MIAMI — Subprime auto is a good bet for ABS investors, panelists on the Consumer ABS Financing Outlook roundtable said at the ABS East conference.
In a straw poll, attendees voted for which segment of consumer ABS would be the best performer. Credit cards were No. 1 with 31% of the vote, followed by subprime auto with 24%. Prime auto was No. 3 at 11%.
The “subprime” label might make some investors cautious when looking for opportunities in the securitization market, said John McElravey, managing director, head of consumer ABS research at Wells Fargo Securities LLC, along with other panel members at the conference on Thursday.
Some investors may not get involved in subprime auto because they look more at credit quality, he said, and the subprime label is a problem for them. The distinctions between different asset classes have become murkier as well, he said.
Before the credit crisis there were more distinct divisions between what were considered prime, nonprime, and subprime auto. Since about 2010 the line between nonprime and subprime has become less well-defined, experts said.
Elen Callahan, director of Deutsche Bank, said on yesterday’s panel that “back in the day” the Office of the Comptroller of Currency recognized subprime as a customer with a Fico score of 660 or below. However, currently there is a “gray space” for consumers with scores between 620 and 700.
At the end of the day, subprime and nonprime are “just labels,” McElravey said. He said investors should look at the expected cumulative losses of each portfolio, and the overall collateral characterization.
Callahan advised staying with “tried and true names,” or the top-tier issuers, but she still looks for opportunities in subprime auto, she said.
“[Subprime auto ABS] are short-term transactions that get upgraded relatively quickly, and when you look at the spread levels today, they are cheap in comparison to other transactions,” Callahan told AFN after the panel. Subprime auto ABS has the added bonus of fast, positive ratings actions, Callahan said. She said those factors make subprime auto ABS “a good place to be.”
For more content like this, check out the upcoming Auto Finance Summit, October 21-23 at Wynn Las Vegas. Visit www.AutoFinanceSummit.com for more information.
