Loss severities in auto deals with high concentrations of trucks and SUVs could soon rise if demand for those vehicles continues weakening, according to Fitch Ratings analysts. In fact, recovery rates on defaulted truck and SUV loans are already starting to decline, thanks to high fuel prices and increased dealer incentives that have conspired to dampen used vehicle prices.
Fitch reports that recent wholesale auction prices were down 8.60% for full-sized pickups and 13.1% for SUVs on a year-over-year-basis, according to data from vehicle auction services provider ADESA, Inc. Fitch added that the Manheim Index reported a 10.1% year-over-year decrease in the full-sized SUV segment as well.
"Loss severity will increase for transactions with high concentrations of SUV and truck loans, if demand remains low for these vehicles due to elevated fuel prices," said Fitch Managing Director Chris Mrazek. Auto ABS deals containing loans originated by U.S. captive auto finance companies have the highest concentration of those vehicles, topping 50% in many cases, followed by banks and foreign captive finance companies, with generally 10% to 50% concentrations.
Weaker demand for SUVs has also caused dealers to try and boost sales through incentives, which in turn has the potential to hurt recovery rates by lowering demand, and, therefore the price of used vehicles.
One sell-side analyst noted it is often impossible to find out the vehicle type concentrations for loans in a particular outstanding deal, however, Mrazek noted the concentrations at issuance can generally be used as a guide.
Fitch now applies more stressful recovery scenarios to truck and SUV loans versus other vehicles. Mrazek noted, however, that he does not expect immediate enhancement level changes by the agency. "It is something that we are watching closely," Mrazek noted. Mrazek also did not expect issuers to change the compositions of vehicle types in their deals, but rather that they would continue to securitize whatever they are selling. "It is a function of the receivables they originate," he said.
For now, the good news is that the deals Fitch rates are performing within expectations and appear to be well positioned to handle the increase in loss severities. "We feel pretty good at this point," said Mrazek.
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