Spreads in the subprime auto ABS sector are showing a sharp disparity between programmatic and less regular issuers as investors focus on better known names and stronger structures in the face of a potential recession.
Panelists at the auto ABS session at the Structured Finance Association's Las Vegas conference this week said that, even though economic forecasts point to credit risk among borrowers, the increase in auto loan delinquencies mostly reflects a normalization after a strong performance during 2021.
Auto loan delinquencies are rising above pre-pandemic levels, according to Citi research, but this is a sign of “normalizing” after the pandemic.
“Both for the subprime and for non-prime, the default rates are not at [the] levels [of] before the pandemic,” said panelist Eugene Belostotsky, ABS research director at Citi.
A difficult market last year sent spreads on BBB rated subprime auto bonds to 450bp on average in the last quarter of 2022. Although spreads had tightened to around 260bp earlier this year, they began to widen again in recent weeks, according to Belostotsky.
However, spreads movements look very different for programmatic issuers than they do for less frequent names in the market.
For example, regular issuer Exeter’s class ‘D’, BBB/BBB rated bond was priced at 250bp over the I-curve on February 17 after the company recently agreed to make limited capital contributions to its 2022 trusts.
In the same week, Avid Acceptance — which issues its last securitization in October 2021 — came to market with a smaller subprime auto deal where the BBB rated tranche was priced at 490bp over the I-curve.
A likely deterioration in borrower health is encouraging investors to hand pick deals with strong structures and more experienced issuers to avoid credit risk while still benefiting from wide spreads, say investors.
One ABS investor told GlobalCapital that they see potential for some subprime auto issuers that have loosened lending standards to go under and trigger some losses for bondholders, though the consensus is that this will not be a generalized, market-wide trend.
“Some lenders loosened underwriting standards more than they should have during the pandemic, and they didn’t tighten them quickly enough,” another market source told GlobalCapital.