Can auto ABS weather the pandemic?
In the past few weeks, six auto lenders have jump-started the securitization market after a nearly one-month hiatus. CarMax Auto Finance, GM Financial, Hyundai Capital America, Nissan Motor Acceptance Corp., Santander Consumer USA and Toyota Financial Services combined to issue $6.1 billion of securitization volume without even having to tap the Federal Reserve’s emergency funding facility meant to attract investors.
Granted, some lenders scaled back the size of their securitizations. For instance, GMF’s $790.3 million April ABS transaction is 36% smaller than the captive’s January deal, while TFS’ $1.1 billion securitization was 31% smaller than its February deal.
One possible reason for the declining volumes is the higher price associated with the wider spreads on the transactions. In the Toyota deal, the spread on the A-2 tranche was 90 basis points over EDSF. That compares with a 9bps spread for the same tranche just two months earlier.
Yet the credit enhancement in this fresh batch of issuances is built to withstand higher losses. The reserve account as a percentage of the initial adjusted pool balance for five of the six deals increased to 1.00% from 0.25%. A reserve account is a line of defense against losses in a securitization.
On a dollar basis, HCA had to shell out $11 million into the reserve account for its $1.1 billion securitization. By comparison, the captive stashed $2.7 million for a comparably sized transaction back in October 2019. Meanwhile, CarMax’s reserve account shot up to $11.5 million from $3.9 million.
Subprime lender Santander saw its reserve account ratio climb to 2.00%, the equivalent of $20 million, from 1.00%, or $10 million. In addition, the overcollateralization requirement in Santander’s ABS deal more than doubled to 26.15% from 12.25% in the lender’s August 2019 deal. Overcollateralization is a form of credit enhancement that entails stocking away extra securities in case some in the initial portfolio performs worse than expected. Practically speaking, Santander will have to set aside an additional $261.5 million worth of auto loans to cover potential nonperforming loans in its $1 billion transaction. That compares with $122.5 million of overcollateralization previously.
Rating agencies have also adjusted expected loss rates in the April auto securitizations. For instance, S&P Global expects Santander’s latest ABS deal to experience cumulative net losses in the 18.25% to 19.25% range, up from a previous range of 15.50% to 16.25%. NMAC’s CNLs are anticipated to rise to the range of 1.50% to 1.70%, according to S&P, compared with 1.05% to 1.15% previously.
Combined, credit enhancement efforts will likely protect newly minted securitizations from the higher delinquencies expected as a result of COVID-19. But lenders face a threat from securitizations issued in 2019, and perhaps, even 2018, because those deals built in lower loss estimates and required less credit protection.
Subprime lenders, especially, are poised to encounter worsening ABS performance as the economy falters. To that end, Kroll Bond Rating Agency has put 21 securities totaling $866.6 million on “watch downgrade” and another 39 securities, totaling $1.8 billion, on “watch developing.” When establishing the cautionary ratings, KBRA factored in transaction performance, structure and break-even loss coverage multiples assuming an increase in defaults resulting from the economic slowdown and higher unemployment rates.
“Auto loan and auto lease ABS servicers have been granting disaster hardship loan modifications, extensions and waiving late fees for borrowers impacted by COVID-19,” the agency said. “While these modifications will keep borrowers current on their loans, it could result in lower monthly collections and reduced cash flow to the securitization trusts.”
Already, Bank of America has deferred tens of thousands of auto loans in recent weeks. At Ally Financial, 716,000 consumers — 18% of its customer base — had enrolled in a loan-modification program as of March 31, and nearly three-quarters of enrolled customers had requested a 120-day deferral. While those examples are unrelated to securitization, 220 of the contracts — less than 1% — in GMF’s most recent securitized pool had received a payment extension as of April 8, and other lenders will likely start to note similar figures.
As the recession plays out, it remains to be seen whether 0.25% reserve accounts will provide enough cushioning to withstand the effects of the shrinking economy. Perhaps auto securitization performance will follow the path forged throughout the credit crisis; 531 tranches were upgraded, 16 were downgraded and only two defaulted in S&P-rated securitizations from 2006 to 2011.
Those securitizations weathered unemployment levels that hovered around 8.7% from March 2009 to October 2011.
A key element of the COVID-19 situation is the drastic deterioration taking place. In the first two weeks of April, the Manheim index of used-vehicle values has plunged a record 11.8%. Some pundits expect the U.S. jobless rate to hit 20% by June. The economy overall shrank at a 4.8% annualized pace in the first quarter, and lenders have been stashing away billions of dollars in anticipation of loan losses.
Presumably, the most dramatic securitization losses will be felt by smaller subprime lenders, particularly in the lower tranches of those deals. American Credit Acceptance, DriveTime Automotive, Global Lending Services and Veros Credit are just a few of the lenders at risk for rating downgrade, according to KBRA. But securitizations issued by larger lenders are also at risk — think CarMax, NMAC and Santander — as worsening loan performance pushes those transactions to the limit.
