CHICAGO — Auto lease asset-backed securities took a big hit last year causing a decreased appetite to offer leases. This ultimately caused several automakers to leave the leasing market; however, according to Fitch Ratings, it's a much different story this year.

With the wholesale market performing stronger this year, Fitch officials explained that this reversed the trend of heavy residual value losses on leased vehicles. The wholesale improvement has steadied auto lease ABS performance.

In fact, Fitch officials said Wednesday, "As a result, Fitch has observed growth in credit enhancement levels across all Fitch-rated auto lease ABS in the past year, despite heavy RV losses in 2008. These increases in credit enhancement enable the transactions to support larger amounts of potential future RV losses, which Fitch views as the primary risk to auto lease ABS.

"It should be noted that elevated credit default levels will likely continue and some seasonal deterioration in RV performance in the next several months is likely to occur," executives said.

Overall, the company anticipates that vehicle values will remain well above 2008 lows over the next year, thanks largely to positive supply factors.

"Improving asset performance and the transactions' structural strengths, such as non-declining credit enhancement targets, will result in stable rating performance for U.S. auto lease ABS in the near term," pointed out Brad Sohl, a Fitch director.

Basically, in 2008 volatile fuel prices, a tough economy and domestic automaker stability concerns, along with other macroeconomic factors, led to a dramatic drop in used-vehicle demand, officials said.

While trucks and SUVs were the first to take the hit after oil prices skyrocketed, demand extended into other segments as consumer confidence continued to plummet. By November 2008, residual losses of Fitch's portfolio of rated auto lease ABS surpassed 20 percent of the securitized residual value.

Also, in December 2008, Manheim reported that its Used Vehicle Value Index declined to a 13-year low of 98.

However, since January of this year, the market is looking better. Used-vehicle values have ramped up significantly. And as of September, the Manheim Index hit 118.5, a 6.95-percent year-over-year increase, and up 20.9 percent over the December low.

Residual loss rates on Fitch's rated auto lease ABS ultimately mirrored this improvement. In fact, vehicle dispositions on the total portfolio in August led to nearly 10 percent gains of securitized residual value, compared to losses of more than 20 percent less than a year ago.

As residual performance has stabilized, this has rebuilt credit enhancement facilities that were drawn upon during the difficult 2008.

"The building of these credit enhancement levels serves to protect the issued notes from the potential for future residual losses should vehicle values deteriorate significantly," Sohl explained.

The improved ABS performance and residual loss coverage also led Fitch to recently upgrade several outstanding auto lease ABS.

Looking ahead, Fitch officials said, "While some level of seasonal deterioration is expected in the coming winter months, Fitch's RV performance outlook for the near- to mid-term is positive, even considering potentially weak demand, as the drivers of supply are expected to remain constrained.

"The 11-12 million unit industry average forecast for U.S. vehicle sales in 2010 is generally above 2009 expectations, yet remains significantly lower than yearly levels in recent years. This drop in new-vehicle sales is expected to limit the number of traded-in vehicles available for purchase," officials noted.

"Similarly, the decline in leasing penetration combined with lower fleet rental volume experienced in 2008 and 2009 will also contribute to fewer off-lease vehicles. Fitch remains cautious as vehicle values and realization rates remain subject to consumer demand factors linked to the health of the overall economy, as well as factors such as volatile fuel prices," executives remarked.

Moreover, credit defaults will likely remain elevated as unemployment continues to hurt performance, the company indicated.

"However, the positive asset performance outlook for vehicle values leads to Fitch's Stable Outlook for all AAA-rated auto lease notes. Similarly, subordinate auto lease ABS notes carry either Stable or Positive Rating Outlooks, with one class currently on Rating Watch Positive," officials reported.

"The structural strengths of non-declining credit enhancement targets, combined with a relative very short asset life, which results in rapid increases in loss coverage levels, contributes further to Fitch's view of stable near-time rating performance for the sector," the company concluded.