NEW YORK -

S&P Global Ratings is observing what it dubbed “generally better-than-expected loss results,” according to its latest report on the auto loan ABS market.

And analysts gave an upbeat forecast for the trends to continue this year as unemployment levels tick lower and the pandemic gradually subsides because of vaccine distribution.

“The generally better-than-expected loss results, improved employment outlook, and wide variances in extension rates across issuers led us to reduce the fixed incremental adjustment to base-case cumulative net losses that we applied to our auto loan ABS transactions last year beginning in late March,” analysts said in the report.

“In the application of our criteria, we are now factoring into our analysis issuer-specific performance data since the start of the pandemic, among other factors, to determine the degree of the COVID-19-related loss adjustment for a given transaction,” they continued.

S&P Global Ratings explained that as expected at the onset of the pandemic in March, extension rates increased significantly as finance companies sought to provide payment relief for contract holders that were unemployed due to business closures from the statewide mandated shutdowns. The firm pointed out that monthly extension rates for U.S. prime and subprime auto loan ABS peaked in April, but subsequently trended downward as statewide closures eased in May and through the summer months.

Despite the reduction in extension rates from their peak last spring, analysts acknowledged that they have yet to see delinquencies and losses increase to typical pre-COVID levels, although S&P Global Ratings noticed that they are starting to trend upward.

Analysts explained that strong delinquency and loss performance has been due to a confluence of factors that have occurred since the start of the pandemic, including enhanced unemployment benefits and stimulus checks, unprecedented levels of extensions granted by finance companies and soaring used-vehicle values.

“We are continuing to monitor how COVID-19 is affecting outstanding transactions and considering how it will impact future ones,” analysts said. “As the pandemic has intensified in recent months, we expect monthly extension rates to continue to rise, but not to the levels we saw in the spring of 2020.

“The high rates of infection have led to reduced business activity, which, in turn, has cut working hours and salaries for many of those still employed, and have kept first-time unemployment claims high (at nearly 780,000 for the week ended Jan. 30 — about 3.1 times pre-pandemic levels,” analysts continued. “Still, unemployment levels remain substantially below where they were in April (peaking at 14.7%) and we expect them to average 6.4% this year.

“Also, a potential third round of stimulus checks is currently being discussed by President Biden’s administration that, along with the stimulus check received in January and the upcoming tax refunds, could reduce the need for extensions and limit the potential increase in losses,” analysts went on to say. “We also expect used-vehicle supply to remain constrained throughout most of 2021, which could continue to support strong used-vehicle values and assist with decreasing the severity of losses on charge-offs.”

As important as those ingredients might be to the health of the auto loan ABS market, S&P Global Ratings might be putting its strongest forecasting emphasis on vaccine availability. The firm pointed out that vaccine production and inoculations are ramping up in the U.S. and throughout the world.

“Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter,” analysts said. “However, some emerging markets may only be able to achieve widespread immunization by year-end or later.

“We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic. As the situation evolves, we will update our assumptions and estimates accordingly,” they added.