FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
March 27, 2000
Toyota Auto Lease Trust 1998-C
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(Exact name of registrant as specified in its charter)
CALIFORNIA 333-65067 33-0755530
(State or Other (Commission File (I.R.S. Employer
Jurisdiction Number) Identification No.)
of Incorporation)
c/o Toyota Motor Credit Corporation
19001 South Western Avenue
Torrance, California 90509
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(Address of principal executive offices)
(310) 787-1310
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(Registrant's telephone number, including area code)
<PAGE>
ITEM 5. OTHER EVENTS
On March 27, 2000, Toyota Motor Credit Corporation
("TMCC"), in its capacity as servicer of the Toyota Auto Lease
Trust 1998-C, arranged an analyst conference call on which it
discussed Moody's Investor Services, Inc.'s recent announcement
that it had placed several classes of Toyota Auto Lease Trust's
lease securitizations under review for possible downgrade.
A transcript of the conference call is attached hereto
as exhibit 20.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS.
(a) Not applicable.
(b) Not applicable.
(c) Exhibits
20 Transcript of conference call.
<PAGE>
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on behalf of the Registrant by the undersigned thereunto
duly authorized.
TOYOTA AUTO LEASE TRUST 1998-C
BY: TOYOTA MOTOR CREDIT CORPORATION, AS
SERVICER
By: /s/ George E. Borst
---------------------------------
Name: George E. Borst
Title: Senior Vice President and
General Manager
March 27, 2000
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ------------ -----------------------
20 Transcript of conference
call.
TOYOTA MOTOR CREDIT CORPORATION
TRANSCRIPT OF CONFERENCE CALL
Introduction
- ------------
Thank you for participating on this call. The purpose of the
call is to discuss Moody's recent announcement in which they
placed several classes of Toyota Auto Lease Trust's lease
securitizations under review for possible downgrade. On the call
today, I will broadly discuss TMCC's current and expected
residual value loss experience, the expected performance of the
lease securitizations and our immediate plans in response to
Moody's action.
Moody's Rating Action
- ----------------------
The classes specifically placed under review are:
- -- Classes A-2, A-3 and B of Toyota Auto Lease Trust 1997-A
- -- Classes A-2 and B of TALT 1998-A
- -- Classes A-2, A-3 and B of TALT 1998-B and
- -- Classes A-2, A-3 and B of TALT 1998-C
The class A-1 securities of 98A, B and C are not under review.
It is also very important to emphasize that the unsecured ratings
of TMCC and Toyota Motor Corporation, as well as TMCC's auto loan
and Gramercy Place securitizations are NOT under review.
According to Moody's, the ratings actions are a result of higher
than expected residual value losses in Toyota's auto lease
portfolio. The residual value losses are outside of Moody's
original expectations and are the result of a combination of
greater than expected turn-in rates and higher losses per vehicle
upon disposition. Credit defaults are not an issue, as Moody's
stated that "losses resulting from defaulting leases in Toyota's
portfolio and across all four securitizations are within
expectations."
Over the next three to four weeks, Moody's will more closely
examine the expected return rates and residual value realization
percentages for each of the transactions, based on the specific
pool characteristics of each deal. We will continue to work with
Moody's to assist them with their analysis of each of the
transactions. We, in fact, initiated the discussions on the
lease transactions to proactively raise potential issues and
begin an open dialogue. During the next few weeks, we will
consider pursuing various alternatives to address specific agency
concerns.
TMCC's Residual Value Performance
- ---------------------------------
Let me first comment on TMCC's recent residual value loss
performance. In general, TMCC's performance is better than that
of our competitors - at least of those that make publicly
available their results -- and is consistent with industry
trends. Those of you who are familiar with the leasing market
are well aware that the industry as a whole has been negatively
impacted by a number of factors over the past few years. A
highly competitive new car market with high levels of incentives
spending has certainly put pressure on used car pricing. The
increased popularity in leasing has also impacted used car
prices, as the increased volume of off-lease vehicles has
increased the supply of late model used cars in the market.
