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European Auto And Consumer ABS: Analysis Adjusted To Reflect COVID-19 Effects

European Auto And Consumer ABS: Analysis Adjusted To Reflect COVID-19 Effects

S&P Global Ratings has updated the credit and cash flow assumptions that we apply in our European auto and consumer asset-backed securities (ABS) analysis. The adjustments reflect the effect of COVID-19, and the associated lockdown and social distancing measures introduced across Europe by the respective governments since early March. The updated assumptions are applicable in the analysis of new issuances as well as in the surveillance of outstanding ratings.


Two components negatively affect the liquidity in these transactions: forbearance measures, like payment holidays, and disruptions in recovery processes. We believe that European auto and consumer ABS are generally in a good position to weather even significant drops or delays in collections, but they could face longer-term challenges if liquidity risks eventually translate into higher credit losses (see "European ABS And RMBS: Assessing The Credit Effects Of COVID-19," published on March 30, 2020).

To reflect the effect of increased forbearance measures, we may adjust our cash flow modelling and will typically decrease scheduled collections by 25% for up to six months. We then assume these amounts to be collected by the servicers in the six months after the portfolio's current weighted-average life ends.

In addition, to reflect current disruptions to collection and workout efforts, we typically extend the transaction-specific recovery timing assumed in our cash flow modelling by 50%, with a maximum extension of six months.


Our base-case default assumptions incorporate a forward-looking view of the securitized pool's expected performance under our prevailing macroeconomic outlook. In light of our current recessionary outlook for Europe, we have increased our base-case default rate assumptions for European auto and consumer ABS, typically by 25 to 50 basis points (see "Economic Research: Europe Braces For A Deeper Recession In 2020," published on April 20, 2020).

In our view, government actions taken so far to bolster European economies from the effects of COVID-19 will support ABS performance. Unemployment is one of the primary drivers for defaults in auto and consumer ABS, and many of the support measures, such as partial unemployment schemes, aim to prevent unemployment from spiking.

Table 1

S&P Global Ratings' European Unemployment Rate Forecasts
As of April 2020
Germany France Italy Spain The Netherlands Belgium Eurozone U.K. Switzerland
2018 3.4 9.1 10.6 15.3 3.8 6.0 8.2 4.1 4.7
2019 3.2 8.5 9.9 14.1 3.4 5.4 7.6 3.8 4.4
2020 3.6 9.5 11.1 16.4 3.8 6.0 8.6 6.1 5.3
2021 3.8 9.7 11.2 16.5 3.9 6.1 8.6 6.0 5.1
2022 3.6 9.1 10.6 16.1 3.7 5.8 8.1 4.4 4.7
2023 3.5 8.7 10.0 15.8 3.6 5.6 7.8 4.2 4.3
Source: S&P Global Ratings.

While we expect higher base-case defaults because of COVID-19, we do not currently believe that the expected level of macroeconomic stress warrants an overarching revision to the stressed default assumptions at the 'BBB' rating level or higher, although that could change.

For U.K. and Irish transactions, where the pools include receivables with the right for voluntary terminations, we apply adjustments to the base-case default assumptions similar to those laid out above. This is based on our expectation that, given weaker used car markets (see also below), there is an increased incentive for borrowers to exercise their voluntary termination right where their equity in the financed car becomes negative. Whereas we expect the number of voluntary terminations to drop in the short term due to the lockdown measures, which generally prevent borrowers from returning their car, we expect them to pick up again and increase after these measures are eased.

Residual Values

On the back of our expectation that European light vehicles sales will likely be down 15%-20% in 2020 and remain subdued in 2021, we also expect weakening European used car markets (see "COVID-19 Will Batter Global Auto Sales And Credit Quality," published on March 23, 2020). Therefore, for transactions with direct residual value exposure, we typically adjust our usual base market value decline assumptions by up to 200 basis points. Similar to the changes we made to the base-case default assumptions, we typically apply these upward adjustments at the 'BBB-' and lower ratings. At present, we see our market value decline assumptions for rating stresses of 'BBB' and above as already including the stress levels we expect to see in the used car markets.

Table 2

Summary Of COVID-19 Adjustments
Assumption Typical Additional COVID-19 Stress
Liquidity stress Delay 25% of the collections in the first six months to after WAL
Recovery timing Extend by 1.5x (up to six months)
Gross loss base case Increase between 25 bps to 50 bps
Voluntary termination base case Increase between 25 bps to 50 bps
Residual value Increase base market value decline by up to 200 bps
WAL--Weighted-average life. bps--basis points.

Performance Monitoring

As the situation evolves, we will continue to monitor how it is affecting outstanding transactions and will take appropriate rating actions, as we deem necessary. In particular, we are monitoring the following:

Operational risks

While servicers typically mastered the initial execution of their business continuity plans without significant disruptions in collections and servicing, we will continue to monitor servicing capabilities and levels, especially in workout.

Third-party credit risk

None of the rated European auto or consumer ABS transactions that we rate is weak-linked to the originator or servicer, and neither are any of the ratings on captive auto ABS transactions weak-linked to the manufacturer or manufacturer group. Still, there can be counterparty risks with regard to any of those parties (such as commingling or set-off risks), which are often mitigated via downgrade language in line with our counterparty criteria.


We will monitor how many borrowers take up payment holidays and other forbearance measures, how those are reported for the transactions, whether the related exposures are repurchased, and how the expected scheduled collections develop. In addition to the specific liquidity situation for the given transactions, this will allow us to understand industry trends and perform peer comparisons for given jurisdictions. We will also monitor how the recovery timing changes.


Actual performance of the rated transactions is of utmost importance in the surveillance of our outstanding ratings. That said, we acknowledge that observation of performance in transaction reports (e.g. increasing defaults or voluntary terminations, or decreasing residual values) is typically only possible with certain delays. We therefore also monitor transaction parameters that we deem to be early indicators of performance, such as drops in actual collections or excess spread, use of reserve funds, or increases in short-term arrears. We will also follow changes in portfolios' scheduled payment profiles, as those are affected by forbearance actions. This can give us additional insight into the impact of measures like payment holidays or extension of loans or leases in cases where a return of the car was or is not possible due to lockdown measures. Another parameter we are looking into is the number of direct debit cancellations, as we would expect those to rise when borrowers get into financial difficulties. In addition, we use market information, e.g. for the development of the used car markets, to complement the analysis.

We acknowledge a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak around midyear, and we are using this assumption in assessing the economic and credit implications. In our view, the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research

  • Economic Research: EU Response To COVID-19 Can Chart A Path To Sustainable Growth, April 22, 2020
  • Economic Research: Europe Braces For A Deeper Recession In 2020, April 20, 2020
  • Economic Research: COVID-19 Deals A Larger, Longer Hit To Global GDP, April 16, 2020
  • European Credit Card ABS: Assessing The Credit Effects Of COVID-19, April 9, 2020
  • European ABS And RMBS: Assessing The Credit Effects Of COVID-19, March 30, 2020
  • COVID-19 Will Batter Global Auto Sales And Credit Quality, March 23, 2020

This report does not constitute a rating action.

Primary Credit Analyst:Volker Laeger, Frankfurt (49) 69-33-999-302;
Secondary Contacts:Elton Eakins, London (44) 20-7176-3698;
Roberto Paciotti, Milan (39) 02-72111-261;

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