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Auto ABS Losses to Increase Despite Stronger Used-Vehicle Values

September 01, 2009

NEW YORK — Used-vehicle values continued to increase in July, which benefited auto ABS performance by constraining loss severity levels. But  loss levels are still expected to increase in the latter half of 2009, consistent with seasonal trends, said Fitch Ratings.

Used-vehicle values were up over 7 percent compared to the year-ago period and have posted gains for the majority of vehicle segments in virtually every month this year. However, poorer 2006 and 2007 vintages are expected to near peak loss levels in coming quarters and 2008 vintages are tracking at record high levels, according to Fitch.

“Auto lenders continue to contract portfolios across the board, given the tougher credit and capital markets environment, but the lack of competition has allowed lenders the ability to demand better terms on new loans, including higher finance rates and lower loan-to-values,” said Senior Director Meghan Crowe, “But higher credit losses and funding costs combined with the permanence of longer contractual agreements, now an industry standard, are expected to keep net profits for the auto industry below historical levels for some time.”

Still, funding costs have begun to rationalize to some extent, as the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) has provided more affordable liquidity to the sector. Subprime auto lender AmeriCredit Corp. completed a $725 million ABS transaction in July 2009 and was able to sell the non-TALF-eligible subordinated notes, primarily to traditional securitization investors.

However, loss frequency remains the biggest driver of loss rates on auto ABS this year, according to Senior Director Hylton Heard. “Unemployment remains historically high and job creation is stalled,” said Heard. “Consumers are still struggling to keep up with their monthly auto loan payments as personal bankruptcies remain at or near record levels.”

Fitch's prime 60+ days delinquency index was at 0.77 percent in July, 8.5 percent higher on a monthly basis. This was the fourth consecutive monthly increase in the index. Annualized net losses (ANL) rose by 3 percent to 1.74 percent in July over June, and remain 23 percent higher than in June 2008.

Despite declining asset performance in 2009, prime 'AAA' auto ABS ratings performance remains stable. Fitch has issued eight upgrades on prime auto ABS in 2009, vs. 14 during the same period in 2008. Negative rating actions have been minimal in 2009, with just three downgrades.

In the subprime sector, 60+ days delinquencies jumped to 4.26 percent in July, a 10.6 percent rise over June. Subprime ANL were at 7.06 percent in July, 6.2 percent above June.

$55.5 billion worth of prime and subprime auto ABS compose Fitch's indexes. The prime auto ABS index total nearly 70 transactions, while the subprime index comprises over 30.

Fitch's outlook for the auto finance industry remains negative for the remainder of 2009 given high unemployment rates, reduced profitability, and the difficult, albeit modestly improved, funding environment. However, consistent funding availability could ease rating pressure for the non-diversified auto lenders significantly over time, the ratings firm said.

“Rating action for larger, more-diversified, non-captive lenders is not likely to be driven by the performance of auto finance businesses alone, although auto segments will continue to contribute to negative rating momentum,” Fitch said.

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