S&P: Corp Auto Downgrades Will Increase US ABS Deals

    NEW YORK--Standard & Poor's--Nov. 20, 2001-- Standard & Poor's recent corporate ratings downgrade of the Big Three automakers is not likely to adversely affect existing structured financings in that market. However, the resulting reduction in access to the unsecured commercial paper market will increase the volume of auto-related asset-backed term deals while activating a commingling trigger built into the transactions, said Paul Kelly, managing director of ABS Consumer Assets at Standard & Poor's.
    Historically, General Motors Acceptance Corp. (GM), DaimlerChrysler AG, and Ford Motor Credit Co. (Ford) have been regular issuers in the asset-backed term market and still "have plenty of receivables on their balance sheets available to be securitized and have not securitized as high a percentage of assets as the monoline credit card companies," said Mr. Kelly.
    In anticipation of the corporate rating action, the Big Three managed their liability and capital structures and liquidity positions, and, to varying degrees, increased their issuance of structured debt transactions and access to the asset-backed market as an additional source of funding and liquidity, Mr. Kelly said. "This will result in an increase in the volume of auto-related asset-backed term deals as well as in structured commercial paper."
    The corporate ratings action saw GM and Ford fall to triple-'B'-plus/Stable/'A-2' while the rating on Germany-based auto manufacturer DaimlerChrysler was lowered for the second time this year, most recently Oct. 31, to triple-'B'-plus /Negative/'A-2'. Scott Sprinzen, managing director of Corporate Ratings at Standard & Poor's, attributed the lower ratings to a "confluence of adverse developments." Mr. Sprinzen explained in a recent report that demand in the automakers' core North American market has held up this year "far better than previously assumed," but pricing pressures and market share losses "have denied them the earnings and cash flow benefits."
    "While there has been evidence of consumer credit weakness as indicated by an increase in delinquency and net loss, the stress tests in the structured deals have incorporated these scenarios and no rating actions for collateral performance are anticipated at this time," said Mr. Kelly. "However, we continue to monitor deal performance closely."
    Even before the tragic events of Sept. 11, signs of softness in consumer demand propelled the Big Three into fierce competitive pricing moves, including the 0% financing deals designed to maintain or recapture market share in this near-record sales year. The consensus is the current windfall will surely taper off as the reality of recession sets in among consumers.
    Ford and GM have dedicated single-seller asset-backed commercial paper programs, which issue structured commercial paper rated 'A-1'-plus and 'A-1'. These programs require that the assets purchased be rated term notes, which could have a positive impact on volume should these companies choose to increase their programs as an option in managing their liquidity position, Mr. Kelly explained.
    Alternatively, access to the multiseller commercial paper market would provide 'A-1'-plus or 'A-1' funding with the sale to the conduit of a pool of receivables or a variable funding note backed by a revolving pool of receivables, Mr. Kelly noted.
    To ensure funds in the structured term deals are not subject to issuer credit risk during the collection period, the transaction structure provides for the remittance of collected funds to a segregated trust account within two business days. Servicers rated 'A-1' or better can remit funds on a monthly basis, typically the day preceding the payment date. A trigger is built into the structure to reduce the risk of funds being commingled, shortening the risk horizon to two days.
    Thus, assuming an even collection of funds during the collection period, investors have a 22-day commingling risk on average with highly related servicers, Mr. Kelly said. "Of course, the magnitude of the risk is a function of the liquidation rate or payment rate of the collateral, which differs between the loan, lease, and wholesale product."