S&P Stress Test Shows Subprime ABS Resilience

MIAMI — While rising losses have caused some concern in the industry, S&P Global Ratings found that subprime auto loans bundled in securitizations are still well positioned to weather an economic downturn.

Analysts typically find that the unemployment rate tracks well with auto ABS losses — as unemployment goes down so does the default rate. Yet, the opposite has been true since 2013.

“Losses are going up from 2015 and 2016 [vintages], even approaching recessionary levels,” Amy Martin, S&P’s senior director, told Auto Finance News during a meeting at ABS East, noting that unemployment is the lowest it’s been since 2001. “But you have to look at it relative to what’s happening with the ratings, and the ratings are very stable.”

The company ran a stress test to see how these securitizations would react under a Better Business Bureau stress scenario, which simulates another 2008 economic crisis event: lower used-vehicle values, 10% unemployment, and rising debt levels. The test found that subprime losses would rise 1.67 times higher than S&P’s baseline economic projections. That would be a large jump because it’s a large macro economic shift, but ultimately AAA and AA rated subprime auto deals would not fall by more than one category over their life under that scenario. That’s “well within” S&P’s criteria, which stipulates that AAA and AA ratings can’t move by more than one category in one year, and can’t move below investment grade in three years.

Furthermore, all of the subprime deals that S&P rates fared better than expected when compared to stress tests performed when the securitizations were first issued.

However, there are some weaknesses to watch, such as lower recovery rates, regulatory scrutiny from state attorneys general, and higher interest rates. “Some companies won’t be able to offset rising borrowing costs because the annual percentage rates on their loans may already be at or close to the maximum state usury limits,” Martin said in a September report. “Also, the newer subprime auto finance companies started during a benign economic environment with

“Some companies won’t be able to offset rising borrowing costs because the annual percentage rates on their loans may already be at or close to the maximum state usury limits,” Martin said in a September report. “Also, the newer subprime auto finance companies started during a benign economic environment with low-interest rates and rising employment, so their ability to survive a rising interest rate environment has not been tested.”