Prime auto ABS deals turned in weaker performance numbers in February, but analysts emphasized that the occurrence was more a result of seasonal factors than fundamental weakness in the auto sector. Meanwhile, performance in the subprime auto sector actually improved in the first quarter, the result of another technical fluke.
Either way, analysts said, performance in the auto ABS sector was not influenced by any spillover effect from the troubled subprime MBS sector.
During February, total auto ABS issuance, which includes loans, leases, rentals, dealer floorplans and other types of loans, came to about $8.4 billion. That made year-to-date issuance total $11.87 billion, a decrease of 21.5% from $15 billion in deals completed during the same period a year before.
In the prime auto ABS sector, the 60-days-plus delinquency index rose to 0.60% in February, a 3% increase over the previous month. On a year-over-year basis, delinquencies fell just shy of February 2006 level, by 1.6%, according to Fitch Ratings.
The annualized net loss (ANL) index also rose to 0.99%, hitting its highest level since January 2006. That represented an 11% increase from January and a 1% increase from February 2006's level.
Although February 2007 is the first period in more than three years that the index did not show year-over-year improvement, routine seasonal quirks and not fundamental weakness is to blame, Hylton Heard, a director at Fitch Ratings, says. In December and the beginning of January, consumers work less as they go away for the holidays. Also, they tend to spend more during that time of year, resulting in increased losses that show up in February's numbers, Heard says.
In the subprime auto ABS sector, a timing issue resulted in improved performance of the 60-day-plus delinquency index and the ANL index, Fitch says. The latter stood at 2.68%, a 5% improvement over the previous month, while the ANL was at 6.57%, a 24% improvement over the previous month. It is not as though subprime credit suddenly improved. Rather, one of the issuers reduced its charge-off period from 90 days to 60 days, which made all of their chargeoffs come due immediately, without a recovery period. That artificially inflated its numbers in January, Heard says. The loss numbers for February, which are more in line with historical norms, dropped dramatically compared to January.
"In absolute terms, subprime is certainly performing worse," John Bella, Jr. managing director at Fitch says. "The better appearance of subprime performance in February, vis--vis January is isolated to a unique servicing procedure [of] an issuer, which does make up a fair amount of the subprime index."
Indeed, Dominion Bond Rating Service's tally found that for February, the subprime auto 60-day delinquency rate was at 0.89%, flat to the previous month. Its 60-day delinquency index registered a slight decrease from the 1% rate for all issuers from the previous month.
"We were concerned that there was contagion," when performing the analysis for February's delinquency and loss rates, Christopher O'Connell, a senior vice president in DBRS's credit card and consumer lending group, says. Most of the players in the auto sector are thus far untouched by the upheaval in the subprime mortgage sector, analysts caution that condition could change in the coming months. One test might be the performance of wholesale auto loan trusts throughout the year.
"If the payment rates on auto wholesale loan trusts start shrinking, it could be a sign that consumers are not buying cars," O'Connell says. Nonetheless, if payment rates on wholesale auto trusts do drop, the ABS market should not overreact. The wholesale auto sales market is so seasonal, that any change in performance statistics would have to be measured against historical averages before any conclusions could be drawn about the health the auto market, and whether problems in subprime mortgages are to blame, he says.
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