While Hurricanes Harvey and Irma will likely have minimal effect on the credit quality of U.S. corporate issuers, auto asset-backed securities transactions may be impacted temporarily, according to a multiples reports from rating agencies.
“Although it is still too early to assess the full impact these hurricanes will have on auto loan ABS performance, S&P Global Ratings expects higher delinquency rates and defaults on a temporary bas — mainly for transactions with greater exposure to the affected areas and lower-credit-quality obligors (especially smaller subprime issuers regionally concentrated in the South),” analysts said in an S&P Global report released last week.
Kroll Bond Ratings Agency also expects that there will be some near-term impact on delinquencies for borrowers in the affected regions, considering the extent of the flooding and damage. However, “the impact will take several months and perhaps years to unfold,” KBRA noted in a report, and the rating agency is currently evaluating the impact of existing auto-security portfolios.
Cash flows into securitization trusts of auto floorplan, loan, and lease transactions will temporarily decline as servicers work through payment arrangements with dealers and customers whose vehicles were damaged or destroyed in the hurricanes, Moody’s Investors Service said in a mid-September report.
But at the same time, vehicle sales will increase as consumers look to replace damaged or destroyed vehicles, which could help maintain payment rates in auto floorplan ABS. Harvey and Irma may have done more vehicle damage than any storm in U.S. history, destroying as many as 500,000 vehicles, according to Cox Automotive, while Black Book estimates up to 1 million might have to be replaced.
The possible demand from consumers who need to replace vehicles was reiterated by S&P Global Ratings. “Select issuers in transportation sectors could be hurt by the hurricanes … business disruptions will likely be temporary and partly offset by pent-up demand later on,” according to the S&P report. “We don’t expect much — if any — ratings impact for North American financial institutions from the recent hurricanes.”
For more content like this, check out the 17th annual Auto Finance Summit, which will take place on Oct. 25-27 at the Wynn Las Vegas. To learn more about this year’s event — or to register — visit the Summit’s homepage here.
