DBRS Publishes U.S. Subprime Auto Loan ABS Commentary on Evaluating Recession Scenarios

DBRS, Inc. (DBRS) released the commentary “U.S. Subprime Auto Loan ABS: Evaluating Recession Scenarios,” in which DBRS evaluates the impact of hypothetical recession scenarios on credit enhancement coverage of losses for recently issued subprime auto loan asset-backed security (ABS) transactions and the potential impact on ratings of those transactions.

U.S. economic growth has slowed in the second quarter of 2019 along with general declines in business investment, manufacturing activity and capacity utilization. While consumer spending and employment have remained robust, DBRS acknowledges that recent periods of yield curve inversion and increasing market volatility are indications that recession warnings are on the rise. As these signs of a slowdown in the U.S. economy are expected to continue, the question arises as to how subprime auto ABS transactions could perform in a future recessionary economic environment.

The analysis showed that, given certain hypothetical recession assumptions, an increase in losses on subprime auto loan collateral could increase the risk of downgrade for subprime auto loan ABS transactions, particularly for debt tranches rated below AAA. Additionally, the risk of downgrades grew with each increasingly subordinated debt tranche. However, the structural components of the ABS auto loan transactions enabled them to withstand DBRS’s hypothetical increase in losses, and as the transactions delevered and credit enhancement increased over the life of the transactions, downgrade risk was mitigated.

A copy of this commentary is available at www.dbrs.com or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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