Tariffs prompt lower auto ABS forecasts, DQ rise

Prolonged auto tariffs could lead to a decline in auto securitization issuance and worsened credit performance. Deutsche Bank lowered its forecast for 2025 auto asset-backed securitization (ABS) volume in tandem with a 500,000-unit reduction in its projection for U.S. light vehicle sales to 15.4 million at the end of March due to anticipated tariff-induced price increases and supply chain disruptions. The bank’s updated auto ABS forecast for this year is $160 billion, down from an initial $175 billion, Kayvan Darouian , director of ABS research at Deutsche Bank, told Auto Finance News . “Auto [securitizations] are already running behind year over year." -- Kayvan Darouian, Deutsche Bank “Auto [securitizations] are already running behind year over year,” he said, noting that a dip in new-car sales will impact prime and lease auto ABS issuance as those deals are largely backed by new-vehicle loans. ABS volume down 13% Auto ABS volume through April 11 totaled $49.2 billion, down 13.4% YoY, according to the latest data from JPMorgan Securities . While nonprime issuance ticked up 15.7% YoY to $14 billion, prime issuance was down 12.9% YoY to $22.3 billion. Lease issuance declined 27.8% YoY to $9.1 billion. By comparison, total ABS issuance came in at $163 billion in 2024, up from $146 billion in 2023. “If you look at consumer fundamentals generally, prior to the tariffs, the consumer looked to be in a pretty good spot,” Darouian said. “Our forecast this year for ABS was bullish. We’re starting from a good point.” [caption id="attachment_58350639" align="aligncenter" width="950"] (Courtesy/Big Wheels)[/caption] Spreads widen, deals paused Tariffs on imported vehicles of 25% went into effect on April 3, with levies on parts set to take effect by May 3, unless President Donald Trump moves forward with exemptions he floated last week. Tariffs are expected to raise vehicle prices this year , though many automakers have opted to hold prices steady for the next few months. Spreads on prime auto ABS began to widen at the end of March and have continued to do so as tariffs take effect. As of April 10, spreads on AA three-year prime auto-backed securities were 95 basis points (bps) over Treasuries, wider by 18 bps compared with March 27, according to JP Morgan. [caption id="attachment_58350638" align="aligncenter" width="487"] (Source/JPMorgan Securities | Chart/Auto Finance News)[/caption] Widening spreads have prompted several transactions to be repriced, according to an April 11 Kroll Bond Rating Agency research report. Disruptions following the tariff announcement on April 2 also prompted multiple transactions totaling $17.5 billion across various asset classes, which KBRA was in the process of rating, to be put on hold. While KBRA hasn’t adjusted its 2025 ABS issuance forecast, the agency expects volume could be “dampened if current conditions persist.” KBRA projects retail auto loan ABS supply to rise 9.4% YoY to $175 billion in fiscal year 2025. Some issuers may also pivot from ABS to warehouse facilities until market conditions stabilize, Elen Callahan , head of research at the Structured Finance Association , told AFN . “The new-issue market has been quiet because issuers are sitting and waiting [for] a more stable market,” she said. "The new-issue market has been quiet because issuers are sitting and waiting [for] a more stable market." -- Elen Callahan, Structured Finance Association As of today, two auto ABS deals have come to market in April, according to Finsight , which monitors securities. By comparison, there were 19 auto ABS transactions in March. Price increases could lead to DQ uptick If tariffs remain in place, credit performance across securitized auto loan transactions is expected to weaken due to loans originated at higher prices after tariffs were put into place, Deutsche Bank’s Darouian said. “To the extent that the price of a vehicle goes up $3,000 or more, lenders may be incentivized to go with longer terms to manage that monthly payment,” he said. “Empirically, [longer-term] loans don’t perform as well ... and that translates into worse credit performance. “For that reason, we would favor pre-tariff [ABS] deals across prime and subprime,” Darouian said. “The ABS market could recover quickly if the situation is resolved soon.” Higher unemployment and recessionary pressures could “erode credit performance across structured finance,” while increased delinquencies and loan extensions could lead to higher losses across consumer ABS deals, according to KBRA. Morningstar DBRS identified tariffs as “one of the greatest risks to the consumer” because they could raise prices and increase the risk of a recession, according to research published April 14. Consumer sentiment fell 10.9% month over month and 34.2% YoY in April, according to the latest survey data from the University of Michigan . Improved recoveries may offset defaults While tariffs are likely to drive up delinquencies, increased prices will support higher values on used vehicles , leading to better recoveries that could offset defaults in auto ABS transactions , according to DBRS. Consumers’ credit profiles are weakening due to a higher cost of living and less savings, Ines Beato , associate managing director and sector lead for U.S. ABS ratings at Morningstar DBRS, told AFN . “We may see an increase in the use of extended loan terms." -- Ines Beato, Morningstar DBRS “We may see an increase in the use of extended loan terms,” she said. “Origination volume is correlated to car sales. ... We may see a continued shift toward used-vehicle purchases and increasing demand that will elevate used-car values, which could help existing deals’ performance in terms of stronger recovery rates, but it could impact sales due to affordability predicaments.” A pull-forward in demand for vehicles before prices rise could support higher recovery values in the short term, but some consumers may opt to postpone vehicle purchases or exit the market if prices remain elevated, according to KBRA. The full impact of tariffs on auto ABS deals will depend on how lenders respond to affordability concerns and how long tariffs stay in place, Beato said. “With consumer confidence dropping, people are being more discretionary in their spending,” she said. “That may increase personal savings rates and put people in a more positive credit situation. There's a lot of moving pieces, and shifts day to day on what’s happening from the administrative perspective and how that trails into the economy.” Auto Finance Summit East 2025 is set for May 12-14 at the JW Marriott Nashville, featuring fireside chats with Santander Consumer USA and Chase Auto. Visit autofinance.live for more information.

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