articles Ratings /ratings/en/research/articles/200511-european-auto-and-consumer-abs-analysis-adjusted-to-reflect-covid-19-effects-11482573 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

In This List
COMMENTS

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.

Liquidity

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.

Credit

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.

Liquidity

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.

Performance

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: www.spglobal.com/ratings). 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;
volker.laeger@spglobal.com
Secondary Contacts:Elton Eakins, London (44) 20-7176-3698;
elton.eakins@spglobal.com
Roberto Paciotti, Milan (39) 02-72111-261;
roberto.paciotti@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.