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Subprime Auto Bonds From 2015 May End Up Worst Ever, Fitch Says

A Tesla store is shown at a shopping mall in San Diego, California, U.S., April 28, 2017. REUTERS/Mike Blake

Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitizations, according to Fitch Ratings.

This group of securities is experiencing cumulative net losses at a rate projected to reach 15 percent, which is higher even than for bonds in the 2007, Fitch analysts Hylton Heard and John Bella Jr. wrote in a report Thursday.

“The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending, a trend which was not as apparent in the recessionary vintages,” said the analysts, referring to lenders’ stretching out repayment terms on subprime loans, sometimes to over six years, to lower borrowers’ monthly payment. That becomes riskier in the tail end of the loan, after the car has mostly depreciated and borrowers may be left owing large balances.

Credit-rating companies that assess the auto debt packaged into bonds have raised concerns in recent months about rising delinquencies and defaults. They note that additional pressures in the used-car market have weighed on lenders’ ability to recoup funds from borrowers who have their cars repossessed.

Furthermore, the market for subprime auto-loan securitizations has shifted considerably since 2008. Fitch warns of the rapid growth of new and less-established lenders with weaker underwriting standards, echoing other industry reports that show “deep subprime” lenders making up a bigger part of the market.

While Fitch and competitors including Moody’s Investors Service have cautioned about risky lending practices growing in the auto ABS market, the raters don’t foresee wide-scale downgrades, given structural enhancements in the notes and their fast amortization.

S&P Global Ratings, which rates a larger percentage of the markets than Fitch and Moody’s, has blamed the rising net loss rates on weaker recoveries. S&P noted this month that net losses on prime deals have reached a pace not seen since 2008.