Auto loan and lease ABS will experience worsening recoveries and heightened performance pressures should vehicle values continue to fall and supply continue to swell, according to a Fitch Ratings report analyzing stress-test data.
Losses have been gradually trending higher since 2016 and the possibility of higher defaults “becomes more tangible if increased competition, a decline in sales, and looser underwriting standards converge,” Fitch Director Margaret Rowe said. “Incentives and OEM spending is also up in each of the last three years and may further weaken used-vehicle values, which will make managing vehicle production levels more critical over the next two years.”
Fitch stress-tested its rated auto ABS under a “moderate” scenario — representing a 20% reduction in recoveries — and a “severe” scenario — representing a 50% reduction.
Results find that the 20% reduction showed no rating deterioration for both loan and lead ABS. But the 50% reduction revealed that subprime auto loan ABS could experience downgrades of one category or more for their subordinate tranches. Rowe attributes this to their reliance on excess spread.
“Downgrades would likely be concentrated to the most junior subordinated notes of a subprime deal in the most severe scenario,” Rowe said.
However, high investment-grade ratings in both asset classes would experience “little to no impact” and remain “stable” under the “severe” scenario, according to the report. Fitch also expects a number of upgrades in 2018 for more seasoned issuances and notes growing credit enhancement levels, swift amortization, and added lease protections due to the inclusion of “more conservative” securitization mark-to-market ALG residual values.
To download the full study titled, “Supply & Severity: Will Swelling Used Vehicle Supply Impact Auto ABS Ratings?” click here.
