Moody's: US auto ABS credit quality to marginally decline, issuance to increase in 2013

In addition, Moody's anticipates that outstanding auto ABS will not be materially affected by a recession that might result from an inability of the government to resolve the budget crisis and avoid automatic spending cuts and tax increases (the fiscal cliff) because of the strong credit characteristics backing earlier vintages. Moody's also projects higher auto ABS issuance driven in part by the increase in investor demand for a well-known product that can satisfy a need for short-term cash surrogate investment as well as a need for yield from deeply subordinated non-investment-grade tranches.

"We are changing our outlook for the US auto ABS to stable, after having maintained a positive outlook for the last two years," says Mack Caldwell, a Moody's senior vice president. "The change reflects the growing appetite for risk among both lenders and investors."

Drivers of lower credit quality

The Moody's report cites three trends that will drive the marginal credit quality decline in 2013. First, the credit characteristics of loans moved from sponsor-managed portfolios the their ABS pools will be weaker. Second, some prime lenders will intentionally begin to lend to less creditworthy borrowers because of the saturation of lending in the prime sector. Third, the subprime auto market, an attractive investment for private equity and the structured capital markets to some extent, will have the means to expand.

Impact of the fiscal cliff

In a recent report, Moody's Analytics predicts an unemployment rate of 9.1% by the fourth quarter of 2013 if the US government goes over the fiscal cliff. While existing vintages of auto ABS would be little affected because of their strong credit profile, new auto ABS pools featuring weaker credit obligors will deteriorate to a greater degree but not to the levels during the recession when performance was roughly twice the loss level that we had expected.

New issuance

Moody's predicts that bank and bank-affiliated sponsors will issue more auto ABS volume in 2013 as well in order to diversify funding and provide a means for growing existing auto platforms.

The report, which covers Moody's credit views on auto loan, auto lease and floorplan ABS is available to registered users at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF309768.

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J McGinnis Caldwell Senior Vice President Structured Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Aron Bergman Analyst Structured Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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