Despite four factors that might make its confidence deteriorate, Kroll Bond Rating Agency (KBRA) said in a report released on Monday that it remains “comfortable” with auto loan ABS fundamentals.
That assertion came within the firm’s newest structured finance research report titled, "U.S. Auto Market Update: Deconstructing Headline Loss Rates." Before making a trio of additional assertions, KBRA acknowledged delinquency and net loss rates for the securitization of auto paper have been rising.
Analysts pointed out that peak losses in prime and non-prime collateral pools reached 0.94 percent and 9.43 percent earlier this year, respectively, versus 0.79 percent and 8.23 percent a year ago.
KBRA also conceded that there multiple late-cycle indicators continuing to garner headlines — softer used-vehicle pricing, rising inventories, weakening seasonally adjusted annual sales (SAAR) and rising loan losses. Nonetheless, analysts arrived at its “comfortable” position while making these conclusions:
—Much of the deterioration in auto loan ABS fundamentals can be attributed to mix shift. However, as the used-vehicle market has softened, the firm has seen incremental deterioration on an issuer-by-issuer basis.
—Analysts think used-vehicle prices remain vulnerable to a confluence of factors, including excess OEM production and dealer inventory, elevated new-model price incentives and growing off-lease vehicle supply. KBRA’s expectation is for continued softening in the used-vehicle market through 2017 and 2018, which will likely continue to place pressure on auto loan loss rates as severities remain elevated.
—Despite rising losses, KBRA insisted risks remain well contained, and investors are well protected given that these securitizations continue to benefit from robust credit protection.