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ABS Spotlight Summary - February 2017

Core Content Overview

The February 2017 issue of ABS Spotlight provides an analysis of credit developments across various asset-backed securities (ABS) sectors in the US and Canada. It highlights positive and neutral credit impacts from legal settlements, economic forecasts, and market trends, while also addressing structural and operational risks in the marketplace lending and student loan ABS markets.

Main Sectors and Key Points

Auto & Equipment ABS

• Volkswagen Dealer Settlement (Credit Positive):

  • VW reached a $1.2 billion settlement with US dealers affected by the diesel emissions scandal.
  • The settlement includes cash payouts, inventory repurchases, and deferral of capital improvement obligations.
  • This improves the financial health of dealers, leading to higher payment rates in the VW Credit Auto Master Trust.
  • The trust's monthly payment rates have remained above trigger levels (27.5% and 35.0%), indicating strong performance.
  • The settlement is expected to moderately improve payment rates in the future, but the effects are anticipated to be temporary.

• US Farm Income Forecast (Credit Positive):

  • USDA forecasts a 1.8% increase in US farm net cash income in 2017, ending three years of decline.
  • This is credit positive for equipment ABS tied to agricultural loans, especially for John Deere and CNH Industrial.
  • Although delinquencies remain elevated, the stabilization of the farm sector's interest coverage will limit further deterioration.
  • Net cash income is considered more relevant to credit performance than net farm income, which includes non-cash factors.

Credit Cards & Consumer Loans ABS

• Canadian Credit Card ABS (Lower CE, Credit Positive):

  • Canadian programs have lower credit enhancement (CE) levels compared to US programs due to stronger sponsors and more stable collateral performance.
  • Average CE for Class A notes in Canadian programs is 7%, versus 20% in US programs.
  • Canadian credit card receivables showed only moderate deterioration during the 2008–2009 crisis, suggesting better resilience.

• US Credit Card ABS (Improved Performance):

  • The US Credit Card Index shows a decline in charge-off and delinquency rates in December 2016.
  • Charge-off rate fell to 2.54% (down 8 bps from November), and delinquency rate improved to 1.49% (down 3 bps from November).
  • Payment rates increased significantly to 26.67%, driven by high consumer spending and convenience user accounts.
  • Yield and excess spread also rose, contributing to a positive outlook for the sector in 2017.

Student Loans ABS

• Gainful Employment Findings (Slightly Credit Negative):

  • Recent findings on gainful employment are slightly credit negative for existing student loan deals but positive for future securitizations.
  • This indicates potential risks for current deals but opportunities for new ones.

• Xerox Corp. Split (Credit Risk):

  • Xerox's split may increase risks in private student loan ABS serviced by Xerox Business Services LLC.
  • This could affect the financial stability of the servicer and, consequently, the performance of the ABS.

Marketplace Lending ABS

• Lending Club Legal Ruling (Credit Positive):

  • A court ruling in favor of Lending Club and WebBank in a class-action lawsuit is credit positive for marketplace lending ABS.
  • The ruling supports the use of individual arbitration, reducing the risk of class-action lawsuits that could challenge loan rates under usury laws.
  • This lowers the likelihood of servicing disruptions and operational risks.

• Guide to Marketplace Lending Securitizations:

  • Marketplace loans are defined as online-originated consumer, business, or real estate loans.
  • These loans often have straightforward billing and collections processes, but limited loss mitigation options after defaults.
  • Risks include underwriting uncertainty, fraud, and regulatory exposure, particularly in the US where some loans are originated by banks on behalf of platforms.

Outlook and Other Highlights

• 2017 Outlooks:

  • Moody's provides outlooks for various ABS sectors, including Auto, Equipment, Credit Card, Marketplace Lending, and Student Loans.
  • The outlook suggests stable or improving credit quality in most sectors, with the exception of certain student loan deals.

• SFIG Vegas 2017:

  • Moody's is a Platinum-level sponsor and will present several sessions on topics such as marketplace lending disclosure, regulatory updates, and investor perspectives.
  • The event will take place from 26 February to 1 March in Las Vegas.

• ABS Quick Check Portals:

  • Moody's provides access to ABS Quick Check and Structured Finance portals for real-time data and analysis.

Key Indices and Metrics

• US Prime Auto Loan ABS Credit Indices (December 2016):

  • Net loss rate increased to 0.98% from 0.96% in November and 0.76% in December 2015.
  • 60+ days delinquency rate rose to 0.63% from 0.62% in November and 0.56% in December 2015.
  • Cumulative loss rates increased, but remain within expectations.
  • The performance of these ABS is expected to continue improving in 2017.

• Credit Enhancement Levels:

  • Canadian credit card ABS have lower CE levels due to stronger sponsor credit and collateral performance.
  • US credit card ABS have higher CE levels, reflecting greater risk.

Conclusion

The February 2017 issue of ABS Spotlight underscores a generally positive credit outlook for several ABS sectors, particularly in auto, equipment, and credit card markets. It also highlights legal and structural developments that could impact future performance, including the Lending Club ruling and the Xerox split. The report serves as a comprehensive resource for understanding the current credit landscape and future risks in the US and Canadian ABS markets.