Key Takeaways
- Vehicle electrification is here to stay. As the market for used battery electric vehicles (BEVs) and plug-in hybrid vehicles (PHEVs) matures, more residual value data for these engine types is becoming available.
- Used BEVs generally depreciate more than PHEV vehicles while internal combustion engine (ICE) residual values generally outperform both BEVs and PHEVs. Hybrid electric vehicles (HEVs) also generally perform at least as well as ICE vehicles.
- In auto asset-backed securities (ABS) pools secured by a significant proportion of BEVs and PHEVs we generally factor the used vehicle price uncertainty in our rating analysis and have recently updated our approach based on used car price depreciation for these engine types.
- Previously, we considered PHEV and BEV vehicle types in the same combined EV excess concentration limit. To reflect residual value data trends, we have adjusted our analytical approach and split PHEVs and BEVs into two separate categories and updated our concentration limits in both Europe and the U.S.
What we're watching: A growing market share of BEVs and PHEVs will increase credit risk in auto ABS transactions. As BEVs and PHEVs currently depreciate more than ICE vehicles and HEVs, we have adjusted our recovery and residual value assumptions in securitized pools with more than 10% exposure to BEVs, and 30% and 20% exposure to PHEVs in European and North American transactions, respectively.
Why it matters: BEVs and PHEVs' faster depreciation than ICE vehicles and HEVs increases credit risk for auto ABS transactions backed by related loans and leases.
What we think and why: Secondhand values will continue to face pressure in the near term, as demand for used BEVs and PHEVs may not keep pace with new registrations growth, with added pressure from reduced new vehicle prices and improvements in battery technology and range.
Regional Diversification In EV Adoption Gathers Pace
In 2023, BEVs and PHEVs represented approximately 22% of new car registrations in Europe (eurozone, European Free Trade Association, and the U.K.). Adoption rates vary significantly across countries, with more mature markets in Norway and Sweden (EV penetration rates exceed 80% and 30% respectively), while Italy and Spain remain in the early-adopter phase (in the 8%-10% range; see our latest global auto sales forecasts.)
In the U.S. combined BEV and PHEV sales in 2023 represented 9.3% of total vehicle sales, with a slight slowdown in the second half and evidence of rising inventories for several models. With manufacturer subsidies from the Inflation Reduction Act (IRA) and investments in local supply chains, along with tax credits, we still expect significant launches at more affordable price points throughout 2025. Together, these factors could gradually reduce the volume gap with Europe.
To date demand for PHEVs and BEVs in both Europe and the U.S has been supported by several factors including government subsidies, tax incentives, carbon emissions regulations, and policies supporting EV ownership, while charging infrastructure and vehicle range is also improving.
However, more recently Europe's EV transition is slowing. Between 2022 to 2023 BEV and PHEV market penetration increased in China and the U.S. but remained flat at 22% across the EU15 countries. In some countries reduced subsidies has slowed EV sales. For example, in Germany--the EU's largest BEV market--budget cuts in December 2023 ended an EV subsidy program that had paid out about €10 billion since 2016 and BEV registrations subsequently fell 30.6% year-on-year in May 2024. We also believe that if consumer demand fails to accelerate, governments could soften regulatory stances on hybrid and ICE vehicles, further weakening the BEV outlook. Our forecasts suggest the share of BEVs and PHEVs as a percentage of total vehicle sales will exceed 30% in Europe and 14%-16% in the U.S. by 2025.
