Strong 2Q ABS Performance Prompts Moody’s to Update Loss Assumptions, Review Securities

Continued strength in the performance of auto loan, lease, and floorplan ABS last quarter has prompted Moody’s Investors Service to update its credit loss assumptions on securitizations that closed through September 2012. 

Because pool performance was “stronger than we originally expected,” Moody’s is also reviewing several securities for upgrades, Sanjay Wahi, a vice president and senior analyst, said in a press release. Additionally, the company is evaluating securities ratings in prior vintages due to a continued decline of loss expectations, or a build-up in credit support because of sequential pay structures, which is what happens when certain bonds are chronologically paid down before other bonds. “Once certain bonds are paid down, that allows for further support from the existing loans to support the bonds,” a Moody’s spokesman told Auto Finance News.

Another reason Moody’s is reevaluating the securities ratings is also because reserve accounts remain strong, and a continued over-collateralization. “The assets that support the bonds always start from an over-collateralized position; there’s always more value in the assets than there is in what has to be paid off,” the spokesman explained. “These bonds that we’re obviously upgrading, they were not at our highest ratings because we had certain risks and certain concerns about it, but all of these factors have allowed us to feel more confident about their ability to meet their obligations under the bond.”

Just this week, Moody’s upgraded 26 tranches, confirmed one tranche and affirmed another 27 tranches of AmeriCredit subprime auto loan securitizations between 2010 and 2012, affecting roughly $4.3 billion of ABS.

“The residual gain is down to 5.6% from 6.4% as of our last report, and the lowest it’s been since Nov. 2010,” said Aron Bergman, an assistant vice president and analyst at Moody’s. “We expect it to continue to decline, albeit slowly, in 2013.”

In the first six months of the year, roughly $7 billion of floorplan ABS notes were issued, a $2 billion year-over-year gain, which is a continuation of higher issuance activity the past several years. In the past three years, public floorplan transactions rose to $15 billion from $5.5 billion in 2010, according to Analyst Keith Van Doren.

Moody’s attributes the issuance rise to a mixture of increased ABS demand, a rise in sales by large automakers, most of whom have reported higher sales for the past three years, and lost cost of ABS funds regarding on-balance-sheet funding.