Based on last week's announcement of Chrysler LLC filing for Chapter 11 'pre-packaged' bankruptcy under Section 363, ALG has adjusted the residual values for Chrysler brands for the current May/June 2009 edition-Chrysler brands' residual values have been lowered by ~6 ppts on average on a 36-month level. Specifically, used market supply forecasts and demand side factors have been revised to account for the bankruptcy filing. ALG believes that in the short term, accumulated vehicle inventories across the Chrysler group will be released into the new market and hence used market prices will be adversely impacted due to larger supply. Furthermore, intrinsic new market demand for Chrysler vehicles is anticipated to drop more severely in the next few months with strong carry-over effects into the used market.
Note: MJ09 column represents current May / June 2009 edition for 2009MY, *MJ09 Edition column reflects ALG's adjustments to Chrysler brands.
The table above summarizes the Chrysler brands as well as other key competitor brands in terms of the 36-month percentage residual values (dollar residual value as a percentage of typically equipped MSRP) at the brand level (cars, trucks and SUVs combined). The MJ09 Edition* column illustrates the adjustments made for the Chrysler brands (see figures in red) which is on average-6 ppts lower at the brand level. Hence, Chrysler brands are forecasted to return within the range of 29 percent to 32 percent of typically equipped MSRP as opposed to the 35 percent to 38 percent set in our official guide books for the May / June 2009 edition.
The residual value adjustments to the Chrysler brands have been made after careful consideration of the estimated demand and supply dynamics in the new and used market due to the announcement of Chapter 11 (Section 363) bankruptcy. We also expect increase in new vehicle incentives to offset the demand challenges.
ALG expects that in the short term, excessive new vehicle inventory will have a negative impact on used market values; inventories are anticipated to be unloaded into the market within the next few months with implicit effects on new and used prices. In the longer term ALG forecasts a reduction in supply in the used market as a consequence of the re-organization which is positive. Intrinsic new demand measured by consumers' perception for Chrysler vehicles is predicted to be substantially weaker in the short term as a direct consequence of the bankruptcy filing-consequently, used market demand is anticipated to suffer proportionally or even more. Dealer closings will further exacerbate the supply/demand dynamics. Over the next six months, the used market is forecasted to weaken significantly.
ALG has leveraged past examples of brands going out of business or being sold to establish comparative analytics on the demand and supply side. In order to derive the estimated impact for the Chrysler brands under the circumstances of Chapter 11 bankruptcy, these insights have been considered and molded into our residual model.