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Historical portfolio performance is a key input to determine expected future pool performances under various scenarios, in particular payment behaviour of obligors. Rating agencies expect to receive historical data to obtain a credit rating (Fitch, 2006). They try to estimate a full probability distribution of the expected credit loss of the pool and its variance, based on the estimates of the expected credit loss and its variance (Fitch, 2011; and Moody‟s 2011a). The rating agencies expect to receive at least 3 to 5 years of historical performance data of the portfolio of defaults and delinquencies (Fitch, 2011; and Moody‟s 2011a). It is important to keep detailed metrics as preparation to achieve a high credit rating securitization transaction (Fitch, 2011). The (historical) payment performance of car lease securitization transactions can be measured by delinquencies and defaults. In order to measure this accurately it is important to define whether an asset is delinquent or in default.

A delinquency in a loan or lease occurs when a borrower fails to make one or more periodically payments under an agreement (Fabozzi, Davis, & Choudhry, 2006). Portfolio delinquencies provide insight in the payment performance of lessees and refer to the number of days that a lessee failed to make his payment. By defining delinquencies correctly, it is possible to gauge whether lessees are unable to make its payments and the seriousness of the delinquencies. More insight in the lessees with delinquencies and their seriousness is obtained by defining classifications of delinquencies (Fabozzi,

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Davis, & Choudhry, 2006). We use the most common method of delinquency classification, which was recommended is the Office of Thrift Supervision (OTS) and broadly used in ABS transactions21:

 Current delinquent: Payments to 30 days late

 30 days delinquent: Payments from 30 to 60 days to late

 60 days delinquent: Payments from 60 to 90 days to late

 90+ days delinquent: Payments 90 days or more to late

If the lessee is unable to meet its payments, it is possible that he goes into default. 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). Generally, defaults occur for leases that are 90+ days delinquent with no prospect of improvement of periodic payments.

The basis for credit loss analysis is the portfolio loss data and the static pool loss data. Portfolio loss data is simply the losses that occur in each period as a percentage of that period outstanding portfolio balance, which composition is changed over time (Moody‟s, 2011a). The conditional default rate (CDR) provides insight in the development of defaults per month on an annualized basis. A static pool loss data is an isolated static subsets of originated contracts and used for a detailed tracking of its performance of the contracts over time (Fitch, 2011). It is used to determine the expected credit defaults and net losses that arise in the securitization. It shows the ratio of cumulative losses to original lease balance for a static pool of assets. The cumulative default rate (CDX) is the proportion of leases in the portfolio that has gone into default as percentage of the total value of the portfolio. The loss curves derived from the static pool data are used to estimate expected losses based on the static pool. These expected losses can be applied to the securitized portfolio, in order to determine the total expected loss from defaults of the securitization transaction (Moody‟s, 2011a).

Fabozzi, Davis, & Choudhry (2006) discuss a combination of two parameters for quantifying default performance in an asset portfolio. The conditional default rate (CDR) is the annualized value of the balance of new defaulted leases. This is calculated over the course of a month, as a percentage of the unpaid balance of the portfolio at the beginning of the month. The conditional default rate for month t is calculated as follows:

In order to get the annualized CDR, the following formula is used:

_.

The CDR provides insight in the development of defaults per month on an annualized basis. In the same way, conditional delinquency rates can be determined. (Moreover, this can be split into the different delinquency classes as explained in above).

The cumulative default rate (CDX) is the proportion of leases in the portfolio that has gone into default as percentage of the total value of the portfolio. This is calculated as follows:

21

OTC was a department of treasury that was involved in supervision and regulation of federal chartered and state chartered banks, savings and loan associations.

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In the same way, cumulative delinquency rates can be determined. (Moreover, this can be split into the different delinquency classes as explained in above). Default and delinquency rates alone do not provide sufficient insight into the performance of a portfolio. It could happen that a number of defaults in a portfolio results in small losses, while one default in a portfolio can result in large loss. Therefore, rating agencies also focus on the impact of a default (Fitch, 2011; Moody‟s, 2011a; and S&P, 2011). In the event of a default, the lessor is able to recover a portion of the value of the lease contract as explained in Section 4.2. The proceeds from the legal recovery process and sale of the car can be used to reduce losses on defaults. Fabozzi, Davis, & Choudhry (2006) define a parameter for the loss severity rate or LGD rate in order to measure recovery effects. However, rating agencies prefer to see recovery rate in order to measure recovery performance of portfolios. Therefore, it makes sense to define a recovery rate based on the LGD rate22. The LGD for month t is calculated as follows:

and Recovery rate = 1-LGD

Both portfolio loss data and static pool loss data should be tracked on two layers to gain insight into the entire cash flow chain. The contracts of label lease and management & funding customers, are entirely managed by C4L/BFM. Thereby, C4L/BFM has insight in the payment behaviour of both the customer and end customer. A database should be created to store the conditional default and delinquency rates. For funding customers it can be more complex. Funding customers operate on their own, whereby C4L/BFM has limited insight in the payment behaviour of end customers. To complete the database of historical portfolio performance, a data model must be built to get the relevant data to BFM.

For the performance of realization of residual value it is important to determine the loss frequency and severity. Residual value risk of a portfolio is determined by the following key variables (Fitch, 20011; and Moody, 2011):

 Turn-in rate: the percentages of non-defaulted obligors that return their car to the lessor (loss frequency).

 Residual value realization rate: the difference between the expected predetermined residual value and actual residual value at lease end (loss severity).