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Auto ABS Portfolios - The Same…but Different

The commentary analyses the main characteristics of European auto ABS transactions rated by DBRS Morningstar in recent years. Despite auto ABS often being considered a generic asset class, we highlight variances within underlying portfolios that can be substantial. Characteristics of the portfolios result in specific considerations that are then reflected in the expected credit performance of the portfolios underpinning European auto ABS transactions.

Summary highlights include:
-- Captive lenders that normally have more prudent credit policies and attract stronger borrower profiles typically display lower expected default rates and higher expected recovery rates.
-- Transactions that are also exposed to market risk usually exhibit higher default rates as well as higher expected recovery rates.
-- The performance of the debtors who have purchased used vehicles tends to be worse in both terms of expected defaults and recoveries. However, the gap has narrowed over recent years and portfolios in certain jurisdictions (Germany) seem to exhibit very low expected default rates even if the portfolio comprises a high percentage of receivables related to used vehicles.

“We expect to see more transactions backed by portfolios originated by nonfinancial captives with a focus on used vehicle financing, a comparative increase in market risk compared to credit risk, an increase in receivables related to alternatively fueled vehicles, a stable trend among jurisdictions, and an increase in near prime lenders approaching the auto ABS market”, said Guglielmo Panizza, Assistant Vice President, European ABS at DBRS Morningstar.