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High Gas Prices Driving SUV and Truck Values Lower in U.S. Auto ABS, Fitch Reports

July 8, 2008

NEW YORK -- High gas prices are taking their toll on the recovery values of sport utility vehicles and trucks, leading to higher loss severity on defaulted loans in many U.S. auto loan asset-backed securities, according to Fitch Ratings.

Eroding wholesale values on larger vehicles appear to have been pushed over the edge by the practical and psychological impact of $4 gas. The increase in loss severity and default rates will place negative pressure on the subordinate bonds of certain auto ABS transactions. Most at risk are the transactions originated since mid-2006 and have large exposures to the SUV and truck segments. Many of the Detroit Three's captive finance companies transactions fall into this category.

U.S. auto manufacturers' vehicle sales in particular, are heavily weighted towards SUVs and trucks. A typical domestic auto ABS transaction has an average SUV and truck concentration of 60-75 percent of the pool, exposing it to greater impact from the decline in vehicle values.

Non-U.S. manufacturers such as Honda, Hyundai, and Nissan, on the other hand, tend to have lower concentrations of these vehicle types, typically less than 50 percent and in some cases as low as 20 percent reflecting their differing product mix.

The Manheim Used Vehicle Value Index, which Fitch uses as a gauge of health of the wholesale or used car market exhibited a 21 percent drop in the value of large-pickup trucks and a 24 percent decline in large-SUVs on a year-over-year basis.

With trends already negative, historically high gas prices appear to be causing an accelerated decline in these vehicle values. "The $4 gas threshold is likely the primary culprit in the one month drop of 10 percent in used SUV and truck values witnessed this month, one of the largest monthly declines ever," said managing director John Bella.

The combined impact of increasing defaults and loss severity, with recent trends in loss severity moving from a historic average of 50 percent to nearly 60 percent, has driven Fitch's ANL index up by 78 percent over the same time last year. Despite the dramatic drop in SUV and truck values, Fitch has not yet seen any evidence that default frequency has been directly impacted as some had feared. The ‘walk-away’ behavior demonstrated by subprime mortgage borrowers does not appear to be driving defaults in US auto ABS.

In its rating analysis of auto ABS transactions, Fitch has and continues to take into account the negative trend in wholesale vehicle values, particularly for SUVs and trucks. Base case loss proxies are derived on a pool specific basis in order to reflect the differing collateral mix from transaction to transaction. Fitch forecasts loss proxies by SUVs/truck and car segments in addition to separately considering other stratifications including credit tier and loan structure. In its analysis, Fitch stresses recovery rates for the overall pool as well as increasing loss severities for the SUV and truck segments.

While Fitch applies significant stress to defaults and recoveries, the unprecedented drop in vehicle values over the past three months could cause actual net losses to be in excess of Fitch’s initial expectations for certain pools. In these cases, negative rating actions on certain subordinate bonds become more likely.

Fitch is in the process of reanalyzing transactions with higher exposure to declining SUV and truck values. As a result certain transactions have been placed ‘Under Analysis’ on Fitch’s SMARTView pages or on Rating Watch Negative. Further analysis may lead to additional rating actions, including Rating Watches and downgrades.

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