Fitch examines what’s ahead for captives

NEW YORK - 

Fitch Ratings recently took a deeper look at the captive segment of auto financing, projecting their performance and potential revenue push toward their parent automaker.

Analysts determined the trend of rising leverage for U.S. captive auto finance companies, fueled by strong new-vehicle retail financing and lease demand, has moderated recently, according to Fitch Ratings' latest North American Financial Institutions Chart of the Month.

The firm explained the moderation in leverage more recently has been driven by less robust asset growth, strong earnings and capital generation, and in some cases a reduction in dividends paid to the OEM parents. Still, with the exception of American Honda Finance Corp. (AHFC), captives’ leverage remains above Fitch's implied financial benchmark, underscoring the importance of potential parent support in Fitch’s auto captive analysis.

In Fitch's view, captives’ elevated leverage is mitigated to some extent by solid credit performance, which has remained fairly stable despite concerns that looser underwriting standards over the past few years and an excess supply of used vehicles would lead to a sharp degradation in credit performance.

With the exception of GM Financial, which continues to transition to a full spectrum captive since its acquisition of subprime-focused AmeriCredit in 2010, Fitch Ratings indicated that captives’ installment contract and lease portfolios have remained predominantly prime-focused.

Fitch Ratings director Michael Taiano acknowledged that weakening used-vehicle prices in the first half of 2017 appear to have at least temporarily stabilized following the increase in vehicle demand in the wake of the hurricanes in Texas and Florida, and may benefit further from the positive effects of tax reform on the U.S. economy.

“Going forward, we expect leverage for the auto captives to remain fairly stable as new loan and lease demand slows following several years of strong growth, although strong earnings generation could lead to higher dividend payments to OEM parents,” Taiano said.

“While auto captives’ credit performance should continue to normalize over the medium term, the pace of normalization could moderate in the near term as a result of a strengthening U.S. economic backdrop,” he said.

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