Fitch: U. S. Subprime Auto ABS Losses Jump, Now Nearing 9%
Fitch expects annualized losses to move higher for the remainder of 2016. This is particularly true for subprime auto ABS losses which were 27% higher in August on an annual basis, and eclipsed 8% as Fitch has predicted they would a few months ago. At its current pace, Fitch projects subprime auto losses to pierce 10% by year-end.
Factors driving performance include the aforementioned weaker wholesale vehicle values, higher losses from the 2013-2015 vintage pools which have marginally lower credit quality, and historical seasonal patterns during the fall months.
Prime 60+ day delinquencies were at 0.41% in August, 2% higher than in July but were 17% above the level recorded a year earlier. Annualized net losses (ANL) jumped 25% month-over-month (MoM) in August, hitting 0.60% and were 11% higher versus August 2015.
60+ day subprime delinquencies rose to 4.86% in August, up 6% MoM and 22% year-over-year (YoY). Subprime ANL leapt 20% month-over-month (MoM) to 8.89%, and were 27% higher versus August 2015.
There are a couple of notable factors driving losses higher in 2016. Firstly, weak 2013-2015 vintages are contributing to loss rates, including elevated losses on extended term contracts (loans with terms of over 60 months) that default. Additionally, despite the current strength of the wholesale vehicle market, used vehicle values will come under pressure from slowing consumer demand and rising supply in the latter part of the year and early 2017. This trend will slow auto ABS asset performance over the next 12 months.
New vehicle sales dropped below 17 million units in August, a sign that the market may have peaked. Used supply is rising fast driven by higher off-lease vehicles and trade-in volumes. Additionally, inventory levels and incentives are rising. Combined, all these trends are negative and will pressure used values going forward and expect to see lower recoveries in auto ABS transactions as a result.
It is important to reinforce that the mix of Fitch's subprime auto ABS index has changed over the past two years with the influx of new subprime lenders. This mix of second - and third-tier subprime lenders, now totaling approximately 20, make up a larger part of the index on the back of rising auto sales starting in 2012, coinciding with the expansion of auto lending, particularly in lower subprime credit buckets that these lenders focus on.
As of August, the two large subprime platforms rated by Fitch - General Motors Financial's AMCAR platform and Santander Consumer USA's SDART platform, totaled just 54% of the subprime index down notably from 84% in 2013.
However, it is important to note that despite higher loss levels in 2016, these rated outstanding AMCAR and SDART ABS transactions remain within Fitch's initial forecasts. As performance has slipped in the past year, Fitch continues to adjust its base case loss proxies for new transactions accordingly, to address future asset performance expectations. Fitch has issued 52 upgrades in 2016 through August, within range of the level issued during the same period in 2015. The outlook remains stable for asset performance and positive outlook for ratings performance through 2016, with upgrades continuing at a strong pace.
Fitch's auto loan ABS indices track the performance of $96.3 billion of outstanding collateral, of which 60% is backed by prime collateral and remaining 40% subprime.
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