Despite ratings volatility and concerns over near-term ABS coming due, the outlook on Mitsubishi Motors Credit of America (MMCA) retail auto ABS is not as grim as it appeared a year ago, according to research from Barclays Capital.
The risk associated with balloon loan payments is significant as balloon payments account for 26% and 27% of the 2001-3 and 2002-2 adjusted collateral balance, respectively, the report noted. However, the threat of those potential losses has been largely mitigated by the buildup of credit enhancement and support levels during the past 10 to 12 months.
"The credit enhancement and credit support deals that are currently available in the Mitsubishi auto ABS will more than adequately cover you should loss rates spike," said Jeff Salmon, director of ABS research at Barclays Capital.
While the sequential pay nature of the structures in the 2000-1, 2000-2 and 2001-1 deals clearly provide strong credit enhancement, analysts found that the remaining transactions had surprisingly substantial enhancement as well.
"For example, MMCA 2001-3 through 2002-5 all have class A credit enhancement in excess of 29% and class B enhancement of more than 18.8%," analysts penned.
Most of the transactions have at least 18% credit enhancement to the class B or C notes, indicating the deals can withstand defaults of more than 18% of the adjusted collateral balance before losses start accruing to the most junior publicly issued class.
MMCA's retail auto ABS gives investors an average pickup in spread of 60 basis points versus other captive finance peer issues, the report said.
Salmon was also optimistic about recent changes in MMCA's management.
"They will likely be tightening [loan] underwriting standards and credit metrics such that, going forward, they may be giving loans to higher credit quality borrowers than they have in the past," he said.
Most of the problems plaguing MMCA can be attributed to unconventional loan programs and the risky buyers these programs attracted.