Chrysler Emissions Charges Add to Strain at Santander

Daniel Acker

The allegations that Fiat Chrysler used emissions-tampering software on certain vehicles equipped with diesel-fuel engines could have an impact on 60 auto-related securitizations, including several active captive-finance deals sponsored by Santander Consumer USA.

Moody’s Investors Service on Tuesday reported that the Environmental Protection Agency’s notice of violation to Fiat Chrysler (or FCA) last Thursday was a negative credit development for up to 60 loan, lease and even dealer floorplan securitizations that have included some of the 2014-2016 Jeep Grand Cherokee SUVs and Dodge Ram 1500 trucks cited by the EPA.

Moody’s says it believes any “material exposure” would be isolated to only the existing collateralized loan pools of receivables through Chrysler Capital, a captive finance unit jointly managed by ABS sponsor Santander.

“The EPA notice of violation is credit negative for these securitizations in large part because of the potential for reduced consumer confidence in the performance and benefits of the affected diesel vehicles,” stated the report, written by analysts Keith Van Doren and Anna Burns. “A hit to consumer confidence would hurt Fiat Chrysler’s diesel vehicle sales, increasing the risk of lower recoveries for the affected auto loan and lease ABS transactions when vehicles are resold.”

The EPA alleges that the Italian-controlled FCA installed emission control software on certain U.S. vehicles that resulted in increased emission of nitrogen oxides, and failed to disclose their inclusion as required by the federal Clean Air Act.

Unlike the 2015 scandal that involved Volkswagen AG using software to deliberately evade U.S. emissions standards and testing, the EPA is so far only charging Fiat Chrysler over its non-disclosure that it added engine management software for vehicles equipped with 3.0-liter diesel engines.

The EPA is still investigating whether the software represents a “defeat device,” similar to the software installed by the German manufacturer on nearly 500,000 Volkswagen diesel-engine vehicles worldwide.

Fiat Chrysler is denying the allegations, stating it is “disappointed” in the EPA’s actions and “intends to work with the incoming administration to resolve the matter,” according to a statement.

Bond rating agency DBRS on Monday issued a release stating it was placing the ratings for Fiat Chrysler (‘BB’ with a positive trend) on review with “developing implications.”  Moody’s rates Fiat Chrysler’s U.S. division at an investment-grade level ‘Baa3’ with a stable outlook.

While the ratings agency noted the EPA investigation is a likely credit negative for the firm itself, Moody’s believes the ramifications are not nearly as severe as those faced by Volkswagen due to the lower severity of the violation harge and the fewer number of vehicles involved.

Santander Consumer USA underwrites new and used financing through the Chrysler Capital captive finance division it jointly managers for Chrysler, Dodge and Jeep dealerships in the U.S. The U.S. arm of Spanish banking conglomerate Banco Santander S.A. has issued eight ABS transactions under its Chrysler Capital Auto Receivables Trust since 2013, as rated by Moody’s.

Any potential loss exposures on lower recoveries and residuals on the affected models could add to Santander’s recent challenges in lending and securitization.

Besides restating earnings twice due to accounting issues and scaling back on its subprime auto lending originations last year, Santander has faced deteriorating credit conditions on its pool of loans through Chrysler Capital. In Santander’s $904.1 million CCART 2016-B transaction last fall, Moody’s noted that net credit losses, as a percentage of outstanding loans in Santander’s managed portfolio had increased to 2.3% from 1.8% the year prior; and 31-plus day delinquencies grew to 3.9% from 3.3%.

(While Santander Consumer is an unrated servicer, Moody’s notes among the benefits for investors in CCART transactions is Santander’s pledge to repurchase early payment defaulted loans, including those in which a buyer misses the first payment).

Fitch Ratings, which also rated the 2016-B deal, considered the recent ABS performance of CCART pools so poor that last fall it termed the latest Santander/Chrysler Capital offering only a “midprime” pooling of more than 35,000 loans, despite the pool’s prime average FICO score of 712—higher than any of seven previous CCART transactions.

Over 88% of the loans were originated through the Chrysler Capital channel. Over 70% of the vehicles were Dodge and Jeep vehicles, but presale reports did not indicate the portion of diesel-engine trucks and SUVs included in the collateral.

Moody's maintained a "prime" label on the previous CCART transaction, and last fall provided upgrades and ratings affirmations to several tranches of notes in Chrysler Capital asset-backed that are sponsored and serviced by Santander. Moody's stated that weak deal performance was offset by strong deal structures that include non-declining over-collateralization and reserve accounts.

Moody's did not list other loan/lease platforms with Chrysler-made vehicles in their pools, which would have less exposure due to lighter concentration of the affected vehicles in the mix. For floorplan transactions (such as the Ally Master Owner Trust) with Chrysler-made inventory, any impact might felt by the decline in dealer monthly payment rates if affected vehicles can't be sold until emissions issues are fixed, according to Moody's.