Auto ABS remains adequately protected from a potential rise in losses, according to Deutsche Bank.
In an April 10, securitization report analysts at the bank said that the discernible deterioration in credit quality for auto ABS shouldn’t be of real concern because today’s subprime auto deals are structured with initial credit support levels that are typically 2 to 3 time more than the expected loss levels.
Credit enhancement in these deals can include a non-declining reserve account, overcollateralization and subordination.
The analysts also notes that excess spread in the more recent deals has been as high as 10% annualized, while credit support levels are structured to grow as a deal seasons and the underlying loans amortize.
“As credit support grows, auto ABS transactions can withstand significantly higher levels of losses,” explained analysts in the report. “It is primarily due to these structural features that upgrades have overwhelmingly outweighed downgrades.”