NEW YORK — The performance of auto asset-backed securities is a key factor in investors' and capital markets' appetite for such issuances.

And with the auto lending markets tight, keeping a close eye on the performance of prime and subprime vintages could be a key indicator of when the volume of securitizations is likely to ramp up, thus opening up more capital for lenders and captives to slowly ramp up auto loans. 

While Fitch Rating prime and subprime auto asset-backed securities indices are remaining at elevated levels, in a positive turn, the company pointed to some improvements as boding well for the industry.

Prime Performance

Analyzing prime performances, Fitch reported that its 60-plus delinquency index continued to show volatility during the first quarter due to the macroeconomic environment and seasonality.

The index displayed increases in January and February of 8.45 percent and 3.90 percent, respectively, but showed some strength, posting a "notable" decline of 20 percent in March.

"The 60-plus day delinquency index was at 0.64 percent in March 2010, compared with 0.69 percent the previous year, a year-over-year decrease of 7.3 percent," Fitch officials explained in their In the Auto ABS Driver's Seat report.

The index hit a record high of 0.87 percent in January/February 2009 and has remained within that elevated range since. The 10-year average for the 60-plus day delinquency index is 0.54 percent.

Seasonal patterns drove performance during the first few months of 2010, with consumers turning to tax refunds to pay down bills and reduce outstanding debt starting in February and continuing through April.

Other factors bolstering improvements in the indices include the tightening of lending standards and improved loan pools in transactions issued in 2009 and 2010 vintages, when compared to weaker 2007-2008 asset originations, which led to lower overall losses.

"These improvements are expected to continue in the near term as older transactions from the 2006-2008 vintages amortize down, while newer vintages exhibit lower loss performance and begin to represent a bigger weighted-average concentration in the indices," according to the company.

"However, Fitch notes that macroeconomic drivers, such as high unemployment, are expected to persist, pressuring delinquency levels. Meanwhile, loss levels should benefit from improved performance in April, driven by the positive seasonal factors mentioned previously," executives highlighted.

Continuing on, the company indicated that prime annualized net losses improved to 1.24 percent in March, which is a 20.5-percent drop from February. This is a 40.4 percent improvement over the previous year and was the seventh straight month of year-over-year ANL improvement.

"The index last hit this loss range back in the early to mid 2008. Seasonally adjusted cumulative net losses remained elevated during the first quarter of 2010. Fitch's CNL index was at 1.22 percent in March, virtually unchanged for the past six months. The current level is 6.1 percent higher than March 2009 and above the historical average of 0.85 percent. The index hit an all-time high of 1.29 percent in August 2009. Fitch's prime auto loan ABS index tracks the performance of approximately $42.2 billion of outstanding notes from 75 transactions," officials explained.

Fitch reported that improving asset performance actually continued to allow for rating upgrades early this year. In fact, the company issued 11 upgrades through mid April, which is similar to the amount issued in 2009.

"Fitch's outlook for prime rating performance continues to remain stable for the second quarter and for the rest of 2010," the company noted.

Subprime Performance

Also showing some improvement was the subprime performance side of the sector, according to Fitch.

Subprime 60-plus day delinquencies dropped sharply in March after growing in January and February.

The company reported that delinquencies came in at 3.42 percent in March, a 28.9-percent drop compared to February. Further explaining, Fitch officials pointed out that delinquencies reached a high of 5.04 percent in January 2009 and have actually reverted back to "near historical averages" since.

Subprime ANLs were 7 percent in March, which is a 22.8-percent decline compared to the prior month.

"As with the prime sector, subprime ANLs remain above historical levels, even though they have exhibited improvement in recent months. Fitch's subprime ANL index reached an all-time high of 10.1 percent in November 2008," the company said.

The company's subprime auto ABS indices represent about $8.4 billion of collateral outstanding issued from 27 transactions.

