A rising number of auto loan delinquencies could be troubling news for Auto Asset-Backed Securities (ABS) investors, but Morgan Stanley analyst Jeen Ng believes things aren’t as bad as they may seem.
Weakening credit standards in the auto lending market and deteriorating collateral performance have some investors drawing comparisons to the mortgage bubble. However, Ng doesn’t believe that similar fallout is on the horizon.
According to the report, aggregate auto delinquencies have now eclipsed their peak levels during the Financial Crisis. In addition, the percentage of borrowers with credit scores below 660 has climbed from 30 percent to 36 percent since 2011.
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Ng believes that most deal structures have been adapted to account for these changing loan standards.
“ABS bondholders remain well-protected,” Ng explains. “Despite the higher delinquencies and the increased liquidation rates that come along with them, we find that stressing both default rates and loss severities would rarely lead to even the most subordinated investors experiencing losses.”
The rise in subprime auto lending could be one of the major reasons why shares of both General Motors Company GM and Ford Motor Company F are now trading at historically-low PE ratios of below 7.0 despite record auto sales in 2015.
Disclosure: the author holds no position in the stocks mentioned.
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