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ABS Spotlight Summary - July 2017

Core Content Overview

This issue of ABS Spotlight focuses on the credit implications of several key events and trends in the asset-backed securities (ABS) market, particularly in the auto, credit card, and student loan sectors. It also touches on the shipping and wireless tower industries, and introduces solar loans as a new ABS collateral type.

Main Topics and Key Information

1. Takata Bankruptcy and Auto ABS Impact

• Takata's Bankruptcy: Takata Corporation and its US subsidiary filed for bankruptcy due to a massive global recall of faulty airbags.
• Impact on Auto ABS:
  • Japan: Minimal impact on auto loan ABS due to limited exposure to affected vehicles and free replacement of airbags by manufacturers.
  • US: Limited impact on auto loan ABS, but some auto lease ABS may face higher loss severity if replacement airbags are delayed.
  • Europe: Minimal exposure, so the impact is expected to be negligible.
• Mitigation Factors:
  • Auto manufacturers are replacing faulty airbags free of charge.
  • Most affected vehicles are older, and auto loan ABS deals typically finance new vehicles.

2. Store Closures and Credit Card ABS Performance

• Trend: US department store, office supply, and specialty apparel companies are accelerating store closures due to the shift to e-commerce and mall traffic weakness.
• Credit Impact:
  • Private-label and co-branded credit cards will be negatively affected as cardholders lose access to physical stores.
  • Charge-off rates may rise, and revenues from these accounts could decline.
• Affected Entities:
  • Synchrony Financial Inc. and Alliance Data Systems Corporation are highly exposed to private-label credit cards.
  • Citigroup and Capital One have smaller but still notable exposure.
• Mitigation:
  • The US economy remains strong, and some retailers can shift customers to online channels.
  • Only a portion of credit card accounts are tied to retailers facing challenges.

3. Solar Loans as a New ABS Collateral Type

• Solar Loans Overview:
  • A new consumer credit product with some similarities to existing ABS collateral types.
  • Credit risks include fraud, regulatory issues, and technological changes.
• Risk Comparison:
  • Solar loans are less risky than unsecured marketplace lending (MPL), but more risky than closed-end second lien mortgages (CES), private student loans, and mid-ticket equipment loans.
• Key Credit Drivers:
  • Borrower credit quality and the ongoing utility of solar panels.
  • Potential for fraud and regulatory uncertainty around net metering.

4. US Credit Card Index: Charge-offs Tick Up in May

• Performance Metrics:
  • Charge-off rate increased to 2.83% in May, up from 2.61% in April.
  • Delinquency rate fell to 1.41%, but year-over-year delinquencies increased.
  • Payment rate rose to 27.29%, showing improvement in borrower repayment behavior.
  • Aggregate Yield increased to 19.34%, and Excess Spread rose to 13.51%.
• Outlook:
  • Overall positive for the sector due to the strong labor market and full employment.
  • High proportion of convenience card users keeps payment rates elevated.

5. Canadian Credit Card Index: Performance Strengthened in May

• Performance Metrics:
  • Net Charge-off rate decreased to 3.17%, down from 3.26% in April.
  • Delinquency rate fell to 2.02%, down 22 bps from April.
  • Payment rate increased to 48.48%, well above historical averages.
  • Yield rose to 23.75%, and Excess Spread increased to 20.41%.
• Index Data:
  • The index tracks CAD37.2 billion in Canadian credit card receivables as of May 2017.

6. National Collegiate Student Loan Trust (NCSLT)

• Legal Disputes:
  • Ongoing legal disputes are credit negative due to potential servicing transfers and litigation costs.
• Tranche Performance:
  • Most senior NCSLT tranches will pay off even under high-stress scenarios.
  • Junior and subordinate tranches are more likely to suffer losses, especially if the transaction lacks deleveraging or subordinate triggers.
• Key Factors:
  • Fast deleveraging and a cap on transaction expenses help senior tranches.
  • Five NCSLT transactions are expected to face difficulty in paying off senior tranches under stress.

7. Potential Sprint/T-Mobile Merger

• Impact on Spectrum ABS:
  • The merger is expected to improve credit quality of Sprint’s spectrum ABS transaction.
  • A prepayment trigger would protect noteholders if Sprint repays the transaction.
• Impact on Wireless Tower ABS:
  • The merger would lead to reduced lease activity, negatively affecting cash flows.
  • The impact is gradual and varies by transaction depending on exposure to Sprint and T-Mobile.
  • Long-term outlook for the wireless tower sector remains positive.

8. Shipping - Global: Containership and Dry Bulk Drive Stable Outlook

• Market Outlook:
  • The shipping industry outlook was changed to stable from negative.
  • Dry bulk and containership segments show signs of recovery, albeit slow.
• EBITDA:
  • EBITDA is expected to decline modestly in 2017.
  • Low single-digit EBITDA declines are expected, which is an improvement from last year's double-digit losses.
• Segment Analysis:
  • Dry bulk will see slower supply growth than demand, leading to moderate rate increases.
  • Containerships will continue to face supply over demand, but average charter rates will be higher than 2016.
  • Tanker segment remains negative due to high new ship deliveries and low freight rates.

Summary of Key Views

• Takata Bankruptcy: Minimal impact on auto ABS in Japan and Europe, but some risk for US auto lease ABS.
• Store Closures: Credit negative for private-label and co-branded credit cards, with limited impact on most banks and ABS trusts.
• Solar Loans: A new ABS collateral type with risks similar to other ABS products.
• Credit Card Performance:
  • US charge-offs increased, but delinquency and payment rates improved.
  • Canadian credit card performance strengthened in May.
• NCSLT Tranches: Most senior tranches will pay off despite legal disputes.
• Sprint/T-Mobile Merger: Mixed impact, with benefits for spectrum ABS and negative effects on wireless tower ABS.
• Shipping Outlook: Stable for dry bulk and containership, negative for tankers.

Additional Notes

• The report does not announce any credit rating actions.
• Full reports can be accessed via the provided links.
• Endnotes and contact information are available for further details and inquiries.