European ABS: Excess Spread Compression in Auto ABS

Increasing interest rates having an impact on excess spread and portfolio asset repricing is evident in European auto asset-backed securities (auto ABS) transactions in 2023. Loan- and lease-level data from the underlying exposure templates submitted to the European DataWarehouse further attest to that phenomenon.

Summary highlights include:
-- Reduction in available excess spread is more prominent in the European auto ABS prime sector and in specific jurisdictions, where loans and leases are secured in nature and where auto finance originators competed over low interest rate products;
-- Contractual interest rates associated with recently originated auto loans and leases increased due to auto finance companies' own higher cost of funding; however, its impact on portfolio yields remains limited, and it may take several months for portfolio yields to adjust; and
-- Originators use different strategies to mitigate excess spread compression.

“Given lower contractual interest rates linked to the secured nature of the receivables and their prime borrower base, German auto ABS transactions suffered the most from the squeeze in available excess spread”, said Guglielmo Panizza, Vice President of European ABS at DBRS Morningstar. "We expect it will take approximately three-to-four years for the yield of collateral in auto ABS transactions to fully re-price and asset yields harmonise with securitised portfolio yields across Europe", says Miklos Halasz, Assistant Vice President of European ABS at DBRS Morningstar.