Depressed Car Values at Hertz is a Bad Sign for Captive Remarketing

Car rental company Hertz Global Holdings Inc. announced a 14% per unit depreciation in its used car values year over year, which significantly lowered the value of its fleet, the company said in its third quarter earnings report.

The depreciation lowered per unit car values by $304, which resulted in a $39 million hit to its estimate of the overall residual value of its car fleet.

“A customary vehicle depreciation rate review near the close of the third quarter resulted in a substantial depreciation adjustment, particularly on compact and mid-sized vehicles,” said Chief Executive John Tague in a statement. Those compact and mid-sized vehicles also made up a higher percent of the company’s fleet year-over-year, the report stated.

If used car prices continue to depreciate, the value of a leased vehicle coming back to a captive is reduced — even for car loans, the assumed value of collateral also takes a hit.

Depressed used car values, as well as borrowers proving less creditworthy than expected, have long been signs of a downturn in auto finance, however the former often gets too much attention, according to Tom Webb, chief economist for Manheim Consulting.

Manheim’s own Used Vehicle Value Index rose 0.6% in October YoY, but that is just one of many factors to consider Webb told Auto Finance News.

“Certainly recovery rates are impacted by a host of other valuables other than just used car value, most notably the loan to value ratio that the vehicle was put out at, the accuracy of that value in the loan to value ratio, and at what point in the loan did the recovery occurred at,” Webb said.

He added that lenders are expecting depreciation rates and charge offs to rise and a number of individual lenders are reworking their underwriting to address it.

“I don’t think it’s surprising that we’ve had some increase in the severity of loss,” Webb added. “The overall frequency of loss is still not a problem for most lenders.”