Based upon Bureau of Labor Statistics data, after averaging a
nearly 5% (4.9%) annual increase in used car prices in the first
half of the decade, the used car market has averaged only a 0.5%
annual increase in the second half of the decade - although we
have seen some recent improvement with the index up 3.5% in '98
and 1.2% in '99.
For the overall TMCC lease portfolio, return rates have remained
at elevated levels since rising rapidly in 1998. When I talk
about "return rates", I am referring to the number of returned
leased vehicles that are sold by TMCC in a given period as a
percentage of the number of leased contracts that were originally
scheduled to mature in that same period.
In the fiscal years ending September of 1996 and 1997, return
rates on the TMCC portfolio were only 14 and 18%, respectively.
In the last two fiscal years, return rates have trended much
higher at 40% for fiscal year 1998 and 47% for fiscal year 1999.
For the first quarter ending December 31, 1999, return rates were
51%.
Return rates and losses on returned vehicles are a function of a
number of factors, including the impact of competitive new
vehicle pricing for core Toyota and Lexus models, the level of
incentives on new vehicles, the amount and types of accessories
included in leased vehicles and the supply of late model off-
lease vehicles.
Higher losses on returned vehicles also can have a direct impact
on return rates since the difference between the contractual
residual value and the market price can influence a lessee or
dealer's decision to purchase or return a vehicle. If the
residual value set in the lease contract is below market value,
both consumers and dealers are motivated to purchase the vehicle
at the residual value. The higher the contractual residual value
relative to actual market value, the more likely it is that the
car will be returned to TMCC. The increase in return rates from
1997 to 1998 can be partially attributed to higher losses per
returned vehicle in 1998.
We expect return rates to remain at elevated levels at least for
the remainder of the fiscal year. Having said that, however, our
return rates are at levels that are very manageable and are
significantly better than some of our peers.
Return rates -- or how many cars you're getting back - are only
one half of the residual value loss equation. The other half of
the equation is loss severity, or how much you're losing on the
cars that are being returned to you. And that is simply a
function of where you set your residual values versus the
realized prices obtained at the auction. In this regard, our
performance has remained fairly consistent on an overall
portfolio basis since 1998. Average losses on returned vehicles
have remained essentially the same for the last two fiscal years.
For the first fiscal quarter ending December 31, 1999, the
average loss was also very comparable to the prior year's
December quarter. The average loss as a percentage of the
residual value of returned vehicles did increase slightly to 16%
from 15% December quarter to quarter. Losses on returned
vehicles tend to be seasonal; losses are higher in the winter
months when demand for used cars is lower and improve with demand
during the spring and summer months. So we would expect, and
have already seen in January, February and to date in March,
significant improvement in average auction losses.
We continue to take steps to reduce residual value losses by
developing strategies to increase dealer and lessee purchases of
off-lease vehicles and by expanding the marketing of off-lease
vehicles through the internet. Internet sales of off-lease
vehicles to our dealer network represented over 10% of our
vehicle dispositions last year - in fact, we are one of the
industry leaders in this regard, with the dominant market share
in vehicles sold through this channel.
Going forward, absent any significant changes in macroeconomic
factors or in the used car market, TMCC expects residual value
loss performance to improve over time. Residual values on 1998
and newer models better reflect the impact of the competitive new
car market on used car prices and the higher residual value loss
environment experienced in 1998. We are constantly refining our
residual value setting process to incorporate changes in the new
and used car market and improve our ability to accurately set
residual values.
Regarding the Toyota Auto Lease Trust transactions, the 1997-A
transaction has reached a critical juncture as the 3 year leases
in the transaction - which represented approximately 60% of the
initial pool balance - have started to reach their respective
lease maturities. Based upon recent overall portfolio loss
experience which has shown recent seasonal improvement and our
expectation that this loss experience is sustainable, we do not
anticipate any investor losses, but do expect a reduction in the
amount of credit enhancement available to support the
transaction. Since a significant amount of the leases will
mature in the next several months, this portfolio should benefit
from the expected seasonal improvement in losses during the
spring and summer. We also are currently waiving our servicing
fee to provide additional enhancement to the transaction.
