NEW YORK — The majority of 'AAAsf' rated U.S. Prime Auto Loan ABS outstanding classes of notes are comfortably able to withstand a hypothetical recession and material declines in used-vehicle recovery rates, according to recent stress tests conducted by Fitch Ratings.
Under the moderate scenario, Fitch would expect all 'AAAsf' rated notes to likely remain rated investment grade (IG), with nearly three-quarters of these ratings expected to remain rated 'AAAsf,’ while nearly 90 percent would stay in the top two rating categories.
Fitch believes the likelihood of the severe scenario (unemployment rising to 20 percent and recovery rates dropping to 25 percent) occurring is extremely remote. However, if this were to occur, Fitch's analysis found that the scenario would likely cause 67 percent of outstanding 'AAAsf' rated notes to be downgraded to non-investment grade (NIG), while the remaining 33 percent would be expected to remain rated IG.
Fitch subjected its ratings on prime auto loan ABS to two stress scenarios, moderate and severe, by stressing the two factors that most directly affect asset performance, U.S. unemployment and recovery rates on used-vehicle values of defaulted and repossessed loans.
The moderate scenario mimics conditions observed in the United States during the recessionary 2008-2009 period. Fitch calibrated the severe stress scenario to be substantially more stressful, assuming unemployment would grow above peak levels. It also assume wholesale vehicle values would fall below historical lows experienced during the 2008-2009 period.
To gauge the impact on outstanding 'AAAsf' ratings, Fitch stressed unemployment from a base level of 6 percent to 12 percent under the moderate scenario, and 20 percent for the severe case. Fitch reduced assumed wholesale vehicle values from an historical average of 50 percent down to 40 percent under the moderate case and 25 percent for the severe case.
According to results, seasoned transactions (2006-2008 vintages) which are producing some of the highest loss rates to date could withstand even the severe stress since they are largely paid off, and have built significant enhancement.
Transactions originated during the 2009-2012 period, which are producing some of the lowest loss rates to date, are more susceptible to downgrades under the severe scenario, but mostly will be able to withstand even this stress. Under the moderate scenario, most 'AAAsf' ratings issued during this period would remain 'AAAsf' and no ratings would be expected to drop below IG.
The moderate scenario was designed to be consistent with what was observed during the 2008-2009 period. The severe scenario assumed a dramatic downturn in the U.S. economy, with unemployment rising to 20 percent and vehicle values declining to levels never seen before.
Of note, the rating migration under the moderate scenario is much more severe comparable to the actual rating migration experienced during 2008-2009. During this period, Fitch only issued three downgrades on IG-rated prime auto loan ABS notes. Further, virtually every subordinate note issued and rated by Fitch experienced positive ratings actions, including those from the 2006-2009 vintage transactions.
The stress tests were carried out as part of a wider study on how robust global structured finance ratings are to a prolonged economic downturn. Fitch expects to conduct similar stress test reports in the coming months for other structured finance asset classes.
The “US Prime Auto Loan ABS Stress Test” is available here.