Fitch: Risks Remain Present for U.S. Auto ABS in 2010 Amid Late-2009 Stabilization

NEW YORK--Despite performance improvements late last year, loss frequency will remain heightened for U.S. prime auto ABS in 2010 with unemployment expected to remain in the 10% range for much of 2010, according to Fitch Ratings.

After hitting record highs in 2009, U.S. prime auto loan ABS loss rates posted improvements in the final months of last year. Prime annualized net losses (ANL) were at 1.52% in December 2009, a 6% improvement compared to November. On an annual basis, loss levels have improved 23% against December 2008, supported by improving and stable used vehicle values which drove recovery rates higher throughout most of 2009. December posted the fourth consecutive year-over-year improvement in ANL.

Prime auto loan ABS exhibited solid rating performance in 2009, despite declining asset performance and elevated loss levels. Fitch issued 33 rating upgrades in 2009 versus 36 in 2008. There were six prime downgrades issued on just two transactions in 2009, virtually unchanged compared to 2008. Stable ratings performance is attributed to several features present in auto loan ABS including transaction loss proxies being derived utilizing performance data from the weakest performing vintages (2007 and 2008); and structural features including quick amortization along with building credit enhancement levels.

Fitch expects both delinquency and losses to improve in the first quarter of 2010 driven solely by seasonal patterns. 'Workers getting back to work from the holidays, bonuses, and also tax refunds and rebates all aid consumers during the first few months of the year,' said Senior Director Hylton Heard.

Fitch believes that loss severity will be less of a factor in 2010, as the new and used vehicle markets adjusted capacity by severely cutting production levels and thus reducing supply into the used vehicle market. Risks that could drive loss severity higher in 2010 include weakness at the manufacturer level, which would then affect brand values and ultimately depress recovery rates on defaulted loans.

Prime auto loan ABS delinquencies of 60+ days were at 0.71% in December 2009, a 6% increase over November's level mimicking seasonal patterns. Delinquencies did improve on a year-over-year basis by 16.5% through the end of 2009. The rate of delinquencies remains elevated given the poor state of the job market and job creation, poor consumer fundamentals, and high consumer debt levels.

In the subprime sector, delinquencies were 4.47% in December, a 10% improvement compared to the end of the third quarter. Through the end of 2009, delinquencies were within range of the levels at year-end 2008. ANL were 8.90% in December, a 10% improvement over November and also a year earlier, but continue to display volatility month-to-month given the nature of the consumer and sensitivity to changes in the economy and consumer fundamentals.

Fitch's auto ABS indexes track approximately $45 billion worth of outstanding loans issued from 95 transactions. Prime collateral composes 82% of the index, and subprime the remaining 18%.

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