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SF Credit Brief: U.S. Auto ABS Experienced A Dramatic Reduction In Loans In Extension Status In August, But Delinquencies Continued To Rise

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SF Credit Brief: U.S. Auto ABS Experienced A Dramatic Reduction In Loans In Extension Status In August, But Delinquencies Continued To Rise

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Extensions in U.S. public auto loan asset-backed securities (ABS) declined for the fourth consecutive month in August, based on loan-level data filed with the SEC. Across the 17 prime shelves tracked by S&P Global Ratings', extensions dropped 27% to 0.63% from 0.86% in July. For the four subprime shelves in our analysis, extensions decreased 39% to 3.22% from 5.29% in August. Of note, the balance of loans remaining in extension status decreased 42% to 0.99% for prime loans (from 1.71% in July) and 34% for subprime loans to 7.88% (from 11.90% in July). This is an especially informative metric given that many of the prior months' extensions were for multiple months--four months at a time in some cases.

The record-level of extensions resulting from the pandemic-induced recession has been distorting traditional performance metrics, causing losses and delinquencies to be lower than otherwise (see "U.S. Auto Loan ABS Tracker: August 2020 Performance," published Oct. 14, 2020). In order to obtain an early indication of the likely performance of these formerly extended loans, our August extension report also tracks payment and delinquency behavior of loans that have emerged from their forbearance periods.

Chart 1

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Most Public Issuers Reported Lower Extensions in August, But Half Of The Private 144a Subprime Issuers Reported Increases

All of the public prime issuers reported lower extensions in August compared with July, except Ally (see chart 2). Ally's extensions increased approximately 31% to 0.83% from 0.64%. The data, however, indicate that most of these extensions included the receipt of at least a partial payment.

Chart 2

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Similarly, the four public subprime issuers (AmeriCredit, Santander DRIVE (deep-subprime shelf), Santander SDART, and World Omni's Select 2019-A transaction) reported lower extensions month over month (see chart 3). However, five of the 10 144a nonpublic issuers increased their extensions. CPS' extensions increased 22% to 3.49% from 2.86%, Exeter's increased 13% to 4.55% from 4.01%, and Westlake's increased 13% to 4.35% from 3.86%. Exeter's and Westlake's extensions now exceed those of DRIVE (3.86%), whose monthly extension levels had been the highest in the group for April, June, and July. UAC and Avid also reported measurable increases month over month. (For the 144a issuers in chart 3, we used their servicing report data.)

Chart 3

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One-Month Extension Loses Ground

The one-month extension was the most popular extension period in August for 10 of the 21 public shelves, down from 13 in July. The next most common extension term remains two months (see chart 4A).

Chart 4A

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Nearly 50% Of Prime Loans Receiving An August Deferral Made Some Form Of Payment In The Same Month

While the majority of the obligors in the prime and subprime categories who received an extension in August made no payment (53% and 61%, respectively), 47% and 39% (in dollar terms), respectively, made some form of payment (see chart 4B).

Ally reported the greatest success in obtaining some form of payment from those to whom it granted an extension. Approximately 97% of the loans it extended in August had an obligor who made a payment within the month (generally at the same time the extension was granted). However, 78% of these payments were only partial payments, not full monthly payments. VW and California Republic Bank had the highest rate of obligors who received an extension in August who also made a full payment, at 38% for both. Payments are often received concomitantly with extensions when the borrower is behind on multiple payments. For example, if the borrower is behind on two payments and the third payment is coming up, the lender may give the borrower, upon request, an extension on the third payment as long as they make the first payment (and meet the lender's other criteria, as appropriate).

Chart 4B

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Percentage Of Loans In Active Extension Status Down From July

The percentage of prime loans in active extension status for August was 0.99% (on a dollar basis), down from 1.71% in July. Ally had the largest percentage decrease (81%), and no longer has the highest percentage of loans in extension status. As of the end of August, VW held that dubious title with 2.53% of its loans remaining in extension status. Since their most common deferral period from May to August has been three months, it isn't surprising that they have more loans remaining in forbearance. CapOne and Hyundai have the lowest percentage of loans in extension of 0.41% and 0.51%, respectively.

The percentage of subprime loans of public issuers in active extension status for August was 7.88%, a 34% improvement from 11.90% in July. World Omni Select had the largest percentage decrease, dropping by 56%, although Santander's DRIVE shelf had the largest absolute decrease, declining by more than six percentage points month over month. DRIVE remains the highest at 10.08%, while Santander's SDART shelf currently has 7.61% in extension for August.

Chart 5

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Chart 6

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The Majority Of Loans Extended Since March Have Successfully Come Out Of Extension Status

We are tracking the loans that have been extended from March through August and have bifurcated them into two major buckets with subcategories within those groups, as shown below.

Active extension status (as shown in blue in charts 7 and 8):

  • New extension in August;
  • Continues to be in extension in August; and
  • Received a new extension in August, a previous extension period having ended.

No longer in extension status:

  • Extension period expired and loan still outstanding;
  • Paid off or otherwise removed from the pool; and
  • Charged off (for delinquencies, see charts 9, 10, and 11 below).

The majority of extended loans (from March to August)--86% in the prime sector (up from 82% in July) and 76% (up from 64%) for public subprime deals--have come out of extension status and are still outstanding (see charts 7 and 8). Prime issuers with the highest rate of extended loans exiting extension status and remaining outstanding are World Omni (90%), CarMax (89%), Hyundai (88%), and California Republic Bank (88%). USAA and VW have the least with 62% and 70%, respectively, owing to their longer-than-average extension periods.