Table 1
| Electrification scenario | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Share of BEVs + PHEVs as a percentage of total sales | ||||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | 2025e | |||||||||
| Europe 15 | 3.7% | 11% | 18% | 22.2% | 22.3% | 25%-30% | ||||||||
| China (Mainland) | 4.7% | 5.5% | 14.0% | 27.0% | 32.9% | 35%-40% | ||||||||
| U.S. | 2% | 2% | 4% | 7.0% | 9.3% | 14%-16% | ||||||||
| Global | 2.5% | 4.2% | 8.3% | 13.0% | 16.5% | 19%-21% | ||||||||
| Europe 15--Germany, France, U.K., Italy, Spain, Belgium, Austria, Netherlands, Denmark, Finland, Sweden, Norway, Switzerland, Portugal, Turkey. e--Estimate. BEVs--Battery electric vehicles. PHEVs--Plug-in hybrid electric vehicles. Source: 2019-2022 EV Volumes, 2025 estimated by S&P Global Ratings. | ||||||||||||||
An extended transition would benefit legacy automakers if it enables them to maximize the cash flow from existing ICE models. It may also provide original equipment manufacturers (OEMs) more time to adjust their cost bases and increase their ability to absorb the higher production cost of BEVs. However, weaker net pricing and margins for BEVs, pressure on residual values for leased vehicles and lower remarketing values in the used car market (potentially absorbed by the OEMs' captive finance or industrial operations, depending on the arrangement) may counteract these potential benefits for legacy OEMs.
Carbon emissions regulations will also significantly influence the speed of the transition. The European Union (EU) regulator has set the most ambitious target of any bloc to reduce CO2 emissions by 55% by 2030 compared with 2021 levels and to phase out the sale of new ICE-powered cars and vans by 2035. Our base case projection is for this target to be reached ahead of time. The U.S. revised its Environmental Protection Agency (EPA) standards released in March 2024, which do not explicitly prescribe any battery-electric mix but do require accelerating year-on-year carbon reductions.
We expect some legacy OEMs will continue to use hybrid vehicles as a tool to reduce the compliance gap. These legacy OEMs will also likely optimize the trade-off between lower-margin BEV sales versus the cost of carbon credit purchases or penalties, as well as the share of hybrid vehicles produced. This gap will likely reduce in the second half of this decade in the EU and the U.S. once automakers have adapted their cost structures to facilitate a less painful transition. The U.S. and U.K. have also relaxed CO2 targets set by the U.S. EPA and the U.K. government, respectively. The U.K. is currently targeting a 22% zero-emission vehicle mix in 2024 and 28% in 2025 to facilitate a more gradual transition.
Concerns around EV battery health, charging infrastructure, and the range of older EV models has hampered consumer demand for used EVs. Secondhand prices may continue to face pressure in the near term from several factors, including lower new vehicle EV prices associated with price wars, and limited incentives for used-car buyers to move from secondhand ICE vehicles to used BEVs. BEV technology is advancing rapidly, which has many positive consequences such as increased battery ranges, reduced charging times, and improvements to connected capabilities. However, it also speeds up technological obsolescence for existing models and places pressure on BEV residual values. Increased competition from Chinese imports remains an important factor in the competitive landscape although the recent implementation of additional tariffs both in Europe and the U.S. will likely curb the growth in China's BEV exports to both regions (see "Rated China Carmakers Can Take The Heat From European Tariff Hikes On EVs").
Residual Value Performance Varies By Jurisdiction
In most markets across Europe and in the U.S., residual values for BEVs--expressed as a percentage of the list price--are typically lower than those for ICE vehicles. As more data is becoming available it is also clear that the residual value performance of PHEVs is generally stronger than BEVs but below ICE vehicles. HEVs also generally perform at least as well as ICE vehicles. This exposes auto ABS transactions backed by BEV receivables and PHEVs to heightened residual value risk, where applicable, and lower recovery prospects. Performance also varies by country. Given these differences we have adjusted our benchmark pool concentration limits to differentiate between PHEV and BEV performance.
EV residual value performance, when compared to ICE vehicles, differs significantly across European jurisdictions with secondhand BEV values generally trailing ICE vehicle values by 5%-20%, when expressed as a percentage of the initial purchase price. PHEV values have generally been within 5% of ICE values in most countries although in some countries future performance is expected to fall below these levels as shown in the forecasts from Autovista (see charts 1 to 3).
Chart 1
Chart 2
Chart 3
Rating approach
As the above charts show, residual values for PHEVs generally outperform BEVs in the used car market. We recently updated our additional benchmark pool concentration limits across auto loan ABS transactions globally to take this into account (see "Global Auto ABS Methodology And Assumptions").
