Kroll Remains Optimistic Despite Rising Auto ABS Losses

Kroll Bond Rating Agency said historically high delinquencies and losses will continue to rise due to used-vehicle depreciation and a saturation of lenders, according to a new report analyzing the auto ABS market.

However, those rises are not as “ominous” as headlines often make them out to be.

Growing cumulative net losses are offset by a higher amount of credit protection to investors, and it’s really a few select lenders that are driving the losses, the company reported.  

For example, deep-subprime securitizations with weighted average credit scores below 550 have increased from to 23.2% of all issuances in 2017, compared with 19% last year, and 7.6% in 2013, according to the agency’s auto index. That led nonprime losses to peak at 9.43% in early 2017, up from 8.23% a year earlier.

But those increases are largely due to DriveTime and Santander’s deep-subprime shelf Drive, and when Kroll excludes those two issuers losses are “more muted.”

The same can be said of prime issuers where losses have peaked at 0.94% in 2017, compared with 0.79% the year prior. CarMax, Chrysler Capital, and California Republic are the largest drivers for the tick up in losses because of their growing, higher-loss-rate portfolios.

The CarMax shelf accounted for less than 8% of outstanding securitized prime collateral in 2013, whereas Chrysler Capital and California Republic’s shelves didn’t exist yet. Today, those three company’s account for 20% of all securitized prime collateral. Those three prime issuers also averaged an annual loss rate of 1.25% to 3.25%, compared with 0.20% to 0.70% for a typical prime captive issuer.

Used-vehicle depreciation also helps to explain the acceleration of losses. Prime and nonprime loss severity on repossessed vehicles is on the rise averaging 46.1% and 55.5%, respectively, through July, compared with 39.5% and 48.2% over the same period in 2015.

Kroll also notes that lenders are pulling back from the subprime market which will place further pressure on loss severity through 2018.

The agency also echoed the calls of overly enticing OEM incentives, lease penetrations, and rising repossessions that have driven the supply of used vehicles higher, as AFN reported this week.