Subprime auto ABS ratings examined in 3 stressed scenarios
S&P Global Ratings went to its investment research laboratory recently because market participants have become increasingly concerned about subprime auto ABS given that the economy may be on the precipice of a recession wherein unemployment levels would likely rise and inflation could persist.
Given the established relationship between unemployment and losses on collateral backing auto loan ABS, as evidenced in the 2007-2009 recession, S&P Global Ratings acknowledged there is market interest in understanding the likely impact of expected higher unemployment on consumer affordability, collateral performance and auto ABS ratings.
To test the resiliency of U.S. subprime auto ABS ratings to a potential economic downturn — the length and depth of which are unknown — S&P Global Ratings ran three hypothetical economic stress scenarios on 54 transactions issued from 2019 through April of this year.
Under the hypothetical base case, analysts said there were no downgrades and a high percentage of the classes rated in the AA to BBB categories were upgraded by one or more categories.
Under the hypothetical mild stress wherein losses increase by 30%, S&P Global Ratings said upgrades exceeded downgrades for classes with investment-grade ratings, and a significant percentage of those in the 'BB' category were downgraded into a lower category.
Under the BBB hypothetical stress, S&P Global Ratings indicated there was an increasing percentage of downgrades as moved from AAA rated classes to B, and a high percentage of the noninvestment grade classes were vulnerable to defaults.
“Even under this stress scenario a significant portion of the AA rated classes were upgraded due to the deleveraging inherent in these transactions as a result of their sequential-pay structures,” S&P Global Ratings said in a news release.