Auto loan securitizations are back in business, and it looks like yearend totals will top 2013.
Overall retail auto loan ABS activity is expected to reach $65 billion in 2014, up from $61 billion last year, according to rating agency Standard & Poor’s.
Meanwhile Deutsche Bank put overall auto ABS issuance so far in 2014 at a “solid” $56.3 billion. That’s a 17% increase in volume compared with the same time in 2013. Ally Financial Inc., Ford Motor Credit Co., and Santander Consumer USA led the way this year in auto ABS issuance, according to DB.
Given what’s happening in the industry, it’s no surprise that there’s growth in the auto ABS market.
Average auto loans had reached $16,862 in the first quarter, according to TransUnion’s Industry Insights report. That’s a new high for the post-2008 crash period, and a 4% year-over-year spike, according to Deutsche Bank, as well as a 13% increase from the low reached in 2011.
As of June 30, retail auto loan ABS issuance stood at $39.5 billion. That’s up 22% from last year’s number of $32.4 billion, according to S&P. Drilling down by category, the numbers are more telling.
GATHERING STEAM
Year-to-date prime ABS issuance is at $25.2 billion, up from $19.8 billion. Overall prime issuance this time last year was $38 billion. This year, S&P expects prime issuance to reach $40 billion.
S&P also categorizes a smaller group as nonprime. Year to date, nonprime stands at $2.8 billion, compared with $2.7 billion for the same period last year. S&P sees this category reaching $5 billion for the full year.
At $11.4 billion, subprime issuance is up 15% from this same time last year, when it stood at $9.9 billion. S&P projects the final 2014 figure to reach $20 billion, up from $17.8 billion.
“Prime is up quite a bit,” said Amy Martin, senior auto ABS analyst at Standard & Poor’s.
S&P’s Martin noted weaker credit metrics in the subprime space. She said the weakness shows up primarily with the year-to-date loan-to-value ratios increasing to 116 from 114 last year, and midyear weighted average Fico scores slipping to 572 from 577 the same time last year.
Martin said the securitization vintage is showing an increase in losses of about 35% relative to 2011, but that year was an aberration. “We’re seeing a normalization of credit standards, higher losses, but those losses are rising from record low levels,” she said.
S&P doesn’t believe lending standards have relaxed to the same extent they were in 2007 and early 2008, the days before the recession, Martin said. Evidence suggests that standards are a little tighter now than at that point.
“We try to drill down in that longer term loan band and determine the weighted average LTV, and what’s the weighted average Fico,” she said. “What’s the payment-to-income [ratio], is the company managing the risk, and are the longer term loans going to those consumers who are the most leveraged.”
“Globally, auto loan ABS pools will continue to consist primarily of loans to prime borrowers,” said Sanjay Wahi, Moody’s vice president and senior analyst. “The exception is the U.S., which has a sizable market for securitizations backed predominantly by near-prime and subprime borrowers.”
Wahi made the charge in Moody’s report this past June. He said although these same dynamics will likely occur in other regions, the impact will be muted because of the predominance of prime borrowers in non-U.S. pools.
“In Europe, underwriting remains tight compared with pre-crisis standards, reflecting cautious expectations about economic activity,” says Sebastian Schranz, another Moody’s analyst.
John Bella, managing director of ABS at Fitch Ratings, told Auto Finance News that there should be key differentiators established among newer entrants. Among the factors to consider: company financial strategy, how dependent is it on ABS as a source of funding, and the overall strength of the
company’s servicing platforms.
Nonetheless, Bella said it’s important to take into account the utility of a car.
“Even a subprime borrower that’s strapped for cash, if they have a job, they’re going to pay for a vehicle, and if they refinance, that’s not a problem from an ABS standpoint,“ he said.
RISK AND REWARD
But risks are increasing for lenders that depend solely on ABS for funding, Bella said.
Many of these companies have private equity backing to meet growth targets, as well as some seed capital to originate for the next year. But if they can’t access the ABS market, they are vulnerable, he said.
Investors have moved to nonprime because there is a yield pickup, and they feel that the credit enhancements in those deals can support even a portfolio that is under-performing.
The contrast is that if you have a prime portfolio that has roughly a 1% loss, the subprime pool will have a 15%-to-20% lifetime loss.
“There’s a lot of enhancements built into those deals assuming those portfolios are going to start performing worse because of the aggressive underwriting,” Bella said. “But at some point, because there’s so much competition for that same weaker borrower, you’re going to see those losses start to increase in both velocity and pace.”