Moody’s says Chrysler Bankruptcy Could Pressure Auto ABS
Moody’s says the bankruptcy filing by Chrysler is likely to result in lower new and used car prices, putting greater pressure on securities backed by auto loans.
Moody’s has taken several actions on auto loan and lease securitizations sponsored by Chrysler Financial Services Americas LLC (”Chrysler Financial”) over the past six months. The actions on these securitizations were driven by the performance of the underlying pools, as well as by the heightened risk of a bankruptcy of the manufacturer and the impact that a bankruptcy would likely have on used vehicle prices. The most recent rating actions have taken into consideration a high likelihood of a Chapter 11 bankruptcy filing by Chrysler. Therefore, no further rating actions are being taken on the above transactions today, although several ratings (a total of eight tranches issued from six separate transactions) remain under review for possible downgrade.”
The ratings may come under pressure if the decline in vehicle prices throughout the duration of the bankruptcy is greater than our expectation or if the reorganization is unsuccessful and is followed by liquidation.
“We believe that new and used vehicle prices are likely to decline as a consequence of Chrysler’s bankruptcy. The manufacturer may be motivated to heavily discount new vehicles to encourage sales; the discounted new vehicles would negatively impact used car resale values. A bankruptcy may also raise concerns over the continuation of existing models.”
“The risk that collateral value, as reflected by used vehicle prices, will decline is a key driver that will magnify losses in both retail auto loan and lease ABS to varying degrees. In auto loan ABS, generally a limited percentage of the collateral pool is subject to repossession and resale and therefore exposed to market value risk, since only a fraction of the loan pool will default. However, with respect to auto lease ABS, 80% to 90% of the manufacturer’s leased vehicles are turned in at lease termination. Turn-in rates are also likely to increase further when car prices decline, as the lessee’s purchase option becomes more expensive than prevailing market prices.”
Standard & Poor’s announced it is reviewing approximately $16 billion of Chrysler-related ABS but offered no further comment.
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