Consumer ABS is well-positioned to maintain ratings stability in the wake of a potential double-dip recession, according to a new Fitch Ratings report.
Fitch Managing Director of Consumer ABS Michael Dean said that despite mounting pressure from the sovereign debt crisis and inflation concerns, a double-dip is not expected to occur in the near future.
However, in the event of a double dip, he expects that consumer ABS ratings would be unaffected, even as consumer metrics and ABS collateral performance declined.
Fitch analysts cited the previously resilient nature of core consumer ABS sectors, primarily credit cards and auto loans, dating back to the 1980s to support their conclusions. In spite of multiple recessions, and the current weakened job market and rising unemployment, the industry in general has “proven to be battle-tested” in surviving various macroeconomic pressures.
After deteriorating throughout the crisis, with both credit card chargeoffs and delinquency measures doubling to 11.4% and 4.5% in 2010, respectively, the asset class recovered rapidly. Credit card chargeoffs have fallen to 7.3% in June, with delinquency rates reaching 2.6%, according to Fitch.
Dean expects credit card ABS performance measures to continue to recover throughout the remainder of 2011.
However he warned that the progress would likely tail off and possibly even slightly worsen around the end of the year as issuers begin to loosen underwriting standards and seasonal factors come into play.
“Credit card chargeoffs are likely to increase in a double-dip recession, though not as rapidly or as severely as in 2008–2009 given the higher credit quality borrowers currently comprising the pools,” Dean said about the potential impact on credit card ABS.
The report said that unless chargeoffs fall into the low teens, there would be little to no impact on the ratings of current transactions.
Fitch also anticipates prime asset performance to have peaked, but maintains a stable and positive ratings outlook. Prime rating performance remained stable throughout the crisis, which Dean attributed to strong structural features.
Maintaining Consumer ABS Overweight
A separate report by Bank of America Merrill Lynch shared a similar view regarding the resiliency of consumer ABS, particularly the auto and credit card sectors despite the ongoing European debt crisis and high unemployment.
While other sectors of the financial market have been negatively impacted, consumer ABS continues to perform relatively well. As a result, BofA Merrill analysts maintained their overweighting of the sector. They believe that limited supply and stable performance will produce a “flatter ABS credit curve” in the second half of 2011.
However, analysts recommended that if the U.S. debt crisis is not resolved, there would be “far reaching negative consequences” for the FFELP ABS sector. If the debt ceiling is not raised by the appropriate date, payments would not be made. The credit rating of the U.S., and subsequently FFELP ABS will remain on watch.
Last week, spreads on FFELP ABS moved higher amid increased uncertainty surrounding the debt crisis. BofA Merrill said that the strength of the Department of Education is dependent on the strength of the Federal government.
BofAML does not expect a U.S. default, but does anticipate above average volatility in the FFELP ABS market. As a result, analysts prefer credit card and auto sectors over FFELP ABS.
