US Prime Auto Loan ABS Improve to Pre-Crisis 2007 Levels

The strong seasonal benefits of tax refunds and better recovery rates on repossessed vehicles have led to a 30% decline in delinquencies and losses on U.S. prime auto loan ABS through the first four months of 2010, according to Fitch Ratings.

Fitch's 60+ day delinquency index fell 20% in April, while annualized net losses (ANL) improved by 15% posting the third consecutive monthly decline, both over March levels. The strong performance in the prime sector marks the first time the indices returned to pre-crisis levels, while the subprime sector exhibited similar trends.

'Stabilizing economic and consumer fundamentals along with further amortization of weaker 2007 and 2008 vintages are all benefiting auto ABS,' said Director Ben Tano. 'Additionally, strong used vehicle values led to annualized net losses shrinking to their lowest levels in over two years.'

Annualized net losses (ANL) fell by 50% to 1.05% in April from 2.09% a year ago, representing the lowest level for ANL since third quarter-2007. Further, the strong 2009 vintage securitized collateral is producing much lower loss rates than in the past ten years, contributing to better performance overall.

Fitch's prime 60+ days delinquency index posted a decrease of 20% in April from March, dropping to 0.51%, 13.6% lower than the same period in 2009 and the lowest level since June 2007. Tax returns benefited the consumer with average refunds through April 30 up 8% from the previous record year in 2009. Despite the seasonal strength, delinquencies and loss frequency will continue to remain a concern for auto ABS transactions. With unemployment at 9.9% and other economic and consumer issues lingering in the U.S. economy, Fitch expects a slow recovery with continued elevated unemployment through the remainder of this year.

Ratings performance in 2010 and the outlook for the remainder of the year, continues to be stable. To date, Fitch has issued 12 upgrades in 2010 through mid-May, versus eight through May 2009. Fitch would expect positive rating actions to pick up pace given the improved level of performance in the prime sector this year relative to 2009 and 2008.

In the subprime sector, 60+ day delinquencies fell 16.4% in April to 2.86%, the lowest level in two years. Subprime ANL fell 6.3% to 6.56%, returning to levels last seen in mid-2008.

Improvements in the auto ABS sector have coincided with the positive momentum present in the automobile manufacturer market. New vehicle sales volumes are rising while costs are down and low inventories have granted manufacturers greater pricing power. As a result, the financial strength of the auto industry is improving with most manufacturers together with their captive finance arms posting profits in the first quarter of 2010. Fitch upgraded the long-term Issuer Default Ratings of Ford Motor Company and its subsidiary Ford Motor Credit Company (as the ratings are linked) to 'B' from 'B-', with a Positive Outlook in late April. Additionally, Fitch upgraded Hyundai Motor Company and Kia Motors's long-term IDR to 'BBB-' from 'BB+' on May 9.

Fitch's indexes track approximately $55.9 billion worth of prime and subprime auto loan ABS. Of this total, 86% are prime loans while the remaining are subprime loans, all issued from over 100 ABS transactions.