Moody’s Investors Service’s upgrade today of a single Chrysler Financial securitization tranche was overshadowed by its downgrade of eight other tranches.
Historically, auto securitization upgrades have far outpaced downgrades. Among prime auto securitization transactions rated by Fitch, upgrades outnumbered downgrades by eight to one last year. I have a hunch that rate will slow considerably this year.
In the downgraded Chrysler Financial tranches — in transactions 2007-A, 2008-A, and 2008-B — losses are on track to hit 7% or 8%, well above the 2.25%-to-3.75% range originally set forth for the pools. Sure, macroeconomic considerations and a soft used-car market are a component of the portfolio deterioration, but the bulk of the losses can be blamed on poor credit quality loans.
Specifically, about 70% of the securitized pools consist of loans with maturities greater than 60 months, up from about 45% in Chrysler’s 2005 and 2006 deals. And 20% of the loans are backed by used vehicles, compared with 10% in the 2005 and 2006 transactions. With longer terms, loans amortize slower, and with more used cars in the portfolio, anticipated recoveries are reduced; combined, those two factors increase loss severity.
To be fair, the Chrysler Financial downgrades were not totally unexpected — Moody’s noted the weaker portfolio characteristics when the transactions closed. But for losses to triple original expectations should be a warning to other lenders — and bondholders. Rating agency Fitch said earlier this month that it expects delinquency and annualized net-loss levels on auto loans will increase more than 40% this year. Subordinate bondholders will be the first to feel the squeeze.
