With rising unemployment and weaker job creation combined with an anticipated rise in bankruptcy filings, both Credit Suisse First Boston and Fitch Ratings issued research updates on the auto loan sector of the ABS market. While both concur that delinquency and loss performance - and therefore spreads - will remain under pressure until the economy turns around, structures are fundamentally sound.
Boosted by incentive loans that have seeped back into the strategies of captive lenders, auto sales have been strong thus far in 2002, simultaneously creating concern in the used car market. DaimlerChrysler N.A. Holdings was the only one of the Big-Three U.S. auto manufacturers with a dip (-4%) in sales, reports Fitch, and all of the Asian captives had a strong sales month in July. CSFB adds that the Big Three have outperformed the industry as a whole.
For prime collateral, the industry average for annualized losses came in at 1.02% in the most recent period, up from the 0.95% seen in July, with cumulative losses at 0.84% for both August and July. Thirty-day delinquencies were at 1.96%, with 60-day delinquencies at 0.61%. For subprime loans, annualized net losses came in at 7.52%, up 68 basis points from July; 60-day delinquencies, however, increased 17 basis points, to 3.60%.
Spreads continued to widen throughout August, notes Credit Suisse First Boston in the most recent Auto Performance Overview. CSFB says it had expected as much, as annualized net losses rose in all three segments of the credit spectrum. Two-year, triple-A rated auto loan ABS is currently trading in line with its 52-week averages, but CSFB adds that three-year subprime auto paper is currently cheap versus historical levels.
Despite the widening, spreads versus Treasurys have remained stable, thanks to swap tightening at the front end of the yield curve, CSFB adds. CSFB recommends investors keep auto ABS product as a core short-duration holding, noting 35 upgrades of various Ford subordinated ABS tranches - due to collateral performance - since January 2001, the most recent on Aug. 21.
"We feel enhancement levels are adequate - excess spreads are at all-time highs in auto-loan transactions, with two-year Treasurys hovering right over 2.00% - and the wraps prevalent in the nonprime sectors should give investors comfort as well," said CSFB research head Neil McPherson.
Fitch also feels enhancement is sufficient, noting the lessons learned in the mid-1990's. Thomas Nieliwocki, a director in the Fitch auto group who worked on the report entitled In The Auto ABS Driver's Seat, adds that while delinquencies have risen, they are relatively low on a historical basis. "If you have been following the auto sector for the last five years, you remember the subprime market in 1996 and 1997 and the troubles experienced. Currently there are far fewer players, each with more stringent underwriting standards."
As for volume going forward, wider spreads in the unsecured market for auto manufacturers, combined with the return of zero-percent financing for consumers, should spur ABS issuance through year-end past the $85 billion predicted by CSFB. Through the first eight months of the year, auto loan ABS volume is at $64 billion, according to Thomson Financial. The sector is on pace to top $96 billion, which may further pressure spreads.