US Auto Loan Losses Continue Rising
Fitch Ratings expects auto loan performance to continue to deteriorate, especially for older vintages.
Excerpted from U.S. Auto: Asset Quality Review 2Q09
Despite the weak economy and high unemployment levels, Fitch Ratings saw auto lenders benefit from seasonal trends in the first half of 2009, thanks in part to an improvement in used vehicle values. Still, loss rates continued to increase year-over-year and up-ticks in second quarter delinquency rates, which is a common seasonal trend, signal higher loss rates in the back half of the year. Furthermore, poorer 2006 and 2007 vintages are expected to near peak loss levels in coming quarters and 2008 vintages are tracking at record high levels.
‘Auto lenders continue to contract portfolios across the board, given the tougher credit and capital markets environment, but the lack of competition has allowed lenders the ability to demand better terms on new loans, including higher finance rates and lower loan-to-values,’ said Senior Director Meghan Crowe, ‘but higher credit losses and funding costs combined with the permanence of longer contractual agreements, now an industry standard, are expected to keep net profits for the auto industry below historical levels for some time.’
Still, funding costs have begun to rationalize to some extent, as the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) has provided more affordable liquidity to the sector. AmeriCredit Corporation, a subprime auto lender, completed a $725 million ABS transaction in July 2009 and was able to sell the non-TALF-eligible subordinated notes, primarily to traditional securitization investors. However, the weighted average coupon and initial enhancement levels of 7.5% and 28.1%, respectively, compare to 5.2% and 9.5% three years ago, when the transactions included bond insurance.
Fitch believes loss and delinquency trends will continue to deteriorate, particularly as older vintages amortize and poorer-performing 2007 and 2008 vintages account for a larger portion of the indices.
Seasonally adjusted cumulative net losses (CNLs) hit an all-time high of 1.25% in June 2009, but the loss rates on 2007 and 2008 vintages are tracking at record high levels, and CNLs on these vintages could reach 3.00% to 3.50%.
Fitch’s outlook for the auto finance industry remains Negative for the remainder of 2009 given high unemployment rates, reduced profitability, and the difficult, albeit modestly improved, funding environment. Fitch took numerous rating actions in the auto space in 2008 to reflect these trends. The long-term Issuer Default Rating (IDR) of Ford Motor Credit Company, for example, has fallen from ‘B’ at the beginning of 2008 to ‘CCC’ while the long-term IDR for AmeriCredit Corporation has gone from ‘BB’ to ‘B-’. While the outlook remains negative, consistent funding availability could ease rating pressure for the non-diversified auto lenders significantly over time. Rating action for larger, more-diversified, non-captive lenders is not likely to be driven by the performance of auto finance businesses alone, although auto segments will continue to contribute to negative rating momentum.
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