NEW YORK -

Perhaps Kroll Bond Rating Agency (KBRA) offered evidence that the atmosphere in auto financing might actually be returning to normalcy, especially when it comes to delinquency and losses.

In April, KBRA placed 229 securities on watch across the unsecured consumer and auto ABS sectors. Over the subsequent months, the firm said credit performance has been better than expected, and the transactions have continued to pay timely interest, while credit enhancement levels have generally risen due to structural de-levering.

As a result, KBRA said all ratings previously on watch were removed from watch status and affirmed as of Oct. 23. This move included 169 unsecured consumer credit deals and 60 auto ABS deals.

“Unsecured consumer and auto loan performance has so far been resilient amid the pandemic, supported by government stimulus checks, enhanced unemployment benefits, and payment relief options offered by loan servicers. In addition, most originators had implemented tighter underwriting standards leading up to the crisis as many were anticipating a business cycle downturn,” KBRA said in its report that highlighted the watch moves.

“In the aggregate, we have seen lower net losses and delinquency rates from March through October compared to the start of 2020 and versus year-over-year levels. These trends demonstrate that borrowers are resuming payments, even as hardship assistance programs wane and additional government stimulus is stalled,” analysts continued.

“While delinquency rates have started to increase in recent months, KBRA believes this is a return to normal delinquency patterns rather than an indication of significant stress. KBRA expects delinquencies and losses to increase through the remainder of the year, however, this may again be moderated if an additional stimulus program is implemented and similar payment assistance programs are extended,” analysts went on say.

KBRA then elaborated on what elements could trigger more turbulence for auto-finance companies; factors outside of the industry.

“Even though securities have shown good performance, clouds remain on the horizon. The markets continue to operate in an uncertain environment in regard to the virus, and federal stimulus does not appear imminent, with some indicating it may not come until after the presidential inauguration,” the firm said.

“Further, many forms of relief including eviction moratoriums for renters and homeowners as well as mortgage and student loan forbearance, will expire as we enter next year. However, the deleveraging that occurred in many deals leaves them better positioned, from a credit enhancement perspective, to withstand future performance degradation, particularly investment-grade securities,” analysts went on to say.