European Auto ABS Market Accelerating Toward Green Energy

Kroll Bond Rating Agency UK released a report on the European auto market, which is continuing to remove carbon emissions from its entire vehicle fleet, with the use of new hybrid powered and battery electric vehicles (BEV) growing dramatically as a result.

According to KBRA, the market achieved its first green auto ABS deal in February with a transaction that exclusively contained hybrid- and electric-powered vehicle backed loans sold to investors. However, on further examination of recent European auto ABS transactions, there appears that a steady greening progression was already underway. In the report, KBRA examined the increased use of alternative energy (which includes hybrid and BEVs) vehicles in securitization transactions.

Key Takeaways

  • Alternative energy vehicles accounted for more than 50% of new European vehicle registrations in Q4/22, the first time they surpassed traditional petrol and diesel fuel types. BEV sales reached a record high in the UK, becoming the second most popular powertrain in 2022, surpassing diesel vehicles. This trend is largely attributed to stricter government tailpipe emission standards for new vehicles.
  • There has been an increase in the amount of hybrid and BEVs that are included within securitization collateral pools. Inclusion of these power types ranges from close to zero to more than 40%, with the first fully hybrid European transaction issued in February with collateral from Italy.
  • A green discount does not exist in European auto ABS, as there currently appears to be no significant differentiation in pricing between those containing greener collateral and those with fully traditional powered auto collateral. Despite strong interest from ESG investors, it appears credit factors are driving pricing, resulting in final credit spreads that are comparable to other transactions with lower BEV concentrations.
  • There is an uneven but increased level of disclosure on the breakdown of collateral pools by fuel type and emissions levels of the underlying vehicles. KBRA has observed some recent transactions that provide a detailed breakdown of the underlying vehicles by fuel type, CO2 consumption and emissions group, but there are still several transactions without any disclosures.
  • Not all transactions are created equally. The proportion of auto leases and loans backed by hybrid and electric-powered vehicles in new securitizations are driven by many underlying characteristics of the portfolio. These can include (i) the split of new versus used vehicles in the portfolio, (ii) the vehicle type, with many securitizations containing meaningful proportions of commercial vehicles, (iii) leisure vehicles alongside passenger vehicles, (iv) the original equipment manufacturer (OEM) alternate energy vehicle product offering, and (v) country of issuance.

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