Auto ABS performance diverged during 1Q12, Moody's Investors Service said in its latest quarterly auto loan, auto lease and auto floorplan sector updates.
According to Moody's, the recent vintage auto loan ABS pools deteriorated versus earlier vintages, while auto lease ABS and floorplan ABS are still improving.
But, the rating agency still does not predict any drastic changes in industry dynamics resulting from macroeconomic weakness. It expects only marginal deterioration in used-vehicle prices with new-vehicle sales rising this year over 2011 levels.
Auto loan ABS pool performance, particularly subprime pools, took a turn for the worse in 1Q12 given the lessee's weakened credit profiles. The performance improvement that started with 2009 transactions reversed with the 2011 vintage. Moody's said subprime lenders have started the trend of making cyclical credit adjustments that are typical when the economy is recovering. Credit easing in prime pools has been slower and more limited, although Moody's also expects these pools to weaken.
"Because of loosening underwriting, we expect the performance of auto loan pools securitized in 2011 and thus far in 2012 to be weaker than that of pools securitized in 2010, which have been the strongest performers since the credit tightening that began in 2008," said Sanjay Wahi, a Moody's vice president and analyst.
He added that Moody's has considerably lowered its loss expectations on loan pools from 2009 and 2010 based on a strong used-vehicle sector and an improving economy. However, the rating agency expects that "any future adjustments to our expectations for the 2011 pools will be less dramatic," Wahi stated.
The 2011 pools, despite being weaker than the 2010 pools, should still outperform pools going back to 2002. The underlying credit in prime pools is still strong, and all-time highs in recoveries on repossessed vehicles since mid-2009 are helping both prime and subprime pool performance, particularly in subprime, because of the higher loan default rate.
Moody's monitors over $53 billion of publicly rated auto loan ABS issued in 138 securitizations.
With regard to auto lease ABS, the performance of Moody's-rated transactions is still strong, despite the sluggish recovery. Deals are performing better than original expectations in terms both credit loss and residual value realization. The sector is still benefitting from the substantial improvement in used vehicle prices, the result of lower new vehicles sales and a dearth of trade-ins. Throughout 2011 and early 2012, residual gains in the auto lease ABS sector ranged from 8% to 19%.
Moody's monitors around $10 billion auto lease ABS in 15 securitizations, which increased from $7.7 billion in January 2012.
In auto floorplan ABS, the successful restructuring of the auto industry is still supporting credit quality. "Having spent the last three years restructuring, U.S. original equipment manufacturers are no longer overproducing and have retreated from expensive incentives to push sales," said Keith Van Doren, a Moody's analyst.
Moody's monitors around $26 billion in outstanding floorplan securitizations.
Meanwhile, Fitch Ratings this afternoon said that the move toward slightly riskier borrowers in prime auto ABS pools is unlikely to present a near-term risk to bondholders. "We believe prolonged softness in unemployment rates and jobless claims could have a bigger impact," analysts stated.
Throughout the recovery, auto ABS has performed well. In the past month, it has set records. Delinquencies declined 24% and annualized net losses (ANL) decreased 11% month-over-month. Prime 60+ day delinquencies are at a 10-year low of just 0.35%.
This overall strength is attributable to a consistent increase in used-car values and a decrease in unemployment figures and jobless claims as well an improvement in collateral pools featuring higher FICO scores, lower loan to value ratios (LTVs), and shorter terms.
The Manheim Used Vehicle Value index rose in all five months from November 2011 to March 2012. This has lessened the loss severity in ABS pools. Over the same period, the U.S. seasonally adjusted unemployment rate dropped from 9.9% to 8.2%. And initial jobless claims hit a low of 364,000 in mid-March, down from 391,000 in mid-November. These factors help reduce the frequency of default in ABS pools, Fitch stated.
Since the start of the year, some issuers have subtly loosened their underwriting standards. Fitch says this practice will probably not present risk to the bondholder because since the loosening in standards has been incremental, the pools are diversified, and the collateral mix is solid.
Fitch said that a potential risk in the recent numbers is an uptick in jobless claims in late April to 388,000. Analysts do not believe that this will affect auto ABS at this time. But, a prolonged softness in these and other employment measures can have an impact.
