Fitch: US Subprime Auto ABS Expansion to Continue
August 29, 2012
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NEW YORK — Fitch Ratings believes the trends that led to an
increase in the issuance of subprime auto ABS are likely to continue through
the end of the year.
Why? Analysts said on Tuesday that they contend "lending practices are normalizing, and the trends that issuers enjoy are continuing."
The firm insisted vehicle sales continue to rise from crisis levels with Fitch projecting this year's new-vehicle sales to land between 13.5 million and 14.5 million units.
"This reflects pent up consumer demand after very weak sales in 2009 and 2010," analysts surmised.
"Loan origination has expanded to meet this demand after severe tightening during the 2008 crisis. New subprime ABS issuance is bolstered by increased loan origination," they continued.
While lending standards have loosened, Fitch views this as a normalizing trend in a sector where credit demand remains.
Fair Isaac Corp. data shows that in each of the past seven years, 23 to 25 percent of all nationwide FICO scores have been below 600.
"As employment has stabilized post-crisis, credit continues to increase to consumers at the lower end of the FICO spectrum," Fitch emphasized.
The firm went on to mention investors have been drawn to the spread levels and relatively short duration available in the subprime auto ABS sector.
Fitch noted new two-year AAA rated subprime auto ABS bonds issued by more frequent issuers yield around 0.85 percent compared to U.S. Treasury two-year securities at approximately 0.25 percent, with less frequent ABS issuers offering even more spread.
"Additionally, as investors stay on the short end of the yield curve, auto ABS is seen as way to pick up yield without extending duration," analysts highlighted.
Furthermore, Fitch pointed out subprime performance remains robust this year with the firm's subprime annualized net loss index at 4.74 percent in July, well below the 13.14 percent peak level recorded in February 2009.
Similarly, Fitch's subprime 60-plus days delinquency index was at 3.17 percent in July, also lower than the peak 5.04 percent level in early 2009.
"Fitch expects both of these metrics to tick up slightly over the next few months as seasonal patterns take hold in the fall and winter months," analysts projected.
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