In the update we divided the "plug-in hybrid or battery electric vehicle" category into separate "battery electric vehicle" and "plug-in hybrid" categories, and we established "plug-in hybrid" concentration limits of 20% and 30% for North America and Europe, respectively. Separate "battery electric vehicle" concentration limits of 10% remain for North America and Europe. All other variables are unchanged. The wider concentration limits for PHEV vehicles reflect the increased amount of data showing that they generally perform better than BEVs in both the U.S. and European used car markets.
Used car price evolution
Pandemic-related supply chain constraints caused new vehicle registrations to fall significantly at the start of the pandemic and used vehicle demand met reduced supply, which increased residual values for all fuel types. This trend has now reversed, with used car prices falling for all engine types, and BEV prices generally declining the most. BEVs are still feeling volume-related pressure or a mismatch between supply and insufficient demand within the secondhand car market. Unfortunately, this is unlikely to change in 2024 or 2025. While BEVs, and particularly PHEVs, are becoming increasingly popular, interest is insufficient to absorb the growing supply of used models. BEV residual value curves are also more volatile and may be biased by limited manufacturers/models in historical datasets. We expect this to improve as more EV models enter the market.
Charts 4 to 9 show the monthly residual value performance of different fuel types by country. To normalize the data in charts covering European countries, we define a measure of residual value as a 36-month-old vehicle's used market price with a 60,000 km mileage, expressed as a proportion of the initial new sales price.
Chart 4
Chart 5
Chart 6
Chart 7
Chart 8
Chart 9
Current incentive schemes have favored EVs for fleet lessees in some countries. While this has supported new EV registrations, oversupply in secondhand markets may persist as those vehicles come off lease given current low used EV demand from private consumers. Additionally, when supply starts to increase particularly as fleet managers sell their used fleet vehicles, demand may be insufficient, causing secondhand prices to fall. In Europe, the breakdown of sales by ownership shows that private sales account for just 40% of the total (S&P Global Mobility). The remaining sales were mainly to corporates, rental companies, and governments, i.e., "fleet managers." Since 2020, not only have private sales fallen below the 40% threshold (38% in third-quarter 2023), but this bucket, down 12% in 2022, is further declining--36% year-on-year in third-quarter 2023. In the U.S. one large rental fleet company sold 20,000 EVs from its fleet after acquiring them two years earlier noting low demand for them and higher collision and damage repair costs. In the U.K., used BEV volumes may be increasing due to previously leased new BEVs (linked to purchase incentive schemes) entering the secondhand market. This has caused supply to exceed demand given the lack of mass EV adoption, with common concerns cited by private individuals for not purchasing EVs including range anxiety, charging infrastructure, fast depreciation, and higher prices than ICE vehicles. Some evidence suggests transitional technologies such as HEVs and PHEVs have benefited from consumer concerns about BEVs. Consumers view these vehicles as more environmentally-friendly (than ICE vehicles), while offering the security of an ICE engine.
Analytical Approach To Stressing EV Values
In our view, the higher potential depreciation of both PHEVs and BEVs increases credit risk in auto ABS transactions in the short term from a recovery or residual value perspective, if applicable. As these risks have evolved, we have updated our approach to reflect developments in the car market and used car prices for different engine types.
When a securitized pool has a material portion of BEV assets above the 10% threshold and PHEV assets above a 20% or 30% threshold in North America and Europe, respectively, and as outlined in our criteria, we would typically apply additional stresses in our recovery and residual value analysis.
Some of the key analytical considerations made in our analysis of residual value risk and EV recoveries in auto ABS include:
- Does the lender differentiate its residual value setting by powertrain type (BEVs, PHEVs, and ICE or HEV)?
- How accurate has historical residual value performance been across different powertrain types compared to the forecast?
- How do recoveries compare among BEVs, PHEVs, and ICE or HEV assets?
