The level of speculative-grade ABS outstandings is six times greater this year than it was in the lead up to the Great Recession in 2006, according to Amy Martin, S&P Global Ratings’ sector lead in U.S. auto ABS. It’s a stat that highlights why “caution is warranted,” in subprime deals today, she said during a webinar.
“Not only has ‘BB’ issuance doubled to $1.26 billion last year, but this is the first time we’re seeing B ratings (one grade lower than ‘BB’) to the level we are,” Martin said. “Year to date, we’ve rated $317 million in ‘B’ auto paper, and that exceeds all prior years from 2007 through 2017 combined.”
Despite the rapid growth of these speculative-grade deals, they still represent a small portion of the overall securitization volume, which is tracking 20% higher year over year to $59 billion through August.
There are many signs of strength in the secondary market including high investor demand, flat year-over-year vehicle sales, improving vehicle values, higher loan origination volume, and tightening subprime credit.
“We’re seeing growth from the domestic captives,” Martin told AFN. She also noted increased prime issuances from GM Financial, auto loan deals from BMW and Mercedes-Benz — both of which were absent through the first eight months of last year — Volkswagen’s first return to the ABS markets since 2014 with a $1 billion loan deal, and a $3 billion increase in Santander Consumer USA’s issuance.
What concerns Martin is the increase in speculative-grade deals and the lack of robust protections for those deals.
“Into the last downturn, many issuances were bond insured and structured with various performance triggers, not just collateral net loss (CNL) triggers,” she said. “These other triggers would identify when performance was deteriorating and cut off excess spread to the seller, and the trapped funds would then be used to enhance the deal. Today many don’t have triggers or have just CNL triggers that don’t identify problems in the delinquency buckets.”