NEW YORK - At its Auto Securitization Briefing held here last week, Moody's Investors Service discussed servicer risk as it relates to different types of auto securitizations. Annika Sandback, vice president in the asset finance group, isolated the risk to each asset type, covering retail loans, wholesale floorplan loans and rental deals. Moody's also gave a brief rundown of how it ranks auto-loan servicers.

For retail loan deals, Sanback said the key link to the servicer is the actual health of its servicing operations, not necessarily its financial position, meaning that a downgrade of a servicer's debt rating may not translate into weakened servicing. The size of a servicer's operations is also an important consideration in terms of retail loans, because it is more difficult to transfer servicing from a large-scale to a small-scale servicer, if that becomes necessary. Another important consideration is whether the servicers are centralized or decentralized, said Sandback, pointing to Ford Motor Credit and General Motors Acceptance Corp. as companies with regionalized servicing.

According to Sandback, the wholesale dealer floorplan sector has the most substantial link to servicing risk out of all types of auto deals, because of manufacturer repurchase agreements. These agreements require manufactures to buy back unsold vehicles at the end of specified terms, therefore if the financial condition of the seller-servicer deteriorates, its ability to repurchase vehicles will be directly affected.

Rental-car deals also have exposure to repurchase agreements and rely on payments from those manufacturers to honor those agreements. To that end, the credit quality and financial health of the manufacturer comes into play, as well as the portion of vehicles in the pool that are covered by repurchase agreements.

Moody's analyst Wing Ng also gave a brief explanation of what the agency looks at in assigning its servicer ratings. Moody's rates auto loan servicers on a scale starting with SQ 1 being the best rating and SQ 5 being the lowest. The ratings last for one year and are based on reviews of every stage of the collections process. Moody's looks at factors such as the training and experience of the staff and its methods. The agency also looks at numbers such as roll, charge-off and cure rates, and assesses the servicers financial condition, including the servicer's corporate or bank rating, its capital adequacy, cashflow and legal and compliance policies.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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