Although several manufacturers are repurchasing EVs at contract maturity, at higher rating levels we generally do not give credit to manufacturer support/buybacks when formulating our residual value assumptions.
We will continue to monitor secondhand values of all vehicle engine types and adjust as appropriate our residual value assumptions for these vehicles, based on supporting data.
Chart 10 outlines our approach for assessing residual value risk in auto ABS transactions.
Chart 10
We incorporate an additional haircut to the excess EV assets in the pool in step 3 (see chart 10), to cover for the residual values that are subject to market-value risk. When the portfolio contains more EV assets than outlined as the pool concentration limit in our criteria--currently 10% for BEVs and 30% for PHEVs in Europe and 20% for PHEVs in North America--we apply a rating-specific haircut to the residual value.
This will also depend on the originators' strategies and residual value setting policies. We need to understand if originators are considering residual value performance in their residual value forecasts, whether they differentiate between ICE or HEV, BEV, and PHEV assets, and on what basis.
We also analyze recoveries for defaulted receivables. The rates and timings across jurisdictions and originators differ, as these variables depend on factors such as legal rights, financing terms, servicing intensity, liquidity of the used vehicle market, and idiosyncratic risks related to the vehicle brand and type. When analyzing recoveries for portfolios with a material portion of PHEV and BEV assets, we will consider this last factor.
Overall, in Europe and the U.S., residual value performance for BEV assets is worse than for PHEV vehicles with ICE and HEV vehicles performing best, and in Europe and the U.S. Autovista and Black Book are forecasting this trend to prevail throughout 2025-2026. This does not strictly depend on a country's specific EV adoption rate. Given the worse performance of PHEV and BEV assets, we stress our base-case recovery rates accordingly.
If a portfolio contains a material portion of PHEV and BEV asset assets, exceeding the concentration limit stated in the sector and industry variables associated with our global auto ABS criteria, and we believe that the originator is not distinguishing between the different powertrain types, we will typically apply the following adjustments for European and U.S. pools.
Table 2
| Credit adjustments | ||||||
|---|---|---|---|---|---|---|
| BEV concentration | Residual value stresses | Recovery rates | ||||
| <=10%* | We generally would not apply an additional stress for BEVs as we view the materiality of the exposure as limited. A diversification benefit may apply across manufacturers, models, and powertrains with a limited EV concentration. | We generally would not apply an additional stress for EVs as we view the materiality of the exposure as limited. A diversification benefit may apply across manufacturers, models, and powertrains with a limited EV concentration. | ||||
| >10%* | As a starting point in our analysis, additional residual value haircuts would generally apply to the excess exposure amount. | We may determine separate recovery rate assumptions between ICE vehicles and EVs and determine a weighted-average recovery rate for the pool based on the excess exposure. For example, we may apply a weighted-average recovery rate for the pool of: ICE recovery rate * (1-excess concentration) + EV recovery rate * (excess concentration). In Europe, rating-specific haircuts are then applied to the weighted-average recovery rate for the pool. In the U.S. our ECNL will typically account for a lower expected recovery rate on the BEVs. | ||||
| PHEV concentration | Residual value stresses | Recovery rates | ||||
|
<=30% IN EUROPE <=20% IN NORTH AMERICA |
We generally would not apply an additional stress for PHEVs as we view the materiality of the exposure as limited. A diversification benefit may apply across manufacturers, models, and powertrains with a limited PHEV concentration. | We generally would not apply an additional stress for PHEVs as we view the materiality of the exposure as limited. A diversification benefit may apply across manufacturers, models, and powertrains with a limited PHEV concentration. | ||||
|
>30% IN EUROPE >20% IN NORTH AMERICA |
As a starting point in our analysis, additional residual value haircuts would generally apply to the excess exposure amount. |
In Europe we may determine separate recovery rate assumptions between ICE vehicles and PHEVs and determine a weighted-average recovery rate for the pool based on the excess exposure. For example, we may apply a weighted-average recovery rate for the pool of: ICE recovery rate * (1-excess concentration) + PHEV recovery rate * (excess concentration). Rating-specific haircuts are then applied to the weighted-average recovery rate for the pool. In the U.S. our ECNL will typically account for a lower expected recovery rate on the PHEVs. |
||||
| *The residual value concentration is determined by the aggregate base residual values of BEVs or PHEVS expressed as a percentage of the total base residual values. The concentration for determining recovery stress is determined by the aggregate balance of the BEV or PHEV contracts divided by the total pool balance. These haircuts assume a long-established third-party forecaster of residual values with a solid track record of forecasting the residual values of the various types of vehicles in the pool. ECNL--expected cumulative net loss. | ||||||
We may further adjust our residual value assumptions in step two or six from chart 10 if we believe that the penalty is insufficient to capture the total residual value risk in the securitized pool.