The 1998 transactions, which were structured and credit-enhanced
in a higher loss environment than the 1997 deals, provide higher
levels of credit enhancement that will enable them to withstand
higher levels of losses than 1997-A. Despite the additional
enhancement in the 1998 transactions, Moody's will examine each
of the deal's pool characteristics and cashflows to determine the
potential impact of losses on the credit enhancement built into
the deals.
Credit enhancement on the 1997-A transaction at deal origination
included:
Reserve Fund 2.50%
Transferor's Interest 2.00%
Class B subordination 6.00%
-----
10.50%
Excess Servicing 2.50%- approximate
Credit enhancement on the 1998 deals increased as follows:
<TABLE>
<CAPTION>
1998-A 1998-B 1998-C
<S> <C> <C> <C>
Reserve Fund 4.50% 5.50%* 5.50%*
Transferor's Interest 2.00% 2.00% 2.00%
Class B subordination 7.00% 6.50% 6.50%
----- ----- -----
13.50% 14.00% 14.00%
Excess Servicing 2.50%** 2.50% ** 2.50%**
_____________
* specified balance
** approximate
</TABLE>
Based upon recent overall portfolio loss experience, we do not
anticipate any investor losses on the 1998 deals. At issue is
the potential reduction in the amount of credit enhancement
available to support the transactions.
We have calculated the following breakevens for each of the deals
using a tape of current outstandings as of January 31, 2000.
These figures assume credit default rates of 65 basis points per
annum, no voluntary prepayments and that all vehicles that go to
full term are returned and auctioned.
Class A and B Breakeven Levels <F1><F3>
TALT 1997-A TALT 1998-A
----------- -----------
RV Loss RV Loss
Severity<F2> Severity<F2>
-------- --------
Class A 18.72% 20.98%
Breakeven
Class B 8.53% 10.75%
Breakeven
TALT 1998-B TALT 1998-C
----------- -----------
RV Loss RV Loss
Severity<F2> Severity<F2>
---------- -----------
Class A 19.85% 19.02%
Breakeven
Class B 11.74% 10.98%
Breakeven
[FN]
<F1> Modeling assumptions:
-- Assumes timely payments on lease contracts and no
delay in realization of auction proceeds.
-- Assumes Aggregate Net Investment Value, Adjusted Class
Balances and Reserve Fund Balances as of January 31,
2000 as reported in the February 25, 2000 Servicer
Certificates.
-- Assumes each Trust has fixed rate obligations as
described in the related offering documents.
-- Assumes 0.65% per annum of credit losses.
-- Assumes no voluntary prepayments or lease extensions.
-- Assumes servicing fee is waived in the TALT 1997-A
scenario.
<F2> As a percent of aggregate outstanding residual value, net
of defaults.
<F3> The actual characteristics and performance of the lease
contracts and leased vehicles may differ from the
assumptions used in preparing these materials, which are
hypothetical in nature. Changes in these assumptions may
have a material impact on the information set forth herein,
and in the characteristics and ultimate performance of the
lease contracts and the leased vehicles. No
representation is made that any performance or results
indicated herein will be achieved.
</FN>
You will note that the Class A investors can withstand very high
levels of residual value losses. Using the 1997A deal as an
example, the 18.7% residual value loss severity implies that
every vehicle currently outstanding, net of defaults, can be
returned and incur a 18.7% loss without the Class A investors
being impacted. Obviously, in each deal we will have voluntary
prepayments and not every vehicle that goes full term will be
returned.
A couple key disclosures should be made here. First, the 97-A
breakeven reflects the additional enhancement provided by the
waiver of TMCC's servicing fee. And second, when assessing the
residual value loss severity breakeven, TMCC's return rate data
must be used carefully. TMCC's return rate figures represent
returns as a percentage of originally scheduled residual value,
not aggregate outstanding residual value at any one point in
time.
As we move further along in the process with Moody's, we hope to
be able to provide additional information to you to allow you to
better assess the lease transactions. And, as I mentioned
earlier, we will continue to work with Moody's over the next 3-4
weeks to assist them with their analysis of the lease ABS
cashflows and will consider all available alternatives to address
specific agency concerns.
