EV market evolution
Uptake of electric vehicles (EVs) is not a flat trajectory. The pace of development should accelerate as the range of options available increases and market participants further bed in the idiosyncrasies of the asset class – though this may not be imminent.
DI GORI There is additional complexity in the fleet space. This comes from the residual-value risk inherent to our operating-lease transactions. A different dynamic is at play for EVs given the additional risks in this asset class versus ICE [internal combustion engine] vehicles.
For us, it is always going to be a discussion with investors about credit appetite for the additional risks that may be inherent in EV residual-value settings.
MILIS One significant auto ABS [asset-backed securities] investor recently told me they expect to have increasing concern about securitisation structures that are exposed to the future prices of second-hand ICE vehicles.
I found this interesting because it was the first time I had heard an investor talk so strongly about the residual value risk of a ‘normal’ ICE car.
DI GORI We completed an ABS transaction back in March that was the most successful in our history. We met with numerous investors, and we didn’t have that experience at all. Investors understood the transition and how it will occur – in a very gradual and balanced way.
In fact, investors often ask us about residual-value settings for EVs, because of the risks inherent in obsolescence, for example, or improvement in battery manufacturing that could potentially make a new product far better than the one in the market today.
Having said this, I think some investors will certainly become more interested in the credit dynamic of ICE vehicles while others are more focused on EVs. This may play into deal dynamics over the coming years.
DI GORI When a car needs to be sold at the end of a lease, it is either going to be sold at a profit or loss. Rating agencies have an established approach to assessing residual-value risk in transactions: they apply haircuts to vehicles at different rating bands.
With ICE vehicles, there are any number of data points the rating agencies can point to, which they do independently and through data we are able to provide. We have been doing this for 35 years at Eclipx, so we have ample data to show the agencies covering our own performance. This helps the process.
The interesting dynamic with EVs is that we do not have a lot of data points on the re-marketing performance of vehicles. However, we are seeing rapid take up in New Zealand and we try to point the rating agencies to offshore experiences when they assess this risk in fleet transactions.
New Zealand is especially interesting because it has been an importer of second-hand EVs from Japan for a number of years. There are a lot of pricing points rating agencies and the like can refer to.
To sum it up, the best way to describe it is as an education process. We have had to provide a lot of data to rating agencies and we have shared it with investors as well – to get them comfortable with how we set residual values.
DI GORI We will have EVs within our next New Zealand ABS transaction with a residual-value risk, and we had a small component in a previous transaction as well. It is not as if it is impossible. We are confident investors will have appetite in our next transaction, particularly in New Zealand where EVs will be a more material part of our portfolio than in Australia.
The residual-value considerations unique to EVs is an education issue – how we take investors on the journey of understanding. The rating agencies also have a role to play. They need to decide whether they are aligned with this global transition or whether they will take a more conservative approach. The more conservative approach rating agencies take, the more expensive transactions will be because of the increase in credit enhancement.
HELLERUD Another risk we have to be mindful of is portfolios with concentration toward a single EV model. I think this will be a temporary risk, but it is one we have been grappling with. If there was a major issue with a particular EV model it could pose a real issue for a weaker counterparty. We are certainly considering all the risks associated with residual value and counterparty strength when we look at potential transactions.
DI GORI There is manufacturer and model concentration at the moment. This is slightly exaggerated in the fleet space because the vehicles need to be fit for purpose.
For our most recent transaction, half the portfolio was made up of light and heavy commercial vehicles. We are dealing with companies that need tool-trade vehicles, whether they be utes or light vans, to do their jobs. A huge uptick in makes and models in this space is not something we see coming in the near term.
It won’t be until we see an increase in the makes and models available across all segments – including passenger, and light and heavy commercial – that we will be able to take the next step.