Second credit-ratings agency flags increased stress in auto loan market
S&P have joined rival credit rating firm Fitch Ratings in flagging an increasing risk in the subprime auto loan market. In March, Fitch warned that delinquencies in subprime auto loans has reached a high not seen since 1996. The release from S&P focuses on the overall length of loan exposures, which have been increasing steadily and which potentially add to the risk of default. A total of 78% of subprime retail auto loans included in the agencies subprime index now have maturities exceeding 60 months with 72-month loans predicted to remain the predominate loan term, and which according to S&P could weaken that portion of complex structured finance market. 

S&P Global Ratings joined rival credit-ratings agency Fitch Ratings in flagging increasing risk in the market that packages and sells low-rated auto loans.

S&P said Monday that U.S. subprime retail auto loan asset-backed securities (ABS) transactions are leading to more back-loaded losses and longer loss curves, which could weaken that portion of the complex structured finance market.

Unexpected losses can lead to defaults and make it more expensive to borrow to buy a vehicle at a time when auto manufacturers and retailers hope to see early-year sales momentum speed up. Notably, the majority of subprime borrowers purchase used, not new, cars. In this case, auto loans, including those with subprime ratings, or what’s perceived as the highest risk of default, are grouped together and securitized to bring in a new group of investors; it’s similar to the well-publicized subprime home-mortgage ABS market that helped sink the U.S. into recession some eight years ago.

The S&P Global Ratings subprime index, which includes most of the subprime retail auto loan ABS transactions that it rated since 2000, shows a 76 percent hike in the percentage of loans with original maturities exceeding 60 months, to 78 percent for the 2011 vintage from approximately 44 percent for the 2003 vintage. Since then, the percentage has remained generally stable at approximately 80 percent.

In March, Fitch Ratings warned that delinquencies in subprime car loans had reached a high not seen since October 1996. The number of borrowers who were more than 60 days late on their car bills in February rose 11.6 percent from the same period a year ago, bringing the delinquency rate to a total of 5.16 percent, according to the credit-rating company.

ABS have been in higher demand from yield-seeking investors turned off by low yields elsewhere; this demand can tend to drive up issuance, at least for the short term.

The rate of missed payments is higher for loans made in more recent years, a reflection of more liberal credit standards and the larger number of deals from lenders serving less creditworthy customers, Standard & Poor’s Ratings Services said in a separate note this spring.

S&P, in Monday’s release, isn’t addressing delinquencies, but rather is talking about overall length of loan exposure, which can add to default risks. “Given observed trends, while the percentage of loans with terms greater than 60 months has remained stable since 2011, we expect loans with 72-month terms to remain the predominant loan term,” S&P Global Ratings said. “In addition, we expect the percentage of loans with 73- to 78-month terms in subprime pools to continue to increase. As such, we expect this will further alter and lengthen the loss curves for vintages after 2011.”

The Wall Street Journal has reported that a major driver of strengthening auto sales has been the high level of auto lending, which has been an offshoot of looser borrowing standards. That trend could pile on to default risks, especially as loan terms lengthen.

Read:Subprime flashback: Early defaults are a warning sign for auto sales