Fitch Publishes Updated U.S. Auto Loan ABS Rating Criteria
OREANDA-NEWS. Fitch Ratings today published an updated Asset-Backed sector specific criteria report. There have been no material changes from the previous version, and therefore Fitch expects no impact on outstanding ratings.
This report updates and replaces the prior criteria report with the title 'Rating Criteria for U.S. Auto Loan ABS', dated April 10, 2015.
The report presents Fitch's analytical approach to rating prime and nonprime U.S. Auto Loan ABS and outlines the unique features of these transactions. Additionally, the report details key rating drivers associated with U.S auto loan ABS as detailed below.
KEY RATING DRIVERS
Collateral Performance: Fitch's expectation on collateral performance is a key rating driver. Fitch assesses future performance expectations through an analysis of an originator's historical static pool and securitization data, including delinquencies, defaults, net losses, recoveries, loss timing and prepayments. Fitch analyzes granular collateral pool/loan tape characteristics and risk concentrations to determine credit risks present that drive transaction loss frequency and loss severity.
Macroeconomic Risks: The economic environment can have a material impact on U.S. auto loan ABS ratings. Fitch takes into consideration the strength of the economy, as well as future expectations, by assessing key macroeconomic indicators that are correlated with asset performance, such as unemployment rates.
Forward-Looking Approach to Derive Base Case Loss Proxy: Fitch derives its base case proxy by examining fully amortized historical vintage loss curves, extrapolating incomplete vintage curves, matching future expectations with any relevant previous vintage data, and weighting by relevant pool credit characteristics. Additionally, a margin of safety is built into the base case by weighting previous recessionary vintages and adding adjustments for future unemployment expectations and/or wholesale vehicle market conditions, where applicable.
Payment Structure: A transaction's payment structure and cash flow allocations will be a major driver in assessing credit enhancement (CE) adequacy and to determine ratings. Fitch uses a Microsoft Excel-based internal cash flow model customized to reflect the transaction payment structure and tests the impact of stressing various assumptions, including prepayments, default timing, recovery rates and recovery lag. The output of the cash flow modeling is reviewed to assess whether the rated bonds are fully paid, in accordance with the transaction documents, in each stress scenario associated with a bond's rating.
Legal Risks: Legal risks can affect the rating in the event that legal uncertainties pose a threat to the availability of cash flows or the collateral itself. Fitch's legal analysis includes a review of the legal structure and legal opinions furnished by the originator to confirm cash flow derived from the assets will not be impaired (either as a result of the bankruptcy or insolvency of the originator or any other transaction party, such as a swap counterparty, or the trustee's lack of a perfected first-priority security interest in the assets) or diminished (as a result of taxation).
Counterparty Exposures, Including Seller/Servicer Operations: Counterparty exposures can pose a risk to transactions if the relevant counterparties are a source of credit or performance weakness. The analysis incorporates a review of the counterparties of an auto loan ABS transaction, including operational (originations, underwriting and servicing) and corporate reviews, to determine and ensure consistency with Fitch's counterparty criteria titled 'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014).