The improving economy has cast a ray of sunshine among Fitch Ratings analysts, who were generally optimistic throughout the firm's quarterly outlook conference call last week. Stronger growth prospects, Fitch said, will contribute to a spike in senior/sub structures for non-prime lenders throughout the year, as the debt tracker has been approached by issuers and bankers interested in bringing unwrapped ABS.
Noting the trend of upgrades outpacing downgrades, Fitch said that the sparse downgrade activity in the first quarter suggests a recovery that bodes well for consumer ABS. Risks will persist, however, in certain ABS sectors.
While ABS downgrades in the first quarter of 2004 were primarily performance-driven, they were confined to sub-investment grade tranches. Not surprisingly, aircraft and retail credit cards were the sectors Fitch expects to remain volatile throughout 2004.
Of the upgrades, the majority took place in subordinated tranches of prime auto loan and student loan ABS. Both asset classes should continue to perform well going forward. Guarantor counter-party downgrades triggered the downgrades in the student loan sector.
The credit card sector will benefit from rising interest rates, rising portfolio yield and stable monthly payment rates. Excess spreads in the first quarter were roughly 100 basis points higher (6.51%) versus the same period last year.
Fitch also pointed to the changing landscape in card ABS, where issues are larger, less frequent and longer dated than ever. New issue supply, down 32% in 1Q04 versus 1Q03, was split equally between fixed- and floating-rate deals.
Fitch remains negative on retail credit card ABS, due more to increasing competition among parent retailers than to specific performance issues.
Prime auto ABS should remain stable, as delinquencies in prime pools have improved. One area of concern for Fitch in the prime auto sector is the longer-dated and highly subvened loans backing recent deals, which Fitch plans to watch closely.
"Increased long-term loans, greater than 60 months in [original] term, and lower down payments leading to higher LTVs in auto ABS have the potential to lead to increased severities," said Katie Lynch in the Fitch auto group. "As there is limited performance data on these loans, Fitch will increase scrutiny on longer-term loans in auto ABS pools.
Fitch remains negative on subprime auto ABS, despite the improved performance. Even with a negative outlook on the sector, Lynch reported that talk of senior/subordinate structures has picked up.
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