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ABS Spotlight Summary - May 2018

Core Content Overview

The May 2018 issue of ABS Spotlight provides a detailed analysis of credit trends and risks in various asset-backed securities (ABS) markets, including auto loans, credit cards, consumer loans, and commercial/structured finance products. It also covers the credit implications of proposed regulatory changes and trade policies.

Key Topics and Main Points

Auto Loan ABS - US

• Risk Layering: Longer-term auto loans (72 months or more) in prime deals have higher net loss rates due to slower amortization and longer exposure to credit events.
• Credit Characteristics: Longer-term loans are underwritten to less creditworthy borrowers and have lower weighted average credit scores and higher loan-to-value (LTV) ratios.
• Loan Terms: Original loan terms in prime auto ABS have increased, reaching about 65 months in Q1 2018 from 62 months in 2010.
• Pricing: Auto lenders factor in risk layering when setting APR, typically charging 100 bps more for longer-term loans. However, competitive pressures may compress this risk premium.
• Historical Losses: Cumulative losses for longer-term loans from 2003–2015 were 2–5 times higher than for shorter-term loans.

Consumer Credit Trends

• Household Debt Growth: The growth of household debt slowed to 3.8% in Q1 2018, which is credit positive as it is below the 2017 growth rate and aligns with the 2018 GDP forecast.
• Delinquency Rates: Delinquency rates for new credit card and auto loans declined slightly, but are expected to rise modestly over the next year.
• Auto Loan Slowdown: Auto loan growth slowed significantly in Q1 2018, with the slowest annual pace since Q3 2012.
• Credit Card Underwriting: Underwriting standards for credit cards and auto loans tightened modestly, which is a positive signal, though concerns remain about lenders becoming complacent.

Credit Card ABS - Canada

• Performance: Credit card performance in Canada remained steady in March 2018, with a net charge-off rate of 3.27% and a delinquency rate of 2.37%.
• Payment Rates: Payment rates increased to 42.15% in March 2018, up from 38.10% in February, but declined slightly from March 2017.
• Yield and Excess Spread: The average yield dropped by 64 bps to 22.97%, while excess spread increased slightly.

Proposed T-Mobile/Sprint Merger

• Credit Implications:
  • Positive for Sprint Spectrum ABS: The merger is expected to improve the credit quality of Sprint's spectrum ABS due to stronger guarantees and a higher corporate family rating (Ba2 for T-Mobile vs. B2 for Sprint).
  • Negative for Wireless Tower ABS: The merger could reduce demand for tower space and increase lessee concentration risk, though the sector may benefit from rising data usage and 5G adoption.
• Legal Protections: The merger would not automatically trigger acceleration of Sprint's spectrum ABS notes, but could lead to a downgrade, which would require a prepayment offer or default if not addressed.

California's Proposed Building Standards

• Solar ABS: The new standards, requiring solar photovoltaic systems on new residential buildings starting in 2020, are credit positive for solar ABS due to increased solar installations.
• Utilities: The standards are credit negative for California utilities, as they will face higher costs and reduced revenue from non-solar customers.
• Policy Context: California is leading in implementing carbon policies despite the lack of federal action, aiming to reduce emissions by 700,000 metric tons over three years and achieve 50% renewable electricity by 2030.

China Tariff Proposal

• Targeted Sectors: The proposed tariffs on $50 billion of US exports will have mixed credit impacts, primarily affecting agriculture, aerospace, motor vehicles, chemicals, and plastics.
• Mitigation Factors: Many affected companies have diversified operations or can reroute trade flows, reducing the impact on credit.
• Soybeans: The US agriculture sector, especially soybean producers, faces the greatest credit risk due to China's large demand.
• Tobacco and Pharmaceuticals: Legalization of marijuana could negatively affect longer-dated tobacco settlement bonds and pressure some pharmaceutical categories, though it may create long-term opportunities for CBD-based products.

Marijuana Investment Trends

• Legalization Impact: Marijuana is illegal at the federal level but legal in 29 states and recreational in nine others, creating both challenges and opportunities for various industries.
• Alcoholic Beverage and Tobacco Companies: These companies may face substitution risks from marijuana, but could also benefit from new product development and distribution expertise.
• Pharmaceuticals: Legalization may pressure some categories but also open up long-term commercialization opportunities for CBD-based products.

Key Links and Resources

• Sector Updates: Auto ABS - US: Sector Update
• Performance Updates:
  • Prime Auto ABS
  • Credit Card ABS
  • Private Student Loan ABS
• Quick Check Portals:
  • ABS Quick Check
  • Structured Finance
• Podcasts: An Introduction to the US Credit Card ABS Market

Conclusion

The May 2018 issue of ABS Spotlight highlights key credit trends in the US and Canadian ABS markets, emphasizing the role of risk layering in auto loans, the impact of regulatory changes on solar and wireless tower ABS, and the mixed effects of the China tariff proposal. It also touches on the broader implications of marijuana legalization for various sectors. The report underscores the importance of underwriting standards, loan terms, and market dynamics in shaping credit risk and performance.