Subprime auto lender Honor Finance’s 2016 ABS issuance is the first post-crisis downgrade — an indication that the industry’s contraction period is coming sooner than expected, Joe Cioffi, chair of the insolvency, creditors’ rights, and financial products practice group at Davis & Gilbert, told Auto Finance News today.
“[The downgrade] is a reminder that ratings are a reflection and reaction to what’s going on in the economic environment currently,” Cioffi said. The important question is whether credit enhancements — like overall collateralization and excess spread — will sufficiently absorb the resulting losses, Cioffi said.
“Credit enhancements are what keep risks in the market from snowballing,” he said.
Credit enhancements did not hold up in the lower securitization tranche of Honor Finance, which stopped originating loans in May. Consolidation and portfolio sales are likely to increase as credit losses rise and companies fail due to years of loan growth and “competition-induced” weaker lending standards, according to S&P Global Ratings.
Since 2009, subprime loan rating actions have included 1,090 upgrades and zero downgrades. However, the rating agency downgraded Honor Finance’s issuance because the class C notes — originally rated BB-, but downgraded to CCC+ — are “at risk of not being repaid,” the agency noted. S&P believes net losses could rise to approximately 30% of the original $100 million receivables balance.
Kroll Bond Rating Agency followed-suit this week, taking a similar action by cutting its rating on the class C notes issued in the deal.
S&P estimates 2018 subprime issuances of total $13.6 billion year-to-date — compared with $13.3 billion during the same period in 2017.
Honor Finance follows Summit Financial Corp. and Pelican Auto Finance, which have also folded this year.