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Both S&P Global Ratings and Moody’s Investors Service are trying to use their data and information about the auto ABS market to project the health of finance companies and their portfolios later this summer and beyond.

Each firm considered payment frequency, extensions and other actions to help finance company customers and what how those actions might impact providers’ cash flow and other parts of their businesses.

Beginning with S&P Global Ratings, analysts there recapped that for the seven-week span that ended April 25, approximately 33.5 million new jobless workers filed for unemployment. With the majority of newly unemployed or furloughed workers indicating that their job loss was temporary — likely the result of COVID-19 social distancing and containment measures — S&P Global Ratings explained that finance companies responded by giving extensions to affected individuals.

As a result, analysts discovered extensions in auto loan ABS rose significantly in April relative to March.

In the prime segment for April, S&P Global Ratings computed that extensions on a dollar basis equaled 5.76% of outstanding loans as of the beginning of the month, a 54% increase over March’s elevated level of 3.75%. For the four subprime auto loan ABS packages the firm tracks, analysts found extensions more than doubled to 15.75% from 6.82% in March.

“One of the challenges we face in predicting what the rise in losses due to COVID-19 will be is the high level of extensions themselves and not knowing what portion of these extended contracts will resume payments and which will default,” S&P Global Ratings said in an update shared with SubPrime Auto Finance News.

“However, we observed that, of the subprime auto loans extended in March, 24% made some kind of payment in April,” the firm continued. “There hasn’t been sufficient performance at this point to measure the percentage of extended loans that will ultimately default. We suspect that this will start to become clearer in July and August, and that the levels will likely vary by originator.”

S&P Global Ratings went on to note that even as states permit more businesses to operate again, unemployment remains at a level rarely even seen.

“In our view, extensions will likely remain elevated for May due to continued high unemployment levels,” analysts said. “However, as states start to reopen and workers are called back, we would expect extensions to decline and a greater number of obligors to resume their payments.

“Nonetheless, unemployment levels are expected to remain high through the end of the year, and many of the temporary job losses may turn into permanent reductions in workforce,” they continued. Once the extra $600 in unemployment benefits runs out at the end of July, we’re likely to have a clearer picture of how the COVID-19-induced recession is affecting borrowers’ longer-term ability to pay their vehicle loans.

“S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak,” analysts went onto say. “Some government authorities estimate the pandemic will peak around midyear, and we are using this assumption in assessing the economic and credit implications. In our view, the measures adopted to contain COVID-19 have pushed the global economy into recession. As the situation evolves, we will update our assumptions and estimates accordingly.”

Over at Moody’s Investors Service, analysts there also acknowledged finance companies with securitizations likely have worked with their contract holders who have been impacted financially by the coronavirus pandemic.

“Servicers’ approaches to offering borrower relief will drive the prevalence of extension rates,” Moody’s Investors Service said in a separate update sent to SubPrime Auto Finance News. “Servicers that proactively reach out to borrowers and are more generous with their extension policy are likely to have a higher portion of borrowers in an underlying pool with extensions.

“In some cases, these servicers do not require borrowers to prove financial hardship in order to grant a COVID-19-related extension,” the firm continued. “While some of these borrowers will default, many may continue to make their payments once the deferral period ends.

“Conversely, a servicer that is more selective with extension offerings will likely capture a greater share of financially stressed borrowers, increasing borrower default risks once the deferral period expires,” Moody’s Investors Service went on to say.

Analysts emphasized that rising extensions weaken short-term cash flows. They pointed out that reserve funds are available to provide support in the case of short-term declines in interest collections and are typically sized between 0.25% and 1.00% of the initial pool balance.

Furthermore, Moody’s Investors Service noted available principal and interest collections are commingled and used to pay bond interest before bond principal, reducing the risk of a missed note interest payment.

“High levels of loan extensions pose risks to deals’ credit enhancement,” Moody’s Investors Service said. “Typically, auto loan ABS feature sequential-pay structures wherein enhancement builds for senior notes in line with pool paydown. Slow pool paydowns reduce the rate of credit enhancement buildup as noteholders receive smaller distributions. Furthermore, lower pool interest collections can lead to the use of principal collections to cover interest payments on notes, resulting in a decline in over-collateralization.

“Growth in newly offered extensions will decrease through May and June as servicers tighten the criteria around subsequent extensions, easing liquidity risk for deals as cash flows improve,” analysts continued. “The number of new extensions as well as the deferral terms will decline as servicers move to resume loan cash flows.

“At the same time, borrowers who received extensions in March and April will be scheduled to resume their payments, gradually decreasing the share of pools that are extended,” Moody’s Investors Service went on to say. “Additionally, demand for extensions is likely to ease as the reopening of state economies and businesses serves to provide cash to some struggling borrowers.