- Auto loans represented 24% ($54.4 billion) of the total dollar amount invested in U.S. ABCP conduits as of June 2023.
- Growth in auto loan amounts invested in ABCP conduits fell sharply during the first half of 2023, likely due to the inverted yield curve.
- Auto loan-financed ABCP issuance may decline if the yield curve remains inverted into 2024 and issuers continue to choose ABS over ABCP funding.
Auto loans are one of the largest asset types financed in U.S. asset-backed commercial paper (ABCP) conduits. Prime, nonprime, and subprime auto loans combined accounted for 24%, or $54.4 billion, of the total ABCP invested dollar amount as of June 2023 (see chart 1). ABCP conduits, which often may serve as warehouses for auto loans before they are included in asset-backed securities (ABS) transactions, are either fully supported (i.e., a liquidity support provider assumes all credit risk and typically funds for the ABCP's face amount) or partially supported (i.e., a liquidity provider funds only for performing assets). As of June 2023, 50.4% of the $54.4 billion auto loans invested in ABCP conduits were fully supported and 49.6% were partially supported.
S&P Global Ratings believes large auto issuers, who typically rely on ABCP as an alternative source of funding for their auto loan portfolios, may continue to find short-term ABCP attractive because of their lower costs. However, if the yield curve remains inverted into 2024, total auto-loan ABCP invested amount may decline if issuers continue to choose ABS over ABCP funding.
Sector Issuance Remains Robust
There has been an upward trend in the amounts invested in both auto loan ABCP and auto loan ABS since June 2021. Auto loans financed in ABCP conduits rose to $54.4 billion from $51.4 billion between December 2022 and June 2023 (see chart 2). Meanwhile, prime auto loan ABS volume has exceeded the 2022 full-year total since September 2023. We believe this partly reflects higher vehicle prices, greater sales volume, and investor demand for shorter-duration products.
In 2022, the six-month percentage change in auto loan invested amount was higher for ABCP than for ABS (see chart 3) due to the rising interest rate environment that made the potential cost benefits of short-term funding more attractive to issuers. However, the percentage change in auto loan invested amounts in ABCP fell sharply during the first half of 2023. We believe this is likely due to the yield curve, which has been inverted (as measured by the difference between the yields on the 10- and two-year treasury notes) since July 2022.
Nevertheless, overall auto loan-backed ABCP and ABS issuances both increased this year due to the still high demand for auto loans.
Why Auto Loan ABCP?
Large auto issuers typically rely on ABCP as an alternative source of funding for their auto loan portfolios. We note that partially supported ABCP auto loan transactions typically have moderately weaker credit characteristics compared to the ABS auto loan transactions we rate from the same originator or issuer. The ABCP transactions generally include auto loans with longer original terms, lower FICO scores, and higher loan-to-value ratios compared to the ABS transactions.
The ABCP transactions' weaker credit characteristics are typically offset by a shorter period of loss exposure to ABCP investors. This shorter loss exposure is often achieved through a liquidity mechanism that funds the transaction upon deterioration of the auto loan collateral, which is monitored monthly. The losses are covered by credit enhancement in the transaction.
ABCP conduit administrators can also amend transaction documentation to account for higher losses by adding more credit enhancement or tightening eligibility and concentration limits to reduce the amount of lower credit quality auto loans. The administrators are often the liquidity provider for the conduit as well and can thus become the "term investor" in the assets if it is called on to fund the transaction. As a result, each administrator/liquidity provider has "skin in the game" and, therefore, a vested interest in the transaction's performance.
Overall, we believe large auto issuers will continue to benefit from the lower costs short-term ABCP provides.
- SLIDES: Global Auto Loan ABS: A Brief Market Update , Sept. 22, 2023
This report does not constitute a rating action.
|Primary Credit Analyst:||Brandon C Wylde, New York + 1 (212) 438 2581;|
|Secondary Contacts:||Mayumi Shimokawa, New York + 1 (212) 438 2606;|
|Courtney Reopelle, Austin 303 721 4513;|
|Research Contributor:||Pankaj Tari, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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