Rising delinquencies on US subprime ABS

Delinquencies on US sub-prime auto asset-backed securities (ABS) have eclipsed 2009 recessionary levels and are now at a level not seen in nearly two decades, according to Fitch Ratings.

Sub-prime delinquencies of 60 days or more hit 5.16% for February reporting, marking the highest level observed since October 1996 (5.96%). During the most recent recession, delinquencies peaked at 5.04% in January 2009.

February’s delinquencies are increased 11.63% year-over-year (YoY) and 3.63% month-over-month (MoM), the credit ratings agency says.

Sub-prime annualized net losses (ANL) have followed the rise in delinquencies, reaching 9.74% as of February, an increase of 34.10% YoY and 11.59% MoM from January reporting. Despite the increase, ANL remains below the recessionary peak of 13.14% experienced in February of 2009.

Sharp origination growth, increased competition and weaker underwriting standards over the past three years have all contributed to the weaker performance of the past year.

Sub-prime ABS issuance averaged just over $20 billion in 2013 and 2014 before ballooning to over $25 billion in 2015, the highest level since 2005-2006.

ABS issues up

The number of lenders issuing ABS also increased to 19 in 2015 compared to the previous high of 14 in 2005 and 2006. Increased competition has led to increases in loan-to-value (LTV) ratios and extended term lending. Additionally, lenders have marginally weakened credit standards, with particular increases in originations to borrowers with no FICO scores.

Fitch only rates ABS platforms sponsored by two of the larger lenders in the subprime sector, General Motors Financial (AMCAR) and Santander Consumer USA (SDART). Cumulative net losses (CNL) on their recent ABS transactions from 2013 to 2015 are rising marginally but remain well within Fitch’s initial expectations.

Enhancement growth has been strong despite slightly weakening performance and, as such, Fitch consistently upgraded subordinate bonds in 2015 and has continued to do so in 2016, thus far.

Prime sector stable

In contrast, performance within the prime sector remains stable, albeit slightly weaker. Sixty-day plus delinquencies stood at 0.46% for February reporting, up 9.27% MoM but flat compared to the same period a year earlier.

Prime ANL has increased slightly in 2016, reaching 0.69% for February, increased 32.17% YoY. While representing the highest level since February 2011 (0.90%), losses are still well below the historical average of 0.92% and the recessionary peak of 2.23% in January 2009.

Fitch considers the slight increases in losses to be more of a normalization trend within the prime sector as performance trends move away from historical lows experienced over the past five years. However, loss levels could rise further if LTV and extended term lending are not adequately managed and continue to increase.

Fitch expects both prime and subprime auto loan ABS asset performance to improve over the spring months with the onset of tax refunds. That said, typical seasonal benefits are likely to be more muted this year versus recent years given rising pressures on the asset performance as well as anticipated weakness in the wholesale market.

Used vehicle values

Both the prime and sub-prime sectors have been buoyed by strong used vehicle values over the past five years, contributing to lower loss severity on defaults.

However, with new vehicle sales and expected off-lease vehicle supply levels at historical highs entering 2016, Fitch anticipates weakness in the wholesale market, as reflected by the Manheim Used Vehicle Value Index (Manheim), which recently dipped 1.4% in February. Any future declines in the Manheim, as well as other market indicators, will likely contribute to higher loss severity for defaults and drive losses higher.<?p>

Despite further weakness anticipated, Fitch continues to have a stable outlook for prime and sub-prime auto ABS asset and ratings performance in 2016. ANL is expected to rise at or near the 1% and 10% area for prime and sub-prime, respectively, both well within peak recessionary levels.

Fitch’s indices track the performance of $99.5 billion of outstanding auto loan ABS transactions, of which 61.68% is prime and the remaining 38.32% is subprime ABS as of February 2016 reporting.