Higher Losses Prompt More ABS Enhancement

LAS VEGAS — Of the nine subprime auto ABS transactions that have gone to market, four have higher levels of credit enhancements, Amy Martin, senior director of structured finance at S&P Global, told AFN.

“The issuers with higher credit enhancement  include American Credit Acceptance LLC, First Investors Financial Services, Flagship Credit Acceptance, and Exeter Finance Corp.,” Martin said. “We did increase our expected loss levels for all four of them.” The increased losses were in part due to lower recovery rates, she added.

While losses have been elevated in subprime, the higher credit enhancement have helped ease investors’ concern, said Kayvan Darouian, vice president at Deustche Bank.

“When the risks have increased — when you’ve seen an extension in [loan] terms or maybe going down in credit — issuers have responded with higher levels of credit enhancement,” he said. “So, we feel pretty comfortable with subprime auto at this point, and deep subprime auto in the consumer loan space.”

The industry is in the final stages of expansion, but even if the auto finance sector is headed for a downturn, the industry has proven resilient, said John McElravey, managing director and head of consumer ABS research at Wells Fargo Securities.

“One of the things that we’ve seen, this is a sector that’s been around for a fairly long period of time, so it definitely has the benefit of being through a couple credit cycles.”