DBRS Publishes Study on Canadian Retail Auto Loan Securitizations

DBRS has today published a study that provides insight on the various risks associated with retail auto loan contracts: the economy, the used vehicle market and the underlying contracts.

“Despite a continued rise in household debt,” notes Tim O’Neil, Senior Vice President at DBRS, “most Canadian auto consumers continue to meet their payment obligations as losses on securitized transactions trend down from their 2008 peak.” The strong performance of Canadian retail auto loan transactions in recent years can be attributed to improving economic indicators and the strength of the used vehicle market.

Given the continued uncertainty in the speed and strength of the global recovery, DBRS remains cautious with respect to the impact that an uptick in unemployment claims and bankruptcy filings would have on the frequency of losses in Canadian auto loan transactions. DBRS concludes that, should the economy reverse course, the continued increase in consumer debt in Canada exposes transactions to higher loss frequency than the 2007 and 2008 vintages.

Should these defaults occur, losses will be higher than previously experienced as the prevalence of 72 and 84-month term contracts and higher loan-to-value ratios means consumers are out of the money on their vehicles for longer periods. While contract terms are significant loss drivers, DBRS’s assessment indicates that increasing loan-to-value ratios are an even greater concern.

However, as portfolio compositions continue to evolve, “loss estimates in current transactions have kept pace with the changing portfolio compositions, resulting in protection levels that are substantially sized to withstand unexpected economic shocks impacting the auto loan asset class,” says Mr. O’Neil.

In this study, DBRS presents a toolkit to analyze the effects and relative risks of portfolios to changing pool characteristics (contract term, loan-to-value and annual percentage rate) and a fluctuating used vehicle market.

If you are interested in receiving a copy of this study, please email info@dbrs.com.