"It's important to note that these subprime indices track a smaller amount of transactions with amortizing balances. This, coupled with minimal new issuance, has caused the index to shrink over the past two years. Therefore, the performance of individual transactions comprising the indices is having a greater influence on overall performance metrics on both the delinquency and loss sides," officials pointed out.

Consumer Trends

An interesting point Fitch made about consumers in its report is that apparently, they continued to deleverage in the first quarter.

In February, outstanding consumer credit declined at an annual rate of 5.5 percent when compared to the previous month. Revolving credit dropped at an annual rate of more than 13 percent to "near-term lows."

"This comes as consumers are dealing with higher gas prices than in 2009, up more than 30 percent year-over-year, and continual drops in housing values. U.S. home prices fell 0.2 percent on a seasonally adjusted basis from January to February, and for the 12 months ending in February are 3.4 percent lower, according to the Federal Housing Finance Agency's monthly House Price Index," Fitch executives indicated.

However, on a positive note, apparently, personal income got better in the first quarter; however, this was a lower rate than in prior months.

"The U.S. stock market rose further in February and March after a small dip in January," the company said.

Furthermore, Fitch saw positive trends from the record high tax refund levels.

"While the economy's fundamentals are gradually improving, consumers continue to face hardships and a weak job market. The Conference Board's Consumer Confidence Index highlighted these concerns in the first quarter, particularly in February when the index plunged 10 points in March and 5.6 points in April. Notably, consumer bankruptcies are continuing their upward trend, jumping 33.6 percent from February to March, which represents a 22.9 percent gain versus 2009," officials reported.

Recovery, Repo Rates

Thanks in large part to record-level wholesale prices, Fitch pointed out that the strength in used-vehicle prices has contributed to higher recovery rates on defaulted loans and repossessed vehicles in both auto loan and auto lease ABS portfolios.

"Thus, the loss severity is lower relative to late 2008 levels, and ultimately, loss rates in auto loans ABS transactions are declining relative to 2008 and 2009," the company highlighted.

Fitch referred to both Manheim's Used Vehicle Index and ADESA auction statistics to support its analysis.

Noting that incentives on new vehicles grew during the first quarter, Fitch stressed that this is a trend to watch closely.

"(I)ncentives will be a key statistic to watch going forward as automakers begin to factor expectations of a recovering domestic market into sales forecasts and may ramp up production levels accordingly. A return to the hypercompetitive auto markets of earlier this decade could quickly erase the gains in the wholesale vehicle market in recent periods and harm recovery values and loss performance in auto loan ABS transactions. As such, manufacturers need to continue to maintain discipline in this area," Fitch strongly recommended.

First Canadian Auto Issuances

In April, Fitch rated its first term auto-related ABS transactions in the Canadian market.

Fitch rated the Canadian SWIFT Master Auto Receivables Trust, series 2010-1, a dealer floor plan ABS securitization sponsored and serviced by GMAC of Canada Limited, which is an indirect, wholly owned subsidiary of GMAC.

The $1.7 billion class rated "AAA" is secured by an undivided co-ownership interest in a revolving pool of dealer floor plan receivables arising from credit lines made by GMAC of Canada Limited to dealers in Canada franchised by GM Canada, Chrysler Canada and other OEMs.

Also, in the auto lease arena, Fitch indicated it assigned ratings on NIF-T series 2010-1, a Canadian auto lease securitization backed by Canadian auto leases and sponsored and serviced by Nissan Canada Finance, which is owned by Nissan Canada.

Floor Plan Criteria Revamp

The company also noted that it has published a "materially revamped dealer floor plan ABS criteria."

"The criteria report encompasses both diversified and non-diversified (including auto captives) dealer floor plan platforms. Fitch assumes a high dealer default frequency regardless of the Issuer Default Rating of the related manufacturer/lender. With this process, Fitch effectively delinks the dealer floor plan ABS rating from the financial strength of the manufacturer/lender," the company explained.