This week, Fitch Ratings and Kroll Bond Rating Agency (KBRA) offered their latest analysis of recent and potential future auto finance performance based on securitizations, with Fitch seeing the possibility of the subprime segment remaining “resilient,” while KBRA is anticipating some seasonal performance deterioration.

Beginning first with KBRA’s update, firm analysts indicated November remittance reports showed that securitized prime and non-prime auto credit performance continued to soften during the October collection period. KBRA explained the recent decline in used vehicle values led to lower recoveries during the month, causing an increase in net losses for both indices.

According to its report, annualized net losses in KBRA’s prime and non-prime auto indices climbed 8 basis points and 65 basis points month-over-month, respectively, to 0.41 and 7.81%, while the percentage of contract holders 60 days or more past due remained essentially flat at 0.39% and 5.28%.

KBRA determined recovery rates fell 4.8 percentage points and 3.6 percentage points on a month-over-month basis to 48.7% and 43.3% in its prime and non-prime indices, respectively. However, analysts pointed out these metrics remain in line with historical levels, trending near 2017-2019 values in both of their indices.

Considering seasonal trends and the current economic environment, we expect credit performance to generally soften in the coming months, as holiday spending, weakening consumer credit fundamentals, and higher heating costs during the winter months all weigh on borrowers’ finances,” KBRA analysts said.

“Although decreasing vehicle prices will place pressure on recovery rates next year, lower car values should improve affordability for new originations,” they added.

Meanwhile, Fitch Ratings expects the “stronger and most-established” platforms in the fragmented subprime auto ABS space to remain “resilient” even during economic softening, according to its newest report.

Analysts reasoned that performance, low unemployment, still solid yet declining used-vehicle price indicators, and protection provided by securitization structures will support the platforms.

Fitch acknowledged the subprime market has grown increasingly fragmented with a wide spectrum of issuers, and the firms said it is selective in determining which transactions to rate and to what level. Fitch said it primarily differentiates based on inconsistent or limited performance data.

Fitch said it is aware various risks to the transactions, including increased competition, extended-term contracts, regulatory scrutiny, negative headlines and the potential for deterioration in used-vehicle values.

“These risks are unlikely to significantly affect performance for established lenders with the appropriate mitigants,” Fitch said in a news release.

“Much of the consistent performance stems from issuers’ ability to mitigate the aforementioned risks,” analysts continued. “The most robust issuers do so by combining quantitative factors like appropriate credit enhancement with qualitative factors such as experience with servicing and compliance. Fitch conducts our ratings analysis with a conservative through-the-cycle approach in deriving loss proxies.”

While subprime losses and delinquencies exceed prime levels, Fitch recapped that subprime performance throughout the pandemic reached record lows due to government assistance, payment relief, and high payment priority.

Analysts added performance is weakening as support for borrowers decreases but remains within Fitch’s expectations.

“Despite macroeconomic softening after the better-than-expected pandemic performance, Fitch expects that the most established auto loan securitizations should remain resilient in a downturn. Lenders lacking operational experience and risk mitigants are more vulnerable to underperformance,” analysts said.

Fitch’s full report titled, Established Subprime Auto Loan ABS Issuers to Remain Resilient in Slowing Economy, is available at www.fitchratings.comor.