In a conference call yesterday, John McElravey, head of consumer ABS research at Wells Fargo, said that the U.S. auto ABS sector is now the “new benchmark for the consumer ABS market” replacing the credit card sector.
Overall, the consumer ABS issuance stands at $88 billion so far this year, which is up 53% year-over-year and is largely due to the auto sector.
The growth in subprime autos was also highlighted. As of 1Q12, outstandings in the auto loan market was at $663 billion, which is up 4.1% year-over-year. Meanwhile, subprime auto lending in the first quarter reached $232 billion, which is 35% of total market outstandings.
McElvarey also pointed to the recovery in subprime auto ABS volume, mostly coming from the more well-established firms. “One thing we point out is that 82% of issuers of this year include AmeriCredit and Santander Drive, which are two of the biggest firms,” McElvarey said. “Although there are new deals as far as numbers, the dollar value is tilted toward the largest — and probably better capitalized firms — at this point.”
Additionally, from the investor point-of-view, he said that risk is very well contained. McElravey explains that although spreads have slightly recovered, they are still not at pre-crisis levels. Thus, the market is requiring a higher risk premium compared to the past.
Similarly, cumulative net loss rates for the subprime auto ABS sector are also well below pre-crisis levels at this time. Yet, McElravey believes that there will be a “gradual normalizing” of underwriting, lending, and net loss rates over time while credit flows more easily into the subprime auto market.
With the gradual transition to normalcy, Wells Fargo estimated that U.S. auto ABS issuance will reach a total of $85 billion for the whole of 2012.
