Fitch Ratings has fired yet another shot across the subprime bow. This week, Fitch analysts wrote that most subprime auto transactions on the ABS market do not warrant high investment grade (‘AAsf’ or ‘AAsf’) ratings due to the unique risks involved in the sector and instead, they should be capped at ‘Asf” or lower.
Subprime issuance makes up 23% of all auto loan ABS.
Still, Fitch issued that opinion with a caveat, saying that media comparisons of subprime auto to the mortgage market of 2006-2007 should be limited. That’s because the auto market is much smaller, the asset depreciates and automobiles are much less integral to the economy than housing. Nonetheless, the media attention surrounding the space could impact investor moods.
That said, the voice of caution coming from Fitch has been consistent. Analysts Kevin Duignan and John Bella write that they have observed and anticipated declines in asset quality as lender competition has intensified in the space. They also say that many auto finance companies “suffer from dependence on securitizations for their funding needs.” They say that could lead to higher rating volatility. Sole reliance on ABS can leave lenders overly exposed to market volatility and that can influence business practices that could ultimately impact investors and consumers alike.
Fitch also believes negative media attention could spook private equity out of the space, leading them to pull credit lines for several lenders simultaneously. It is dangerous to assume that larger lenders would automatically step up and support a wave of consolidation, according to Fitch, and it is unclear whether some smaller lenders would be left stranded and their borrowers under-serviced should private equity dry up.
That, the analysts write, is the key reason for the ratings cap Fitch would impose on transactions from many subprime auto loan ABS issuers.
