NEW YORK -

Recent stress tests conducted by Fitch Ratings determined the majority of AAAsf rated U.S. prime auto loan ABS outstanding classes of notes are comfortably able to withstand a hypothetical recession and material declines in used-vehicle recovery rates.

Under the moderate scenario, Fitch expects all AAAsf rated notes to likely remain rated investment grade with nearly three-quarters of these ratings to stay rated AAAsf while nearly 90 percent would stay in the top two rating categories.

Fitch believes the likelihood of the severe scenario — unemployment rising to 20 percent and recovery rates dropping to 25 percent — occurring is extremely remote.

However, if this were to occur, Fitch’s analysis found that the scenario would likely cause 67 percent of outstanding AAAsf rated notes to be downgraded to non-investment grade while the remaining 33 percent would be expected to remain rated investment grade.

Fitch explained that it subjected its ratings on prime auto loan ABS to two stress scenarios, moderate and severe, by stressing the two factors that most directly affect asset performance. Analysts insist U.S. unemployment drives loss frequency, and recovery rates on used vehicle values of defaulted and repossessed loans affect loss severity.

“The moderate scenario mimics conditions observed in the U.S. during the recessionary 2008–2009 period,” the firm noted.

“Fitch calibrated the severe stress scenario to be substantially more stressful as it assumes unemployment well above peak U.S. levels and reduces wholesale vehicle values well below the historical lows recorded in 2008–2009,” analysts continued.

To gauge the impact on outstanding AAAsf ratings, Fitch stressed unemployment from a base level of 6 percent to 12 percent under the moderate scenario and 20 percent for the severe case. Fitch reduced assumed wholesale vehicle values from an historical average of 50 percent down to 40 percent under the moderate case and 25 percent for the severe case.

“Seasoned transactions (2006–2008 vintages) which are producing some of the highest loss rates to date, can withstand even the severe stress since they are largely paid off, and have built significant enhancement,” Fitch determined.

Analysts went on to mention that, “2009–2012 transactions, which are producing some of the lowest loss rates to date, are more susceptible to downgrades under the severe scenario, but mostly will be able to withstand even this stress.

“Under the moderate scenario, most AAAsf ratings issued during this period would remain AAAsf, and no ratings would be expected to drop below investment grade,” they added.

Fitch pointed out the moderate scenario was designed to be consistent with that observed in 2008–2009. The firm also said the severe scenario assumed a dramatic downturn in the U.S. economy with unemployment rising to 20 percent accompanied by an immediate decline in vehicle values to levels never seen previously.

“Of note, the rating migration under the moderate scenario (and therefore also the severe case) is much more severe comparable to the actual rating migration experienced during 2008–2009,” analysts surmised.

“During this period, Fitch only issued three downgrades on investment grade rated prime auto loan ABS notes one only category,” they continued. “Further, virtually every subordinate note issued and rated by Fitch experienced positive ratings actions, including those from the 2006–2009 vintage transactions.

Fitch mentioned the stress tests were carried out as part of a wider study into how robust global structured finance ratings are to a prolonged economic downturn.

The firm expects to conduct similar stress test reports in the coming months for other structured finance asset classes.