A report by Barclays Capital said that the post-crisis performance improvements of retail auto collateral are real, and are not a result of new unseasoned issuance with low delinquencies and losses being included in calculations.
In an attempt to verify the authenticity of recent recoveries, Barclays analysts separated retail auto collateral performance metrics by vintage, ranging from 2005 to 2010, to eliminate the potential effects of new or lacking issuance in the sector.
According to Barclays analysts, retail auto securitization collateral performance has recovered remarkably. Since hitting all-time highs for 60+ delinquencies (0.85%) and annualized net losses (2.27%) in February 2009, performance metrics have gotten back to pre-crisis levels for prime retail auto ABS deals, they said.
Analysts added that performance improvement has been just as impressive for non-prime retail auto ABS collateral. They mentioned that after hitting a height in 60+ delinquencies (5.32% in January 2009) and annualized net losses (12.97% in February 2009), performance has also recovered to pre-crisis levels.
However, Barclays analysts said that issuance volume was low by historical standards in 2008-09, and it is possible that the improved performance since 2009 is related to new deals coming on line for calculating the aggregate performance metrics. The addition of new deals to the performance calculations has the effect of exerting downward pressure on the metrics because newly issued transactions usually have low delinquencies and net losses.
It is also possible that the deterioration in collateral performance in 2007-08, while clearly a reality caused by over-leveraged borrowers as well as the weakening economy, was worsened by a lack of new deals being part of the calculations. If no new deals are included, the aggregate performance metrics will manifest and increasing trend with loans aging and delinquencies and losses going up.
The question, analysts said, is how much of the improved performance experienced was related to the restart of the consumer ABS market and the inclusion of new deals in aggregate performance calculations relative to actual, real progress in borrower performance?
Analysts concluded that while some of the improvement may be correlated to “run-off” of older vintage transactions’ collateral pools, the stabilization of delinquencies and annualized net losses shows that collateral performance is recovering. However, the firm's aggregate performance metrics are designed to measure delinquencies and annualized net losses of collateral pools that back now outstanding retail auto securitizations. This is why analysts think their calculations are accurate, and considering the stabilization/improvement in delinquencies and annualized net losses of the earlier vintages in their report, better collateral performance is actually happening.
Relative Value Recommendations
In the same report, analysts suggested a neutral weighting on the senior classes of bank credit card and prime retail auto loan ABS given the low nominal level of spreads on such paper. The bank also continues to recommend an overweight on equipment, FEELP student loan, and subordinate retail auto loan ABS.
Barclays also recommended nonprime retail auto ABS and current- and next-pay classes of private credit student loan ABS to investors, particularly senior rental fleet and timeshare ABS for those looking for incremental yield and a variation from “traditional consumer ABS”.