Fitch: 2Q off to Strong Start for U.S. Auto Loan ABS; Losses Drop 21%

NEW YORK--(BUSINESS WIRE)--Sizeable drops in both delinquencies and losses continued for prime U.S. auto loan ABS in April, according to Fitch Ratings.

Fitch's 60+ day delinquency index fell for the second straight month, declining almost 12% to 0.45% in April. Annualized net losses (ANL) improved by 21% to 0.53%, posting the third straight monthly decline. ANL are similar to mid-June 2006 levels and the second lowest level on record going back to 2001.

'Tax refunds and personal income gains along with healthy recovery rates are supporting further improvements in prime auto loan ABS performance,' said Senior Director Hylton Heard.

Delinquencies have declined 25% through the first four months of 2011, while losses are 55% lower. Fitch expects the drop in delinquencies to potentially translate into improved losses in May. Fitch has observed that the nascent strong performance in the prime sector is akin to the performance observed during the period spanning from 2006-2007, with the subprime sector exhibiting similar trends.

Despite this seasonal strength, Fitch is watchful of any developments that could negatively impact delinquencies and loss frequency.

'Unemployment remains stubbornly high, while the prospects for the U.S. economy to slow this quarter have increased,' said Heard.

Used vehicle values have remained robust this far, benefiting from tight inventory supply as a result of production cuts and dwindling parts supplies stemming from the March earthquake in Japan. Most Japanese manufacturers are not expected to return to full capacity until later this year. This puts into question the level of new vehicle inventory some dealers will have on their lots during the seasonally strong summer months for auto sales. This phenomenon is in turn supporting used vehicle prices as some dealers are turning to late-year models to fill their limited supply of new vehicle inventory.

Furthermore, used car prices have increased in recent months as gas prices rose through early May, especially for entry and mid-level models. Additionally, full size SUV and truck values have suffered and exhibited softness. Despite the fact that gas prices have since come off the peak levels of mid-May, larger size vehicle segments are still continuing to exhibit weakness as their values are highly sensitive to increase in gas prices, which continue to remain high by historical measures.

Ratings performance in 2011 and the outlook for the remainder of the year continues to be stable. To date, Fitch issued 32 upgrades in 2011 through April, versus 15 during the same period in 2010. Fitch expects positive rating actions to continue in 2011. Conversely, negative actions figure to be limited given current asset performance as a result of U.S. economic stability, positive industry momentum within the auto sector, and the benefits of structural features present in transactions. Fitch's outlook for asset performance remains stable for 2011.

In the subprime sector, 60+ day delinquencies fell 34% in April to 1.73%, the second lowest level on record since the inception of the index since January 1995. Subprime ANL fell 11.8% to 4.52%, or 31% below year-ago levels.

Fitch's indices track the performance of $57.9 billion in auto loan ABS. Of this amount, 80.2% or $46.4 billion is from 82 outstanding prime auto loan ABS transactions, while the remaining 19.8% or $11.4 billion is comprised of subprime auto loan ABS issued from 26 transactions.

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