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ABS Spotlight - March 2016 Summary

Core Content

The March 2016 edition of ABS Spotlight provides an overview of the US and Canadian asset-backed securities (ABS) markets, with a focus on auto ABS, equipment ABS, credit card ABS, and private student loan ABS. It also includes insights from the ABS Vegas 2016 conference and highlights key credit trends, regulatory developments, and market performance data.

Main Views and Key Information

Market Conditions and Securitization Trends

• Tough market conditions are depressing securitization issuance, with spreads widening and secondary market liquidity declining.
• Subprime auto ABS issuance has increased, indicating some resilience in the sector despite broader challenges.
• Secondary market illiquidity is a major concern, with investors citing reduced liquidity and pricing disagreements as key issues.
• Regulatory changes, such as Reg AB II, are expected to increase costs for issuers and raise privacy and operational challenges.

Auto ABS Overview

• Auto ABS structures are generally simple and standardized, with similar features across countries, supporting stable credit quality.
• Revolving structures are re-emerging in some markets, particularly in the US and China, but they introduce additional credit risk due to the use of incoming cash flows to purchase new receivables.
• Underwriting standards are easing in some markets, particularly in the US and China, which may lead to slightly lower credit performance in newer portfolios.
• Global macroeconomic pressures, such as the oil slump and China's economic slowdown, are affecting portfolio performance in different ways.
• The US auto ABS market is benefiting from a strong domestic economy, but delinquencies are rising slightly due to the economic slowdown in China.
• The Japanese auto ABS market remains strong, supported by a stable economy and supportive labor conditions, though growth is moderate.
• In Europe, the auto ABS market is stable, with low unemployment and a favorable interest rate environment.

Equipment ABS and Risks

• Annual pay loans and leases are increasing risk in equipment ABS short-term notes due to their impact on cash flow and performance.
• Collateral concentration in two recent private student loan ABS deals tied to a single for-profit institution raises concerns about default risk.
• The oil slump is a key concern for CLOs and other asset classes, with potential for increased defaults and contagion effects.

Credit Card and Consumer Loans

• Lending Club's updated model is expected to reduce but not eliminate legal risks.
• US credit card charge-offs increased in February, while the Canadian credit card market showed strong performance in January.
• Marketplace lending is growing rapidly but faces challenges such as legal uncertainties and rising defaults.

Student Loans

• High concentration of collateral in private student loan ABS deals, particularly those tied to a single for-profit institution, is a significant risk factor.
• Legal uncertainties around partner bank origination models are a concern for marketplace lenders.

Other Markets and Asset Classes

• Solar ABS in the US faces challenges from state regulatory changes, such as Nevada's new net metering rules.
• Non-prime mortgages and alternative mortgage products can still offer solid credit quality if they avoid layered risks.
• China has become the second-largest securitization market globally, with a significant portion of issuance from interbank transactions.
• Latin America and South Africa show potential for growth in ABS markets, particularly in credit card merchant receivables and covered bonds.

Tools and Resources

• Moody's has launched a Global Auto ABS Market Comparison Tool, allowing for a comprehensive analysis of auto ABS markets across 14 countries, including qualitative and performance data.
• Moody's CreditView is highlighted as a tool that provides performance data and transparency for structured finance deals.

Regulatory and Legal Considerations

• Risk-retention rules are expected to have a neutral effect on CLOs but may reduce issuance and create disruption in the CMBS market.
• TRID rule complications are affecting mortgage originators in the RMBS market, though buyers still exist for minor non-compliant loans.
• Regulatory concerns are less prominent than before, but remain a key area of discussion and potential impact.

Outlook and Projections

• US GDP growth is forecast at 2.3% in 2016 and 2.5% in 2017, with continued low interest rates.
• Euro area GDP growth is expected to remain around 1.5% in 2016-17, with employment rates in key markets at 4-10%.
• China's GDP growth is projected to slow to 6.3% and 6.1% in 2016 and 2017, respectively, with a moderate increase in auto ABS delinquencies.
• Japan's GDP growth is expected to be between 0.0% and 1.0% in 2016, with low unemployment and stable auto ABS performance.

Conclusion

The March 2016 ABS Spotlight underscores the complex interplay between market conditions, regulatory changes, and structural features in the ABS market. While some sectors show resilience, others face growing risks, particularly in the context of global macroeconomic headwinds. Moody's continues to monitor these developments closely and provide insights to support informed investment decisions.