All quiet on the auto ABS front

The auto asset-backed securities market has been chugging through the first four months of the year in a welcome reprieve following a turbulent 2023. Auto asset-backed securities (ABS) volume hit $62.4 billion as of April 19, outpacing 2023 year-to-date volume by 38.7%, according to JPMorgan Securities . That’s nearly half of 2023’s $146 million of auto notes, according to an Auto Finance News analysis of securities data. The wider ABS market was up over the first quarter of last year, Ines Beato , senior vice president, sector lead of U.S. ABS ratings, at Morningstar DBRS , told AFN . “We have a pretty healthy pipeline,” Beato said. “I would expect at least in the near future that kind of elevated volume to continue.” Still, origination volumes have been trending downward for many auto lenders, which could slow issuance volume later in the year, Beato said. “Part of that [slowdown in originations] is credit tightening and intentional. And the other aspect of that is just affordability that is starting to affect consumers — they’re kind of priced out of the loans,” she said. “All of that is going to affect origination volume, and ABS is correlated to loan originations,” Beato said. “We expect that to impact the second half of ’24, albeit on dollar volume, the average loan balances continue to be elevated, given that used-vehicle values and new-vehicle values are high. So that may offset some of the decline.” Timing the market Some issuers in the auto ABS market may be pulling their funding plans forward to get ahead of any market volatility in the latter half of the year arising from the U.S. presidential election, Brian Ford , head of structured finance research at Kroll Bond Rating Agency , told AFN. “We’ve seen increased issuance across a number of asset classes,” Ford said. “Some of this might be front-loaded.” Interest rate stability following the Federal Reserve ’s indication earlier this year it would hold interest rates steady ahead of potential cuts later in the year could also be driving issuers to market, Ford said. “Previously, as interest rates are rising, the cost of the debt was rising in real time as it was being issued,” he said. “It was priced at current market rates, but the loans that were being actually securitized were often originated three, six, nine months ago. “You’re finally seeing more alignment in the asset liability matching of new issue volumes, which makes it more profitable,” Ford said. Spreads on auto ABS paper have been “stable and tight,” Ford said. In fact, spreads on single-A rated, prime auto notes landed at 120 basis points (bps) over Treasuries as of April 18, according to JPMorgan Securities. That’s the lowest they’ve been since the first week of May 2022. Similarly, spreads on single-A rated, subprime auto paper hit 115 bps over Treasuries as of April 18, the tightest they’ve been since March 10, 2022. Bank, credit union, floorplan issuances up Banks and credit unions have also increased issuance volume this year, which has helped fuel an increase in total issuance volume, Amy Martin , managing director and sector lead of auto ABS at S&P Global Ratings , told AFN. “The bank volume, from what we hear, is being driven by new proposed regulations that would increase the capital requirements for banks holding auto loans, …” Martin said. “That's not only increasing their ABS issuance, but also, we're seeing credit-linked notes in that space.” Ally Financial , Chase Auto , Citizens and Huntington Bank have all securitized this year, according to Finsight , which monitors securities. Huntington issued a prime issuance and a series of credit-linked notes through Bayview Asset Management this year, while Chase and Citizens have securitized two deals each for a total of $2.4 billion and $2.6 billion, respectively. Notably, Citizens has been using the securitization market to offload some risk and shore up additional liquidity following its exit from indirect auto last year, Martin said. On the credit union front, investors have shown a penchant for the rise in credit union-sponsored auto ABS deals, Elen Callahan , head of research at the Structured Finance Association , told AFN . Investors are attracted to credit unions because they are new issuers in the market, which allows investors to both diversify their portfolio and squeeze out additional yield, Callahan said. “On a very basic level, investors [are attracted to] the fact there is a new issuer, so they’re able to diversify across issuers, and that’s always good,” Callahan said. “There’s also a spread concession right now, because of the fact that they are new,” she said, noting that investors can get a higher return from credit unions when compared to a captive or bank for similar quality paper. So far this year, Valley Strong Credit Union came to market with its second deal of subprime auto loans bought from Exeter Finance , and Green State Credit Union issued its inaugural auto ABS deal backed by prime auto loans. In 2023, seven credit unions issued $2.03 billion in ABS deals, which was 167% more than the 2022 figure of $760 million, according to a February S&P Global report on credit union auto ABS issuance. Floorplan issuance has also been on the rise as inventory on dealership lots increases, helping push up total volume. As of today, five floorplan lenders — GM Financial , Kinetic Advantage , Nissan Motor Acceptance Co. , NextGear Capital and Westlake Financial — have issued $3 billion in floorplan ABS. By comparison, $3.6 billion of floorplan ABS deals were securitized in all of 2023. Credit performance split Credit performance has been split between asset classes but has been propped up by tax season, when consumer credit health is usually at its highest, credit rating agencies agree. “Delinquencies and losses are typically at their lowest given tax refunds season,” KBRA’s Ford said. “We’ll likely see credit performance start to deteriorate again in the coming months, but we don't expect any major deterioration as long as labor markets continue to come into humming along,” KBRA’s Ford said. At S&P Global, “we had been saying that it’s pretty much a tale of two cities, where it’s almost the best of times in prime and almost the worst of times in subprime because the 2022 vintage in subprime was posting significant deterioration relative to 2016 or 2017 levels,” Martin said. In fact, prime annualized losses in February decreased on a month-over-month basis for the first time in five months to 0.68%, according to an April 10 S&P Global report. Ally Financial, CarMax Auto Finance , Mercedes-Benz Financial Services , VW Credit and USAA were among repeat issuers posting higher losses, the report said. Similarly, annualized net losses in subprime decreased MoM in February to 8.04%, down from 9.39% in January but up from 7.48% in February 2023, according to the report. Sticky inflation will likely continue to pressure consumers, especially those in the subprime credit segment, Morningstar’s Beato said. “A majority of the transactions we rate in auto are backed by subprime obligors, and those are the most impacted by inflation,” she said. “We continue to think that there will be pressure on the consumer, so we’re expecting a continued deterioration in performance.” Register now for Auto Finance Summit East 2024 , May 1-3 in Nashville, Tenn., where lenders, dealers and fintech innovators gather in an event designed to bring the power of technology to a cross section of industry players. Visit AutoFinance.Live to learn more.

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