Auto lending in Europe has traditionally been dominated by companies that lend exclusively to customers of a particular manufacturer. And typically loans made by so-called captive lenders have been less risky than those made by non-captives.

Over the last three years, however, the share of portfolios of securitized European auto loans originated by non-captives has risen significantly. And Moody’s Investors Service says this trend has historically indicated a higher credit risk overall for the market.

In research published today, the rating agency noted that European auto loan securitizations are typically backed by pools of either captive or non-captive originated loans, with no mixed pools.

The analysis of existing transaction performance data in the main auto ABS markets of France and Germany, as well as historical vintage data, shows a better performance of auto loans originated by captive companies compared with noncaptive ones.

What makes non-captive auto loans riskier? These portfolios tend to have a higher proportion of used cars. Loans with balloon payment features also dominate captive portfolios, at least in Germany. While these loans have performed well, Moody’s says this characteristic nevertheless increases the risk in the event of a default by the borrower.

Over the past five years, the increase in non-captive originators has predominantly occurred in the most active European auto ABS markets, namely  France and Germany. Newer auto ABS markets like the Nordic countries and the UK are dominated by non-captive originators.

Recent and historical performance data of auto ABS deals shows that captive deals have performed better. Non-captive originators show higher cumulative losses in the German and French markets. Sixty to 90 day delinquencies are also higher for non-captives in outstanding transactions, although this performance data is limited and does not include a full business cycle.

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