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ABS Spotlight Summary - November 2017

Core Content

The November 2017 issue of ABS Spotlight provides an overview of key credit issues affecting the US and Canadian asset-backed securities (ABS) markets. The report covers several sectors, including auto finance, credit cards, student loans, wireless towers, and railroads, and analyzes the performance and credit implications of various developments.

Main Points

Auto Finance Sector

• Negative Outlook: The global auto industry faces a negative outlook due to stagnant or falling demand in the US and China, two of the largest and most profitable auto markets.
• Shift to Larger Vehicles: Consumers have shifted to crossovers, SUVs, and trucks due to lower gas prices, and this trend is expected to continue through 2020.
• Lease Expirations: The number of maturing leases reached a record high in 2017 (3.6 million) and is projected to grow to 4.3 million by 2019, leading to downward pressure on used car prices.
• Looser Underwriting: Increased competition has led to looser underwriting standards and longer loan terms (now 68.8 months, up from 62.0 in 2010).
• Subprime Loans: Subprime loans now account for about 20% of post-crisis auto lending, down from 25%, and are not expected to pose a material risk due to their small proportion of total lending.
• Securitization Role: Securitization is less important now than before the financial crisis, with only 14% of auto loans being securitized, compared to 20% pre-crisis. Securitization is more critical for finance companies than for banks or captive lenders.

Credit Card ABS – Canada

• Performance in September: Net charge-offs declined to 2.83% (from 3.00% in August), while delinquency rates increased slightly.
• Delinquency Breakdown: Early-stage delinquency rose by 6.41%, mid-stage by 3.97%, and late-stage by 2.70%.
• Payment Rate: The average payment rate fell to 42.28% in September, down from 45.58% in August.
• Yield and Excess Spread: Yield dropped to 23.08% (from 23.30% in August), while excess spread increased to 19.08%.
• Total Receivables: As of September 2017, the performance data tracked CAD37.4 billion in Canadian credit card receivables.
• Seasonal Trends: Performance trends align with seasonal patterns, with net charge-offs declining and delinquencies rising.

Private Student Loan ABS – US

• Strong Collateral Quality: Refinancing lenders (CommonBond, DRB, SoFi) have demonstrated strong performance in PSL ABS due to high borrower credit quality and a favorable economic environment.
• Cumulative Default Expectation: Moody's has reduced its cumulative default expectation for newly issued securitizations in the sector to 2.5% from 6.5%.
• Nelnet's Acquisition of Great Lakes: This acquisition is credit negative for Nelnet and its securitizations due to integration risks and increased regulatory scrutiny. It may lead to a reduction in the DOE's loan allocation if the combined entity is viewed as a single entity.
• Impact on FFELP ABS: The acquisition could negatively affect the performance of FFELP ABS, as the combined entity might face scrutiny that impacts loan allocations and servicing.

Wireless Tower Industry

• New Tower Suppliers: The entry of new tower suppliers like Tillman Infrastructure and the Softbank/Lendlease joint venture is credit negative for existing tower operators (CCI, AMT, SBA) and their ABS due to potential downward pressure on lease rates and reduced lease renewals.
• Failed Sprint/T-Mobile Merger: The collapse of the merger is credit positive for wireless tower operators and their ABS, as it leads to increased demand for infrastructure and more lease renewals.
• Lease Renewals: With the merger failure, tower operators are expected to see higher lease renewals and improved prospects for new leases, which will benefit ABS cash flows.
• Tower Operator Market Share: CCI, AMT, and SBA collectively own or operate about 95,000 of the 120,000 wireless towers in the US, indicating strong market presence.

Structured Settlement ABS – J.G. Wentworth

• Restructuring: J.G. Wentworth announced a restructuring plan that will significantly deleverage the company, reducing interest expenses and delaying debt maturity by two years.
• Servicing Continuity: The restructuring will not disrupt servicing of its 32 Moody's-rated ABS transactions, as the servicer (J.G. Wentworth Management Company) is not part of the bankruptcy filing.
• Backup Servicers: The ABS have backup servicers (Portfolio Financial Servicing Company) and standby/master servicers (Deutsche Bank Trust Company Americas and U.S. Bank National Association) to ensure continuity in case of service disruption.
• Market Challenges: Despite the restructuring, J.G. Wentworth faces increased competition and lower margins in the structured settlement market.

Railroads – North America

• Freight Growth Slowdown: A recent slowdown in freight growth is expected to continue, but the outlook remains stable due to sustained pricing gains.
• Freight Revenue Growth: Total freight revenue is forecasted to grow between 3% and 4.5% over the next 12 to 18 months, excluding fuel surcharge changes.
• Coal Shipments: Coal carloads are expected to remain flat or decline slightly due to the long-term secular decline driven by natural gas and environmental regulations.
• Grain Carloads: Weak export markets and stronger overseas crops are expected to weigh on grain carloads, leading to mid-single-digit declines.
• Intermodal Growth: Intermodal freight is expected to continue growing, albeit at a slower pace than year-to-date.
• Crude Oil and Construction Materials: Crude oil shipments are expected to extend their decline, while crushed stone, sand, and gravel shipments will continue to grow due to increased demand for frac sand.

Key Information

• Negative Dynamics in Auto Finance: Stagnant demand, shift to larger vehicles, lease expirations, and looser underwriting standards are key factors.
• Credit Card ABS Performance: Seasonal trends and high proportion of convenience card users influence performance metrics.
• Private Student Loan ABS: Strong collateral quality and improved underwriting standards have led to better performance, but future risks remain.
• Wireless Tower ABS: New tower suppliers and merger failures have different impacts on credit quality and cash flows.
• Structured Settlement ABS: Restructuring plans ensure servicing continuity, but the company still faces market challenges.
• Railroads Outlook: Stable outlook despite freight growth slowdowns, driven by pricing gains and strong demand in certain sectors.

Summary of Key Ratings and Entities

Conclusion

The report highlights the evolving credit landscape across various ABS sectors, emphasizing the impact of market dynamics, regulatory changes, and strategic business decisions. While some sectors face challenges, others benefit from favorable trends, underscoring the importance of ongoing monitoring and analysis in the asset-backed securities market.