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ABS Spotlight Summary - July 2017

Core Content Overview

This issue of ABS Spotlight provides an analysis of key credit issues impacting the US and Canadian asset-backed securities (ABS) markets, focusing on the following areas:

• Auto ABS: Impact of Takata's bankruptcy on auto loan and lease ABS.
• Credit Cards & Consumer Loans: Effects of store closures on private-label and co-branded credit cards, along with performance updates for US and Canadian credit card indices.
• Student Loans: Assessment of the National Collegiate Student Loan Trust (NCSLT) and its performance under different stress scenarios.
• Commercial & Esoteric ABS: Analysis of the potential Sprint/T-Mobile merger and its implications for wireless spectrum and tower ABS.
• Shipping Sector: Outlook for the global shipping industry, particularly containership, dry bulk, and tanker segments.

Main Points and Key Information

1. Takata Bankruptcy Impact on Auto ABS

• Minimal impact on auto loan ABS: The bankruptcy of Takata Corporation and its US subsidiary is unlikely to negatively affect the performance of auto loan ABS in Japan, the US, and Europe.
• Limited exposure to faulty airbags: Auto loan ABS deals have limited exposure to vehicles with faulty Takata airbags.
• Higher risk in US auto lease ABS: Some US auto lease ABS transactions have higher exposure to vehicles with faulty airbags, which could lead to higher loss severities if replacement delays occur.
• Japanese auto manufacturers will continue free replacements: Despite uncertainty over compensation, Japanese auto manufacturers will continue to replace faulty airbags at no cost to consumers, ensuring continued loan repayment.
• European auto ABS has minimal exposure: Most European vehicles with faulty airbags were built before 2012, and auto ABS deals are primarily for new cars, so the impact is limited.

2. Store Closures and Credit Card Performance

• Credit negative for private-label and co-branded cards: Store closures are hurting private-label and co-branded credit card performance due to reduced consumer spending and access.
• Key affected issuers: Synchrony Financial Inc., Alliance Data Systems Corporation, Citigroup, and Capital One are most affected.
• Mitigation factors: The US economy and e-commerce opportunities may help offset some of the negative effects.
• Private-label cards are more vulnerable: Private-label cards are tied to specific retailers and are more sensitive to store closures than general-purpose cards.
• Co-branded cards less affected: Co-branded cards (e.g., linked to airlines or hotels) are less impacted than private-label cards.

3. Solar Loans as a New ABS Collateral Type

• Solar loans are a new ABS asset class: US residential solar loans have backed only a few ABS to date.
• Familiar credit risks: Although new, the credit risks of solar loans (e.g., fraud, regulatory issues, technological change) are not unique to this asset class.
• Relative risk ranking: Solar loans are generally less risky than unsecured marketplace lending (MPL) consumer loans, but more risky than closed-end second lien mortgages (CES), private student loans, and mid-ticket equipment loans.
• Key mitigants: Borrowers typically have strong credit quality and solar panels provide ongoing utility, helping to reduce default risk.

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

• Charge-off rate increases: The charge-off rate rose to 2.83% in May, up from 2.61% in April and 2.75% in May 2016.
• Delinquency rate declines: Delinquency rate fell to 1.41% in May, down from 1.43% in April and up slightly from 1.36% in May 2016.
• Payment rate improves: Payment rate rose to 27.29% in May, up from 25.08% in April and 26.48% in May 2016.
• Positive outlook for 2017: Despite the rise in charge-offs, the strong labor market and continued consumer spending support the performance of securitized credit card pools.

5. Canadian Credit Card Index: Performance Strengthens in May

• Charge-off rate declines: Net charge-off rate fell to 3.17% in May, down from 3.26% in April and 3.33% in May 2016.
• Delinquency rate improves: Delinquency rate dropped to 2.02% in May, down from 2.24% in April and 2.09% in May 2016.
• Payment rate increases: Payment rate rose to 48.48% in May, up from 38.68% in April and 45.78% in May 2016.
• Yield and excess spread improve: Yield increased to 23.75% in May, and excess spread rose to 20.41%.
• Positive outlook: The performance of Canadian credit card ABS is expected to remain strong due to the continued presence of convenience card users.

6. National Collegiate Student Loan Trust (NCSLT)

• Most senior tranches will pay off: Even under high-stress assumptions, most senior NCSLT tranches will pay off due to fast deleveraging and limited additional transaction expenses.
• Junior and subordinate tranches at risk: Some junior Class A tranches may pay off under moderate-stress assumptions, but most subordinate tranches are likely to take a loss.
• Legal disputes as a credit risk: Ongoing legal disputes may lead to servicing transfers and increased transaction costs, but senior tranches are more resilient.

7. Sprint/T-Mobile Merger Impact

• Mixed credit implications: A potential merger between Sprint and T-Mobile would have mixed effects on Sprint's spectrum ABS and negative effects on wireless tower ABS.
• Prepayment trigger protects Sprint spectrum ABS: A prepayment trigger would ensure that Sprint's spectrum ABS noteholders are protected if the merger occurs.
• Wireless tower ABS negatively impacted: Lease renewals and new leases for wireless tower sites are expected to decline, reducing cash flows for tower ABS transactions.
• Gradual and varied impact: The credit effect on wireless tower ABS will be gradual and depend on the specific transaction's exposure to Sprint and T-Mobile.

8. Global Shipping Outlook

• Containership and dry bulk sectors: A stable outlook is maintained due to slow recovery and limited supply growth over demand.
• Tanker segment remains negative: High supply and low freight rates continue to pressure the tanker sector.
• EBITDA expected to decline: EBITDA for rated shipping companies is expected to decline modestly in 2017, but this is an improvement over last year's double-digit declines.
• Consolidation in containership: Companies are expected to continue consolidation to achieve economies of scale and optimize networks.

Key Takeaways

• Auto ABS: Minimal impact from Takata bankruptcy, especially in Japan and Europe.
• Credit Cards: Store closures are a credit risk for private-label and co-branded cards, but overall impact is limited.
• Solar Loans: Emerging asset class with risks similar to other ABS collateral types.
• Student Loans: Most senior NCSLT tranches are expected to pay off, but junior and subordinate tranches are at risk.
• Wireless ABS: Sprint/T-Mobile merger is positive for spectrum ABS but negative for tower ABS.
• Shipping Sector: Stable outlook for containership and dry bulk, negative outlook for tanker due to low freight rates and high supply.