NEW YORK--(BUSINESS WIRE)--Rising US Subprime auto lender competition and an increase in start-ups means problems at one lender could quickly spread to others. Fitch Ratings published a report today examining why "domino" risk is higher in subprime auto lending than other asset-backed securities.
In Fitch's view, the risks to the sector mean that most subprime auto transactions would not earn higher investment-grade ratings and should be capped at 'Asf' or lower. We rate transactions from just three of the nearly 20 active subprime auto lenders: GM Financial (AMCAR), Santander Consumer USA (SDART) and Ally Financial (CARAT).
The intensification of lender competition is particularly important now, as many auto finance companies depend on securitizations for their funding needs. Those lenders that have become overly reliant on securitization face excessive exposure to market volatility, which could ultimately affect investors and customers.
Media reports compared this expansion with the subprime mortgage market in 2006 and 2007. In our view, this comparison is a difficult one to make as the subprime auto market is much smaller than the subprime mortgage market; automobiles depreciate and their prices have a much smaller impact on the overall economy.
However, headline risk or increased regulatory pressure could result in the withdrawal of credit lines and, in some cases, private equity support from one or several lenders subprime auto lenders simultaneously. The report points out that a similar event occurred in the late 1990s in the subprime auto, equipment leasing and franchise lending markets. Fitch is not confident that, in this scenario, larger lenders would step in. We believe some smaller lenders could be left stranded and their borrowers could be under serviced.
The full report 'Subprime Auto Lending Exposed to Domino Risk' is available to subscribers at www.fitchratings.com or by clicking the link above.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research: Subprime Auto Lending Exposed to Domino Risk
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=770268
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