In subprime, the percentage of loans that have come out of extension status and remain performing are 89% for World Omni Select, 77% for SDART, 75% DRIVE, and 73% for AmeriCredit.

Chart 7

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Chart 8

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With more months of data, it's quickly becoming clear that more previously extended loans are being repaid in full or repurchased from the pools than are defaulting. In August, 5.94% of prime loans that had previously been extended had (on a cumulative basis) been retired or repurchased; whereas only 0.43% (on a cumulative basis) had been charged off. Lenders are generally required to repurchase loans from their pools that have extended beyond the maximum allowed under their transaction documents. This is likely contributing to the high pay-off rate. We view this as a positive credit factor because investors are no longer exposed to the credit performance of these previously extended loans, which are likely to perform worse than non-extended loans. However, investors are exposed to the servicer's financial wherewithal to make these repurchases.

In subprime, previously extended loans (from March to August) that have charged-off increased to 0.90%, up from 0.43% in July. DRIVE had the highest charge-off rate on previously extended loans so far of 1.02%. However, nearly 3% of previously extended loans have been paid in full or repurchased.

Of the subprime loans remaining in extension status at the beginning of August, approximately 10% were re-extended during the month (see the light blue section of the bars in charts 7 and 8). This is 2.8x the re-extension rate in prime of 3.5%. DRIVE and SDART had the highest re-extension rates of 12.71% and 11.03%, respectively, while World Omni Select and AmeriCredit had only 3.29% and 1.35%, respectively.

Delinquencies Of Previously Extended Loans Increasing

The vast majority of loans that have come out of extension status--80% and 59% for prime and subprime, respectively--continue to perform and remain current (see the dark blue section of the lines in charts 9 and 10). Within the prime segment, CarMax has the lowest percentage at 67%, while Nissan has the highest at 96%.

Chart 9

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Chart 10

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The level of 60-plus-day delinquencies for previously extended loans (from March to August) whose deferral periods have ended was 1.58% (up from 1.29% in July) for the prime segment, and 4.27% (up from 3.46% in July) for subprime as of Aug. 31, 2020. AmeriCredit (5.50%), DRIVE (4.61%), and CarMax (3.63%) had the highest individual levels. USAA (0.13%) and CapOne (0.40%) had the lowest. The rising delinquency levels on previously deferred loans indicate that many of those who received temporary forbearance are still struggling to make their monthly payment obligations (more so in the subprime segment).

While delinquencies on previously extended loans remain low, they are growing month to month (see chart 11). Prime 60-plus-day delinquencies on previously extended loans rose 23% to 1.58% from 1.29% as of July. The 1.58% level was 8.2x the level of 60-plus-day delinquencies (DQs) on non-extended loans (0.19%) as of August month end.

Across public subprime transactions, 60-plus-day DQs increased 23% to 4.27% from 3.46%, which was 1.7x the level of 60-plus-day DQs for non-extended subprime loans as of August month end (2.53%). We view rising delinquencies as an early warning sign that losses are also poised to rise.

Chart 11

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Payment Behavior Of Previously Extended Loans That Are Still Outstanding

For the prime shelves in August, an average of 71.03% of loans no longer in extension made full payments (up from 68.12% in July), 4.02% made partial payments (up from 3.85%), 10.54% made advance payments (down from 11.60%), and 14.41% made no payments (down from 16.44%). USAA had the highest percentage of full payments at 85.45%, while Fifth Third had the lowest at 62.56%. VW had the highest percentage of loans having made no payment at 18.95%, although Fifth Third and Ally were not far behind at 18.63% and 18.46%, respectively. BMW and Nissan had the highest levels of partial payments at 14.97% and 14.24%, respectively. Nissan and CapOne had the highest levels of advance payments at 13.19% and 12.68%, respectively.

For the subprime shelves in August, an average of 56.96% of loans no longer in extension made full payments, 6.13% made partial payments, 11.78% made advance payments, and 25.13% made no payments. World Omni Select had the highest percentage of full payments at 69.93%, while Santander's DRIVE shelf had the lowest, at 54.84%. DRIVE also had the highest percentage of loans having made no payment, at 27.51%. AmeriCredit had the highest levels of partial payments and advance payments, at 7.48% and 13.35%, respectively.

The above data indicate that the subprime borrowers are having a more difficult time than prime obligors resuming their normal monthly payments, but that is to be expected given their different classifications at loan origination.

Chart 12

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Appendix: Data Notes

The data provided for most of the statistics in this article were generated from the Reg AB II loan-level filings, whether or not the underlying deals were rated by S&P Global Ratings. We've reported the information as presented in the issuers' loan-level filings, which may differ from the issuers' monthly servicing report data. Further, there could be differences among the issuers in how they grant extensions and how those extensions affect delinquencies. For example, some issuers may grant extensions that move an account to a less delinquent status, whereas most issuers grant extensions that will cause the account to be reflected as current. In addition, the loan-level data track all extensions, not just COVID-19-related extensions, which is what some issuers are reporting on their monthly servicing reports.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research

The authors would like to thank Bushra Dawawala for her research contributions to this report.

This report does not constitute a rating action.

Primary Credit Analysts:Amy S Martin, New York (1) 212-438-2538;
amy.martin@spglobal.com
Timothy J Moran, CFA, FRM, New York (1) 212-438-2440;
timothy.moran@spglobal.com
Secondary Contact:Deegant R Pandya, New York (1) 212-438-1289;
deegant.pandya@spglobal.com

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