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ABS Spotlight Summary - November 2016

Core Content Overview

This edition of ABS Spotlight provides insights into the current state and future outlook of various asset-backed securities (ABS) sectors in the US and Canada, focusing on credit quality, performance indices, and market trends.

Key Sectors and Their Analysis

Autos & Equipment

Subprime Auto Finance - US

• Core Content: Subprime auto lending is inherently risky, but lenders with broad franchises and diverse funding sources are better positioned to withstand market confidence drops.
• Main Points:
  • Diversified lenders benefit from parental or affiliate support and stable operations.
  • Smaller monoline lenders are more vulnerable due to reliance on short-term warehouse lending and ABS.
  • Private equity ownership may push lenders to take on riskier borrowers, increasing loan losses.
  • Moody's highlights Ally Financial, Santander Consumer USA, and General Motors Financial as key players with strong credit profiles.

Auto Lease ABS - US

• Core Content: Low gas prices are negatively impacting the sales and residual values of gas-alternative vehicles.
• Main Points:
  • Hybrid and electric vehicles are seeing reduced demand, affecting the collateral mix and residual values in auto lease ABS.
  • The Volkswagen diesel emissions settlement is credit positive for its US auto ABS, as it leads to increased prepayments and reduced residual value risk.
  • The settlement also lowers default risk due to customer dissatisfaction and may lead to early vehicle returns, accelerating cash flows and improving credit enhancement.

Auto ABS - US

• Core Content: The Prime Auto Loan ABS credit indices show improvement in September 2016.
• Main Points:
  • Net loss rate decreased to 0.91% from 0.92% in August, a 1 basis point drop.
  • The delinquency rate decreased to 0.59% from 0.61%, a 2 basis point drop.
  • Cumulative loss rate increased to 0.58% from 0.46%, a 12 basis point rise.
  • Charge-offs fell to a record low of 2.28% in September, down 25 basis points from August.
  • Delinquency rates increased slightly, but remained low due to strong payment rates.
  • Payment rates remained high, driven by convenience card users.
  • Aggregate yield and excess spread both declined, but the overall credit quality of securitized credit card pools remained strong.

Credit Cards & Consumer Loans

Marketplace Lending ABS - US

• Core Content: The FDIC's proposal for improved risk management could enhance the credit quality of marketplace loans.
• Main Points:
  • The proposal would improve oversight of third-party lending models, reducing credit risk.
  • It would require partner banks to evaluate third-party lending models for accuracy and compliance.
  • The guidance aims to increase transparency and reduce risky practices.
  • Banks with less robust oversight practices may see more immediate credit benefits.

Canadian Credit Card Index

• Core Content: Canadian credit card charge-offs and delinquencies increased slightly in August 2016.
• Main Points:
  • Net charge-off rate rose to 3.02% from 3.06% in July, and up from 2.96% in August 2015.
  • Total delinquency rate increased to 2.14% from 2.01% in August 2015.
  • Payment rate improved significantly to 45.73%, up from 42.60% in July.
  • Yield increased to 23.65%, and excess spread rose to 18.77%.
  • The index tracks CAD36.6 billion in Canadian credit card receivables.

Commercial & Esoteric ABS

Tobacco Settlement ABS - US

• Core Content: California's new cigarette tax is credit negative for tobacco settlement bonds.
• Main Points:
  • Proposition 56 increases the state's cigarette tax rate by over 35%, likely reducing national consumption.
  • This will negatively impact the cash flow available to service tobacco bonds.
  • The tax is expected to reduce cigarette consumption by approximately 50 basis points in 2017.
  • The MSA (Master Settlement Agreement) payments are based on cigarette shipment volumes, so reduced consumption means slower bond paydown.

Other Highlights

U.S. Restaurants

• Core Content: Higher operating costs and traffic trends are expected to pressure restaurant earnings in 2017.
• Main Points:
  • The outlook for the restaurant sector was revised to stable from positive.
  • Operating income is expected to grow at 2%–4%, down from the previous 5%–6%.
  • Labor costs are a major concern, especially as commodity prices rise.
  • Casual dining is expected to perform worse than fast casual and traditional QSR.
  • International markets remain a growth opportunity despite domestic challenges.

Key Links and Indices

• Performance Summaries:

  • Auto Loan ABS
  • Auto Lease ABS
  • Auto Floorplan ABS

• Performance Indices:

  • Prime Auto ABS
  • Credit Card ABS
  • Private Student Loan ABS

• Quick Check Portals:

  • ABS Quick Check
  • Structured Finance

Also in This Issue

• ABS - US: Surveillance Recap: October 2016
• ABS - US: ABS Toteboard: October Issuance Volume Falls Behind Prior-Year Period

Summary of Key Findings