Subprime Issuance Bolsters Solid Auto ABS Market
NEW YORK — Auto-backed securitizations will likely account for 55% of total ABS volume this year, and subprime issuers are largely the reason.
“An increasing portion of the auto finance market today is coming from the growth and reemergence of the subprime sector,” Michael Binz, managing director and business leader of ABS Ratings at Standard & Poor’s, told attendees at a structured finance event on Friday. “With this growth, new issuers are coming into the markets [along with] significant new sources of funding, with the private equity presence growing significantly.”
The auto industry’s solid rebound prompted S&P’s focus on the sector in its first Structured Finance “Hot Topics” event of the year.
In fact, the auto sector is growing faster than the overall economy. Sales have picked up, though they have not returned to pre-recession levels, said Erkan Erturk, senior director of structured finance research at S&P. Though pent-up demand seems to be driving the growth in auto sales, “we are not at the level where it could be,” he said.
Keeping that in mind, Erturk performed an analysis — not a forecast — of what pent-up demand could be. Based on non-farm payrolls and the function of the relationship between 1995 and 2006, pent-up demand could total 10 million units.
“If that is the case, that pent-up demand will be coming our way, and we will see the impact on sales in a positive way in the next few years,” he said.
That pent-up demand is among the reasons for growth in auto ABS issuance, Erturk explained. In addition, the strength of the used-car market, vehicle affordability, and the decline of consumer default rates are all stimulating growth.
Still, both Binz and Erturk concurred that risks remain in the sector. Among them is the change in underwriting trends in the auto loan market, consumer confidence inching its way back up, a slow housing recovery, and the European sovereign debt crisis.
