Investors are asking Ben Miller these days when, and how, the auto asset-backed market is going to take a wrong turn.
“ ‘What am I missing? When does the next shoe drop?’ ” Miller, the senior vice president and treasurer for the subprime auto lender Exeter Finance, recalled during a panel discussion Tuesday at the Structured Finance Industry Group's ABS Vegas conference.
The questions sprang from the quandary of a market in which rating agency analysts keep warning about the risks in collateral pools, but investors react by accepting ever-tightening spreads.
“For the most part, we don’t hear [about] credit concerns” from investors, said Amy Sze, an executive director and fixed-income research analyst for JPMorgan, who was also on the panel.
New issuance is off to a fast start with $16 billion in auto ABS priced in January, followed by more than $5.5 billion in deals this month, according to Finsight. Those transactions include both prime and subprime deals across vehicle loan, lease and dealer inventory financing platforms.
Several presale reports on the 2018 deals thus far have detailed rising delinquency rates in both managed pools and existing securitization pools. Loan tenors and loan-to-value ratios are trending up in many prime and subprime U.S. auto vehicle securitizations, as well.
Another concern bubbling to the surface, such as this week’s World Omni auto-lease securitization of new Toyota and Scion vehicle contracts, is the lower-than-expected future value of off-lease vehicles that are pooled in 36-month or longer auto-lease asset-backed deals.
It was the one area with the greatest concern for attendees at the panel. In an informal online pool, nearly 48% of participants expressed their top concern in auto ABS transactions were the resale values of the vehicles. Another 38% expressed worries on any macroeconomic shocks similar to the financial crisis a decade ago, and only 3% on any concerns with how ABS deals are structured.
In mid-February, S&P Global Ratings issued a report warning that recovery rates in U.S. auto loan ABS transactions would struggle with recovery rates due to lower used-vehicle prices, along with myriad woes that will depress the residual values ABS investors have traditionally wrested from repossessed or off-lease vehicle returns.
Fitch Ratings this month also reported prime ABS losses inching upward, with a trailing 12-month average of 0.68%, higher than any of the prior six years — and prime annualized losses are expected to approach 1% this year.
“The RV story tends to be a bigger part of the lease discussion,” said Fitch Ratings ABS analyst John Bella. “This market has been so good for so long" and "because of that, we’re trying to make sure we’re not getting complacent.”