The auto asset-backed securities (ABS) market is a constantly evolving and intricate market that has undergone significant changes recently. While there were some improvements in new car supply in the latter half of 2022, the overall figures reflected the worst year for the EU’s new car market since 1993. Meanwhile, the used car market remained robust throughout the year, with residual values reaching historic highs, but it was not enough to prevent the lowest level of auto ABS issuance since 2009.
Despite the marginally lower deal flow continuing in the first quarter of 2023, the European securitization market for auto ABS has shown significant resilience. Issuances have surpassed levels seen at similar stages in each of the past two years, indicating that this market is poised to grow and we are likely to see significantly more securitizations in the near future.
Navigating Volatility and New Product Demands
Managing risk in auto loan securitizations has proven difficult in this turbulent macroeconomic environment and market volatility continues to present challenges for investors and issuers alike. Yet one of the biggest challenges facing the auto ABS market is the increasing pressure to turn towards sustainability. Investors are now, more than ever, prioritizing environmental, social, and governance (ESG) considerations when investing their capital. This has led to a significant push towards more green auto loan securitizations.
The first public green auto loan securitization was released in February 2023 by Toyota’s Italian subsidiary, Toyota Financial Services Italia (TFSI). It was successful despite supply chain disruptions and spikes in battery and energy costs. The issuance’s success reflects a growing trend of increased investment in green technology as European investors strive to meet the EU’s goals for the reduction of carbon emissions by 2030. However, without historical performance data and analytics software to perform projections for future performance as well as comprehensive risk analysis, it can be difficult to determine the holistic benefits and risks associated with these types of offerings.
An Uptick in Delinquencies But Light At the End of the Tunnel
Following an extended period of historically low levels, the EU auto asset-backed securities market is now experiencing an increase in delinquencies. Notwithstanding two years of remarkable credit performance in 2020 and 2021, largely propelled by government assistance related to the COVID-19 pandemic and high recovery rates, 2022 took a downward turn. Delinquencies rose (with subprime posting record levels by year-end), recoveries declined from peak levels, and losses escalated.
Investors are likely to find that 2023 will continue to be a somewhat bumpy road for auto loan ABS performance. Consumer-facing headwinds include inflation, the possibility of a recession, reduced savings, and increased debt levels. In addition, higher interest rates and affordability concerns are likely to dampen demand for used vehicles and could result in lower recovery rates. Car values are dropping while consumers prioritize debt repayments to navigate the higher-rate environment. Even exposure to used vehicle financing, a consistently strong market, is vulnerable.
Despite these challenges, the overall market fundamentals remain robust due to the high underwriting standards of European lenders and the limited number of high-risk borrowers. It is unlikely that marginal changes will lead to credit rating downgrades for senior notes, and due to pent-up new vehicle demand and new issuers, major ratings agencies expect meaningful market growth this year.
The Tools Required
Managing the volatile auto ABS market anywhere requires sophisticated portfolio management tools, but given the state of the EU’s market, they are essential. Portfolio management software can assist investors in thoroughly assessing and balancing risk with the rest of their portfolio, performing stress tests, and monitoring concentration risk. Moreover, it is more efficient to manage the entire securitization process in one place, including structuring, risk management, and reporting, rather than using multiple tools and platforms.
The auto loan securitization market is experiencing a period of great transition, with new risks and opportunities always emerging. Despite the extensive geopolitical turbulence in Europe, increasing focus on ESG, and challenging macro-economic factors affecting consumers, issuers, and investors alike, there are still plentiful opportunities; showcased by BMW setting spreads to open the first UK auto ABS for 2023 in April with their entity Bavarian Sky UK 5 PLC. Ultimately, it is vital to use sophisticated portfolio management tools to manage the risk associated with this market and ensure that investors are making informed decisions based on data-driven insights.
Visit T-REX for Structured Finance to learn more about how portfolio management platforms can help balance the risks and opportunities in the emerging European market for auto asset-backed securities.