Auto ABS: Anchoring the industry

Despite the COVID-19 pandemic sending waves through the auto finance industry during the past year, the asset-backed securities market continued to act as an anchor, holding lenders steady.  

In March 2020, the coronavirus pandemic contributed to economic fallout that hit every aspect of the auto finance industry. The auto ABS market initially ground to a halt as uncertainty surrounding liquidity and funding loomed, prompting concerns from prime and subprime lenders who rely on the secondary market for funding. It didn’t take long, however, for the ABS market to prove its resiliency.  

By the end of April 2020, multiple auto lenders had funneled a combined $6.1 billion in issuances to the market, sparking a return that continues today. 

As of July 16, 2021, auto ABS issuances on loans, leases, fleet and rental cars, were up 65% year over year to $74.4 billion, outpacing even 2019’s year-to-date volume of $66.2 billion.  

Broken down, issuances in the prime sector fell about 5% YoY, while subprime issuances increased 30% to 40% YoY as of mid-July 2021, Brian Ford, senior director and head of structured finance research at Kroll Bond Rating Agency, told Auto Finance News. This shift was largely due to subprime lenders’ heavy reliance on capital markets to secure funding. 

Still, low benchmark interest rates and elevated used-vehicle values continue to prop up the auto ABS market, which is also benefiting from federal aid to consumers, according to a July 14 Fitch Ratings report. Used-vehicle prices jumped 18% in May and June due to tight inventory made worse by the ongoing microchip shortage and production challenges.  

“Given the strength of the used–car market and where funding rates are right now, I would expect subprime issuers … to be really tapping the ABS market throughout the remainder of the year, especially as the economy reopens and borrowers are willing to spend more and continue to purchase the vehicles,” Ford told AFN.  

On the prime side, vehicle loans originated in late 2019 contributed to a strong first half of 2020, which was followed by a lull in issuances in the fall, Ford said. 

“I would expect that to pick up as manufacturers start to work through their supply chain shortages and more new cars start to roll off the assembly lines. I would expect more sales to occur and there to be more on issuance,” he said. “I don’t think there’s any change in the funding plans of the auto loan captives, it’s just likely there’s been lower SAAR and less production. As that picks up, I’d expect them to continue to use the ABS market as their primary funding source.” 

From credit cards to cars 

Investors are flocking to the auto ABS market due to the decline in credit card issuances, another short duration bond that is attractive to investors. Credit card issuances on the secondary market are largely on the decline due to consumer spending habits as they pay down debt with excess capital provided by tax reimbursements and three rounds of government stimulus. 

In fact, credit card issuances in 2021 are nearly half of what they were pre-pandemic. Banks have issued $6.8 billion in credit card securities as of July 16, 2021, compared with a total of $12.9 billion during the same period in 2019, according to JP Morgan Securities. On the other hand, auto ABS issuances totaled $74.3 billion as of July 16, compared with $66.2 billion in 2019. 

Credit card issuance volume has fallen during the past four to five years as banks and other credit card issuers instead rely on retail deposits, which provide a cheaper source of funding than the securities market. While lenders such as Bank of America and Capital One, for example, still have open lines in the credit ABS market, they rely on it less than they used to.  

This shift has pushed investors who typically tap into credit card security issuances toward the auto ABS market, Ford added. “As ABS portfolios run off, the short duration assets in general, portfolio managers are having to shift more to other areas, autos being the main one, to kind of fill that ABS bucket of theirs,” he said.  

ABS credit card issuance volume has been “really low” as “big players are not tapping into the market,” Chris O’Connell, a senior vice president at DBRS Morningstar, told AFN.  

The number of credit card deals issued in the market has been declining the past few years, with 52 deals issued in 2018, 31 deals in 2019, and seven deals in 2020, O’Connell said. So far in 2021, nine deals have been issued totaling $6.7 billion. “With rates where they are, banks have a lot of options. As a result, the banks are not issuing in the ABS market,” he noted.  

Banks have pulled back on both credit card and auto ABS issuance as a result of federal stimulus bolstering consumers’ savings accounts, added Amy Martin, senior director of structured finance at S&P Global Ratings. “These banks are loaded with a lot of low-cost deposits … people are saving a lot of the money they’re receiving.”  

Bank of America Auto Trust, for one, hasn’t issued a new deal since 2012, according to Finsight, a company that monitors securities issuances. Capital One Prime Auto Receivables Trust’s latest issuance was for $1.3 billion in February 2020, which followed two issuances in 2019 totaling $2.6 billion.  

Auto ABS issuance will likely remain propped up for the rest of the year, Nicky Dang, head of U.S. consumer ABS for Moody’s Investors Service, told AFN. “Auto is in a unique situation because of the short duration,” she said. “Investors who used to invest in both credit card and autos — because of the duration and safe nature of the asset classes — now have only auto to invest into.”

Auto Finance Summit, the premier industry event, returns October 27-29 in Las Vegas. The Summit continues to bring together the best and brightest in the industry year after year for unparalleled networking and professional education. To learn more about the 2021 event and register, visit www.AutoFinanceSummit.com.