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ABS Spotlight - February 2015 Summary

Core Content Overview

This edition of ABS Spotlight provides an in-depth analysis of key credit issues and developments in the US asset-backed securities (ABS) market, focusing on auto, credit card, and student loan asset classes, as well as commercial and esoteric ABS.

Main Articles and Key Points

Auto Loan ABS

• Exclusive Subsidized Lease Arrangement with GM:

  • General Motors Company (GM) and General Motors Financial Company (GMF) have entered into an exclusive subsidized lease arrangement for Buick, GMC, and Cadillac vehicles.
  • This will increase lease originations for GMF, accelerating its integration into GM and raising its exposure to residual value risk.
  • Residual value risk is more volatile than GMF's other auto finance activities, such as consumer auto loans and dealer floorplan loans, which are more stable.
  • The arrangement will reduce Ally Financial's lease volumes, as it loses its dominant role in GM lease origination. Ally's exposure to residual value risk will also decline.
  • Ally is shifting focus to used vehicle loans and non-GM/non-Chrysler dealers to offset the loss in leasing revenue, which could increase its credit risk.

• Performance Indices:

  • The Moody's Prime Auto Loan Net Loss Rate Index increased to 0.64% in December 2014 from 0.58% in November and 0.57% in December 2013.
  • The 60+ Days Delinquency Rate rose to 0.51% from 0.47% in November and 0.46% in December 2013.
  • These metrics reflect the gradual weakening of borrower credit quality and the impact of economic recovery on underwriting standards.

• Exhibits:

  • Exhibit 1: GMF's lease originations are growing rapidly, but its overall portfolio credit quality remains lower than its prime loan and floorplan loan activities.
  • Exhibit 2: GMF's used vehicle loan volumes far exceed its new vehicle originations, indicating a higher risk profile.
  • Exhibit 3: The risk of leasing is higher than that of consumer and floorplan loans, which could impact earnings predictability.

Credit Card ABS

• Antitrust Ruling and Costco Partnership Termination:

  • A US court ruling against American Express (AmEx) in an antitrust lawsuit is credit negative for its credit card ABS trust.
  • The ruling could reduce interchange fees, which in turn would lower yield and excess spread in the trust.
  • The termination of the Costco co-branded card partnership is also credit negative, as it reduces the proportion of high-quality co-branded accounts in the trust.
  • However, extensions with other co-branded programs, such as Delta, are credit positive for the trust.

• Credit Card Purchase Trends:

  • Purchase volumes for the Big Six credit card banks (including AmEx, Chase, and Capital One) continued to rise in Q4 2014.
  • Purchase rates have recovered to and in many cases exceeded pre-crisis levels, driven by a higher proportion of transactors (cardholders who pay off balances) in the portfolios.
  • The trend of moving from cash to electronic payments is also contributing to the growth in purchase volumes.

• Performance Indices:

  • The Moody's US Prime Auto Loan Index shows an increase in net losses and delinquency rates, reflecting weaker borrower credit quality.
  • The Moody's US Credit Card Index indicates that while purchase rates are rising, the growth in receivables balances is outpacing personal consumer spending.

• Exhibits:

  • Exhibit 1: Purchase volumes and balances for the Big Six banks have grown significantly, with receivables balances increasing faster than purchase volumes.
  • Exhibit 2: Underwriting standards have loosened since 2010, contributing to increased credit card demand.
  • Exhibit 3: The proportion of transactors in credit card portfolios has increased, leading to higher purchase volumes and spending.

Student Loan ABS

• Federal Repayment Plans:

  • The growing use of income-based repayment (IBR) and graduated repayment plans is expected to reduce defaults in FFELP (Federal Family Education Loan Program) student loan ABS.
  • These plans provide more flexibility for borrowers, improving their ability to repay loans.

• Loan Forgiveness:

  • A potential increase in loan forgiveness for borrowers attending for-profit post-secondary schools is a credit negative for private student loan ABS.
  • This could lead to higher default rates and lower recoveries in the event of borrower defaults.

Commercial & Esoteric ABS

• Tobacco 21 Laws:

  • The expansion of "Tobacco 21" laws, which raise the legal age for buying tobacco products, is expected to reduce cigarette consumption and, consequently, revenue to tobacco settlement bonds.

• FDA Approval of Natpara:

  • The FDA's approval of Natpara is credit positive for drug royalty ABS, as it indicates continued demand for the drug and potential for higher royalty payments.

• CCOLT Securitization:

  • CCOLT issued the first rated securitization of consumer marketplace loans originated through the Prosper platform, highlighting the growing importance of marketplace lending in the ABS market.

Key Takeaways

• The exclusive lease arrangement between GM and GMF increases GMF's risk exposure, particularly in residual value, while reducing Ally's lease volumes and shifting its focus to used vehicle loans.
• Antitrust rulings and co-brand partnership terminations negatively impact American Express' credit card ABS trust by reducing interchange fees and co-branded account proportions.
• Federal repayment plans are beneficial for FFELP student loan ABS, while loan forgiveness policies are detrimental to private student loan ABS.
• Tobacco 21 laws and FDA approvals influence the performance of related ABS, with the former reducing revenue and the latter improving it.
• The Big Six credit card banks are experiencing strong purchase growth, driven by increased transactor activity and the shift from cash to electronic payments.

Additional Sections

• Econ Dashboard & Commentary: Provides economic insights and market trends.
• Surveillance Recap: Reviews recent market developments and credit risks.
• Issuance Toteboard: Lists recent ABS issuance activity.

Key Contacts

• Jason Grohotolski: Vice President - Senior Analyst, Moody's Investors Service
• Brian L. Harris: Senior Vice President, Moody's Investors Service
• Robert Young: Managing Director - Financial Institutions, Moody's Investors Service
• Imran Ansari: Analyst, Moody's Investors Service
• Pedro Sancholuz Ruda: Assistant Vice President - Analyst, Moody's Investors Service
• Sarah Huang: Assistant Vice President - Analyst, Moody's Investors Service

Conclusion

This edition highlights the evolving credit landscape in the US ABS market, with a focus on the impacts of business strategies, legal rulings, and regulatory changes on various asset classes. The analysis underscores the importance of monitoring residual value risks, underwriting standards, and consumer behavior trends for accurate credit risk assessment.