Unemployment No Big Threat to Consumer ABS
The U.S. unemployment rate would need to quadruple to 20% to have a major negative ratings impact on AAA-rated securities backed by credit card and auto debt, according to Fitch Research.
In a new report, Fitch analyzes the historical relationship between changes in the unemployment rate and changes in U.S. consumer ABS loss rates. Fitch’s forecast is for unemployment to increase steadily to the 5.5% range by year end.
According to analysis, increases in the unemployment rate are expected to cause auto loan and credit card loss rates to increase proportionally with subprime assets experiencing the highest proportional rate. For example, prime credit card chargeoffs should increase on a 1:1 basis. Accordingly, a 100% increase in the current unemployment rate, from 4.8% to 9.6%, would lead up to a 100% increase in current prime credit card chargeoffs, from 5.6% to 11.2%. For subprime credit cards and auto loans the proportional increase is closer to 1.3:1 meaning a 100% increase in unemployment would lead up to a 130% increase in chargeoffs or losses.
Based on this analysis, unemployment in isolation would have to increase, from 4.8% to more than 20% in order to cause a first dollar loss to typical ‘AAA’ rated credit card and auto transactions. Typical ‘BBB’ securities could withstand an increase in the unemployment rate to more than 9% for auto transactions and close to 11% for credit card transactions.
Consumer ABS transactions rated ‘AAA’ can withstand unemployment stresses to levels not seen since the Great Depression.
Fitch stated in February that it expects collateral performance to decline steadily throughout 2008 in the credit card receivable and auto loan assets. However, Fitch believes that the credit enhancement and structural features of the transactions are sufficient to stave off widespread negative rating actions in those sectors.
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