The foregoing discussion contain various "forward looking
statements" within the meaning of Section 27A of the Securities
Act of1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent TMCC's
expectations or beliefs concerning future events, including the
following: that return rates are expected to remain at elevated
levels at least for the remainder of the fiscal year; that there
will be significant improvement in average auction losses; that
residual value loss performance is expected to improve over time;
that the recent seasonal improvement in residual value loss
experience is sustainable; that with respect to the 1997-A lease
transaction, TMCC does not anticipate any investor losses, but
does expect a reduction in the amount of credit enhancement
available to support that transaction; that since a significant
amount of the leases will mature in the next several months, the
1997-A transaction's portfolio should benefit from the expected
seasonal improvement in losses during the spring and summer; that
there will be a seasonal improvement in residual value losses
during the spring and summer; and that with respect to the 1998-
A, 1998-B and 1998-C transactions, TMCC does not anticipate any
investor losses. Actual results could differ materially for a
variety of reasons, including: decline in demand for Toyota and
Lexus products; the impact of competitive new vehicle pricing for
core Toyota and Lexus models, the level of incentives on new
vehicles; the amount and types of accessories included in leased
vehicles; the supply of late model off-lease vehicles; the effect
of economic conditions; and the effect of competitive pressures
on the used car market and residual values and other factors that
could cause an increase in vehicle returns and disposition
losses.
I will now open the call for questions, although, due to legal
considerations, I may not be able to provide much more in
specifics than what has already been discussed.
Questions and Answers
- ---------------------
Q: In one of the transactions there is a return rate or residual
realization rate trigger. Has that been hit?
A: No, it has not. The Residual Value Test has three components
to it, all of which must be met to trigger an increase to the
Reserve Fund. The first component is that more than 25% of
the scheduled maturities are returned and sold, and that
trigger has been hit from time to time. The second component
is that the number of scheduled maturities must exceed 500
and certainly in many cases that has been hit. However, the
third component, in which the three month average matured
leased vehicle proceeds must be less than 75% of the average
residual values during that period, has not been met. A
second test that can trigger an increase to the Reserve Fund
deals with charge-offs. In terms of the charge-off test, the
3 month average charge off rates must be greater than 1.25%
and we have been averaging much less than that. A third test
deals with delinquencies. In terms of the delinquencies, the
3 month average delinquencies for the trigger threshold is
1.25%, and we are well below that for delinquencies over
sixty days.
Q: Has Toyota looked into whether specifically in any of the
transactions or portfolio as a whole whether there are
material differences in the residual value realization either
by leased terms, by the vehicle type and/or model year that
would affect one or more of the trust differently than the
others given the distribution of underlined products in those
trust?
A: I think, generally we expect the assets within the trust to
perform similarly to our overall portfolio. That being said
though, I think we do need to distinguish a couple of things.
In our overall portfolio we have a blend of 24 months, 36, 48
and 60-month contracts coming due at any one point in time
and so our aggregate portfolio performance is a blend of all
that. While in the lease ABS portfolio, the performance will
differ a little bit because, first, the primarily 24-month
contracts will come due, then 36 and then 48 and 60 but
within that we would expect the 36 month contracts to perform
similarly to the 36 month contracts in the overall portfolio.
In terms of the overall portfolio and the performance, I
think overall or generally we are being affected more by
macro factors, just the fact that we continue to have a very
competitive new car market, the used car market, although
having improved, still being relatively soft. We do have a
high supply of leased vehicles and so those types of factors
have an overall impact on the entire portfolio, whether we
are considering 24-month contract or 36-month contract or
Lexus or Toyota. Although there will be differing
performances from model to model, the overall impact is based
on these macro factors.
Q: Separately, is there any information that you're able to
disclose about how this may or may not affect your future
securitization plans?
A: Toyota remains committed to its asset backed program. It is
a core component of our overall funding program and it's
important to us. So, no, we don't anticipate this having an
impact on our future asset backed program.
Q: Do you have information about roughly where the leases in
these pools were booked versus ALG Guide at inception?
A: No, I don't have that readily available for this call and I
think generally Toyota's residual values are slightly higher
than ALG's but I don't have any specific deal to deal
information in that regard for this call.
