The U.S. auto ABS market has soared to new heights this year with over $100 billion in issuance, and performance has stayed strong throughout and even improved, according to analysts. However, questions about the strength of the U.S. consumer loom in the background, as do the ever-present theories that the hot pace of the sector, and the ABS market in general, will crack and come tumbling back to earth.
The auto sector started 2005 with a bang, generating $11 billion in issuance during the usually dull first two weeks of the year. This pace, if it had been sustained, would have led to an unthinkable $250 billion for the sector. While such a torrid pace was impossible to sustain, the market managed to generate an average of nearly $3 billion per week. Despite some widening around springtime, spreads have maintained relatively tight levels, with one-year fixed-rate tranches quizzically gapping out beyond two-years since late summer.
Prime auto ABS performance has improved over the year, as evidenced by a 3.6% year-over-year decline in delinquencies for the month of October, according to Fitch Ratings. Delinquencies are down almost 12% from last year, with annualized net losses down 37% on the year.
However, some analysts question the performance of this year's vintage. "In 2005, collateral trends indicate that credit performance could weaken for the 2005 vintage," said Peter DiMartino, head of ABS and MBS credit strategy at RBS Greenwich Capital. Quoting data from Standard & Poor's, DiMartino points out that average FICO scores for prime and nonprime borrowers have dropped by about 10 points, averaging about 718 for prime and 642 for nonprime over the first half of the year, while subprime FICOs actually rose 15 points on average, to 613.
DiMartino notes the differential between nonprime and subprime FICO scores for auto loan borrowers were at about 55 points from 2002 through 2004, but in 2005 that differential narrowed to 29 points. In addition, the percentages of loans with terms greater than 60 months have increased recently, accounting for only 12% of prime auto collateral in 2002 and 2003, and since then the average has risen to 28%. The percentage of loans greater than 60 months for nonprime collateral has ballooned to 65% from 48% in the same time period, with subprime increasing to 56% from 43%.
These changes do not represent an immediate risk of downgrades but could portend a slowdown in the relatively high pace of upgrade activity, to which the market has become accustomed recently. DiMartino also noted the credit risk associated with longer-term loans can be neutralized by additional credit enhancement.
Used prices increase slightly
In spite of price pressures from dealer incentives, such as employee discount programs, aimed at selling more new vehicles, used vehicle prices have actually increased slightly, according to the Manhiem Used Vehicle Value Index. The index shows a 1.5% increase in prices in October from September, and a 5.7% increase from year-ago levels. Used vehicle prices have a significant impact on recovery values on defaulted loans in auto ABS pools.
Fitch says the used vehicle prices have been "bolstered by reduced new vehicle inventories prompting demand for late model vehicles, lower incentive levels on new vehicles and consistent retail demand," as manufacturers such as General Motors Corp. have lately switched back to value pricing and away from incentives. However, Fitch notes certain incentives will remain as long as new vehicle sales remain depressed, which will likely keep downward pressure on wholesale values, noting that Ford Motor Co. and GM both announced new incentive programs early last month. In the long run, used vehicle prices are widely expected to suffer as a result of dealer incentives, stated Fitch analysts.
RBS Greenwich's DiMartino notes that while the percentage of used vehicles has not jumped noticeably, more than half of nonprime and subprime pools are backed by used car loans, with 64% in the nonprime sector and 57% in the subprime sector, with only 20% used cars loans making up the prime cohort, as of the end of the first half of 2005.
Sales hit autumn slowdown
Auto sales for the month of October have slumped to 14.7 million, according to Fitch, likely attributable to the sales jump over the summer, brought on by dealer incentives such as employee discounts. GM's October sales sank 23% from October 2004 and are down 3.4% year-to-date versus last year. Ford, which relies heavily on truck and SUV sales, also experienced a 23% decline in sales versus October 2004, and nearly a 4% decrease in overall year-to-date sales versus last year. DaimlerChrysler is the only one of the Big Three U.S. auto manufacturers to actually increase year-over-year sales so far, with a 6.1% increase over 2004, but with a flat market share versus October of last year.
Nissan Motor Co. saw a 20% decline in sales for October, mostly caused by slowed SUV and truck sales, while Toyota Motor Corp. and American Honda Motor Co. experienced only slight gains on the month, but have grown year-to-date sales 9.9% and 5.4%, respectively.
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