ABS analysts find ‘encouraging trends’ in 2017 data

NEW YORK - 

S&P Global Ratings pored over the 2017 data for the U.S. auto loan asset-backed securities (ABS) sector and reported that  “a few encouraging trends emerged.”

Analysts added that December ABS performance showed seasonal patterns, resulting in upticks in metrics they watch regularly.

The firm shared this finding in a report titled, “U.S. Auto Loan ABS Tracker: Full-Year 2017 and December 2017 Performance.”

Although lower recovery rates continued to push average annual losses higher for both prime and subprime securitizations in 2017, S&P Global Ratings indicated that losses increased at a slower rate than they did in 2016. The rate of deterioration in recovery rates was also less steep than it had been, and 60-plus-day delinquencies remained nearly unchanged from the annual average for 2016, the report mentioned.

“In our view, auto lenders’ tighter credit standards for writing loans and the improved collateral mix of their securitizations is starting to pay off,” analysts said.

As underwriting standards improved, S&P Global Ratings determined that better pools were securitized in 2017 compared to those in 2016. Loan-to-value (LTV) ratios declined for both prime and subprime pools, and the weighted average FICO was at an all-time high for prime pools and at the highest level for subprime pools since 2009.

The firm also acknowledged the potential impact of hurricanes Harvey and Irma on auto loan ABS performance was on everyone's mind last year. According to the report, the ultimate credit impact on auto loan ABS transactions with high concentrations of installment contracts in Texas and Florida will be minimal.

Although the hurricanes led to higher extension rates among several securitizers with high exposures to the affected areas, lenders responded with hardship extensions, which curbed the potential rise in losses,” analysts said. “Based on our discussions with these securitizers, we believe the extensions for most of them have normalized compared to the high levels in September.”

While trends for full-year 2017 were encouraging to S&P Global Ratings, the firm pointed out that seasonal factors in December led to higher delinquencies and losses for both the prime and subprime sectors relative to November.

Analysts found that prime net losses increased slightly to 0.87 percent for December compared to 0.75% in November, and increased year-over-year from 0.77 percent as of December 2016.

“The main culprit continues to be lower recovery rate,” they said.

The prime sector recovery rate declined significantly to 45.40 percent in December 2017 compared with 50.72 percent in November and 53.25 percent for December 2016. The drop to 45.40 percent marks the lowest monthly recovery rate in the prime sector since 2009.

“Most issuers turned in lower recovery rates year-over-year, with the foreign captive finance companies that finance predominately sedans and other cars reporting more deterioration than their domestic counterparts that have heavier concentrations of trucks,” S&P Global Ratings said.

The subprime net loss rate increased month-over-month to 9.58 percent in December from 8.85 percent in November and declined a bit from 9.65 percent in December 2016.

As a supplement to its subprime composite and index, S&P Global Ratings created the modified subprime composite and index, which exclude certain high-loss deep subprime issuers (Drive, ACA and Exeter).

On a month-over-month basis, the modified subprime loss rate composite increased to 7.62 percent in December from 7.17 percent in November and remained stable compared to a year earlier.

Subprime recoveries decreased to 36.28 percent in December from 37.35 percent in November and 40.13 percent in December 2016.

The prime 60-day delinquency rate increased slightly to 0.52 percent in December from 0.48 percent in November but remained stable compared with 0.53 percent in December 2016.

The subprime 60-day delinquency rate rose to 5.49 percent for December from 5.19 percent in November and declined from 5.53 percent in December 2016.

Several companies reported lower year-over-year delinquencies, including Flagship (for most of its deals from 2013 through 2015), CarFinance (for 2013–2015 deals), and AMCAR (its 2014-1, 2014-3, 2014-4, and 2015-4 deals),” analysts said.

The firm added that its modified subprime 60-day delinquency rate increased to 4.04 percent in December 2017 from 3.76 percent in November 2017 but decreased from 4.23 percent in December 2016.

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