COSTO ESTRATEGIAS PUBLICITARIAS

Credit risk is a primary concern and is a key rating driver in rating securitization transactions. Credit risk is the risk that the obligor will default on its obligation to make periodically payments under an agreed contract, resulting in a loss (Doff, 2005; and S&P, 2011). A default in a car lease contract is realized when the lessor has unilaterally cancelled the agreement, because the obligor did not met his obligation to make periodically payment under an agreed contract (Schmit, 2004). In the event of a default, the lessor is able to repossess the car and claim any losses incurred by the default (Schmit, 2004). A credit loss occurs when the proceeds from the sale of the repossessed car, insurance claim and judgements collected from the obligor are insufficient to cover the remaining securitization value (Fitch, 2011).

The major part of the recovery on the defaulted contract will be reimbursed by the sale of the car. Moreover, there is usually no money left to pay the claims, whereby the recovery is often solely based on the market value of the car. The market value of the car should therefore cover the carrying amount of the contract in order to eliminate the credit risk. However, this is often not the case. A mismatch between the book value of the contract and the market value of the car during the contract can possibly result in a loss (or profit) in the event of a default. This is displayed in Figure 22.

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The figure is an example of a 3-year lease contract with an initial value of €20.000 and a final payment of €10.000 (based on an expected residual value of €10.000 at lease end). The red line is the outstanding amount or book value of the contract at a specific month, which exists of two parts: an amortization part and a residual value part. The amortization part represents the depreciation of the car, which is repaid at a constant rate (annuity). The residual value part is the expected residual value of the car at lease end. The green line represents the expected market value of the car during the contract term. As the prediction of the car‟s value is correct and periodically payments are paid „normally‟, the car is worth €10.000 at lease end which is equal to the final payment.

Figure 22: Example of exposure to potential credit loss of a car lease contract

In the event of a default during the contract term, the market value of the car is less valuable than the book value of the contract, because the car depreciates faster than the repayment on the contract at the beginning of the term (see DBRS, 2010). This means that during the contract, the finance company is exposed to credit losses in the event of default (indicated by the area between the red and green line). 5.2.1 Credit risk in portfolio of BFM

The portfolio of BFM is exposed to credit risk on a one or two-layered base (as displayed in Figure 12), depending on the customer type. In the case of management & funding and funding customers, a default can happen on two layers. The first default possibility is a default of the end customer. In that case the lessee of the leasing company is unable to make its periodic payments under the agreed lease contract. The car is transferred back to the leasing company and a claim is filed against the end customer. This claim contains a penalty for early termination of the contract, a payment on possible damage, a settlement of any excess mileage driven and a claim of the outstanding amount. However, in most cases the end customer is bankrupt and, besides the repossession of the car, only a small portion is recovered. The ultimate responsibility of the contract and underlying car is at the leasing company. Any losses on the defaulted contract with the end customer are therefore for his account. The financial lease contract with C4L remains valid. The leasing company may decide to turn the car into a new lease contract, or early terminate the financial lease contract with C4L (against a final settlement for early termination). This means that a default of end customers does not affect the finance company.

The second default possibility is the default of a leasing company. In that case, the leasing company is unable to make its periodically payments agreed in the financial lease contract with C4L. The (defaulted) lease contracts of the leasing company with the end customer will then be carried over to the leasing company of C4L (label lease portfolio), who will perform as the lessor of the contract with

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the end customer for the remaining contract period. In this way, the lease contract of the end customer simply continues. The early termination will lead to a claim against the leasing company to cover missed payments. This means not only that C4L becomes the economic owner of the car, but also ends up with the car at the end of the lease term, because the redemption statement with the leasing company is no longer valid. At that point, C4L is exposed to credit risk as well as residual value risk of the car.

In the case of management & funding and funding customers, both the leasing company and end customer must default to cause a credit loss at BFM. Therefore, this two-layered structure provides an extra credit risk buffer for BFM before a credit loss will affect the finance company.

In the case of label lease contracts, there is only one layer of default possibility, namely a direct default of the end customer. In that case, BFM is directly exposed to a credit loss in case of a default of an end customer.