What Could Change?
As new PHEV and BEV registrations increase and more manufacturers and models enter the market, a longer time series of residual value performance data will become available to assess if we should adjust our current EV thresholds. In some regions, PHEVs appear to be a transitional technology and full BEVs may prevail as the dominant powertrain type in the long term. BEV residual values may perform in line with historical ICE vehicles, especially if BEV battery warranties and battery health information placate consumer anxiety surrounding battery life. Secondhand BEVs may also play an increasing role in areas such as city driving where consumers are less concerned about range anxiety. In other geographical locations, especially where recharging infrastructure is less prevalent, more automakers are launching PHEVs to address the diverse consumer demand. However, in the near term, we believe BEV and PHEV assets represent increased credit risk in auto ABS transactions. This is particularly the case when residual value risk is present, and currently the risk from BEVs is greater than from PHEVs as reflected in our updated excess concentration limits.
Despite an eventual inflection point where we expect ICE vehicle demand will drop, causing their residual values to fall lower than those for BEVs and PHEVs, we believe the short tenors of our rated auto ABS transactions will mitigate any resulting risk for ICE vehicle receivables.
Furthermore, notwithstanding the 2035 phaseout of CO2-emitting vehicles in Europe, it will still be possible to drive existing ICE vehicles after 2035. Similarly in the U.S. while the Biden administration's emission revised standards for new light-duty vehicles dictate reduced greenhouse emissions by almost 50% by 2032 and certain states, such as California, require an increasing percentage of new passenger vehicle sales to be zero-emission by 2026 through 2035, to our knowledge no bans on driving existing ICE vehicles apply. Combined with the short weighted-average life of auto ABS transactions, we consider for currently rated transactions, the risk of used ICE vehicle prices declining in the longer term to be mitigated. Therefore, we do not believe any adjustments to our residual value and recovery stresses for ICE vehicles are warranted.
Technological breakthroughs, a change in government policy both relating to infrastructure and incentives, or a change in supply dynamics, such as trade wars or an increased range of affordable models could all change this outlook.
Related Criteria And Research
- Rated China Carmakers Can Take The Heat From European Tariff Hikes On EVs, June 17, 2024
- Global Auto Sales Forecasts: Slower EV Growth Offers Temporary Relief To Legacy Automakers, April 25, 2024
- Electric Vehicles Amp Up European Auto ABS Risk, Nov. 29, 2023
- Asset Price Risks: European Auto ABS Appear Resilient To A Potential Fall In Used Car Prices, Nov. 29, 2022
- How Will The Electric Revolution Impact The Credit Quality For The Global Auto Industry?, Oct. 20, 2022
- Global Auto ABS Methodology And Assumptions, March 31, 2022
- What's It Worth? The Rise Of Electric Vehicles In European Auto ABS, Nov. 30, 2021
This report does not constitute a rating action.
| Primary Credit Analyst: | Doug Paterson, London + 44 20 7176 5521; doug.paterson@spglobal.com |
| Secondary Contacts: | Amy S Martin, New York + 1 (212) 438 2538; amy.martin@spglobal.com |
| Agustina Lopreiato, Madrid +34 914 23 32 24; agustina.lopreiato@spglobal.com |
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