structured Finance +49 69 768 076 117 Markus Papenroth Managing Director, Structured Finance +44 20 3530 1707 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com; Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Auto ABS Index - Europe 3Q17 here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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