Despite last year's delinquency spike, the effects of hurricanes Katrina and Rita as well as increased charge-off rates in subprime auto loan portfolios for September, analysts expect the auto loan ABS sector to make a strong finish for 2006.

In line with expectations for the sector, primary auto loan ABS issuance stood at $64.1 billion in September, down 15% from the $75.8 billion issued the same period the year before. Market watchers continue to blame industry consolidation for the drop-off, as well as a more steady focus on the credit quality of borrowers, according to a special sector report from Standard & Poor's.

Last year's hurricanes and the bankruptcy reform law caused delinquencies and losses to rise slightly for the 2004 vintages, compared with deals from 2003. The 2005 deals performed in line with the 2004 vintage.

"Our near-term outlook for the prime sector is favorable, buoyed by low current delinquencies, a healthy economy and labor environment, and declining bankruptcies," Amy Martin, a Standard & Poor's credit analyst wrote.

Performance in nonprime and subprime portfolios worsened compared to previous years. Cumulative net losses among nonprime auto loans in the 2005 ABS pools were up 24%, compared to 2004 deals. Riskier obligors and longer loan terms are to blame for that performance, Martin wrote. Cumulative net losses among subprime loans increased 12% for 2005, compared to 2004.

Subprime auto loans saw increases in charge-off rates for September, the first increase in more than a year, according to findings from Moody's Investors Service. Readings for the low-loss, high-loss and all-pool indexes increased by 1.5%, 2.2% and 2.1% respectively for the second month in a row, Moody's reported. The last time that all three indexes posted monthly increases was back in June 2005. Further, the low-loss, high-loss and all-pool indexes also showed year-over-year increases of 13.3%, 5.7% and 6.7% respectively. The increases, however, did not offset improvements from previous months.

Loan performance

Although poor performance on the parent company level have forced corporate credit ratings on Ford Motor Credit Co. and General Motor Acceptance Corp. to slide lower, the issuers' prime auto loan ABS transactions have performed.

"Performance for these two companies has been better than expected and has bested the average prime index," S&P's Martin wrote.

Into 2007 and beyond, analysts expect loan terms of 72 months to become more popular, due to increased competition for business. The percentage of long-term loans has nearly tripled, to 34% for the first half of the year, up from 13% in 2003, according to Standard & Poor's database of securitized prime auto loans.

Those longer loan terms appear to be the wave of the near future. Heated competition is expected to force banks and independent finance companies to offer loan terms as far out as 84 and 96 months, Martin wrote.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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