Seasonal factors, including the beginning of tax refund season, higher used vehicle prices, and the economic recovery contributed to strong collateral performance in February for the U.S. prime and subprime auto loan asset-backed securities (ABS) market.

The prime and subprime sectors both reported lower net losses and improved recoveries month over month and year over year. Delinquencies also declined for both sectors year over year, while month-over-month data showed stable delinquencies for the prime sector and declining delinquencies for subprime.

Losses At Multiyear Lows In February

Prime net losses decreased to 0.29% in February from 0.39% in January 2021 and 0.56% in February 2020, making it the lowest February loss rate in our composite's history (see table 1 and chart 1). Meanwhile, subprime net losses decreased to 4.67% in February 2021 from 5.73% in January 2021 and 8.63% in February 2020, which was the lowest February level since 2012. It also marked the first monthly decline following increases for five consecutive months from September to January.

Table 1

Chart 1

Seasonal Patterns Improved Recovery Rates

Prime recoveries increased to 70.08% in February 2021 from 67.02% in January 2021 and 58.16% in February 2020. This was the highest reported February level since 2012 (see table 2 and chart 2).

Subprime recoveries also increased to 46.12% in February 2021 from 44.20% in January 2021 and 41.32% in February 2020.

The strong month-over-month and year-over-year increases reflect improved consumer confidence that has contributed to an increase in demand and prices for used vehicles. For example, wholesale used vehicle prices in February (on a mix-, mileage-, and seasonally adjusted basis) increased 3.80% and 18.3% on a month-over-month and year-over-year basis, respectively, according to the Manheim Used Vehicle Value Index. Furthermore, the supply constraints caused by manufacturing stoppages last year due to the COVID-19 pandemic and stoppages this year because of semiconductor chip shortages also contributed to higher new vehicle prices. This, in turn, supported higher used vehicle prices as well.

Seasonal tax refunds and the latest round of federal stimulus payments in January (i.e., $600 per person for certain individuals) also drove demand for used vehicles, resulting in higher recovery rates across both the prime and subprime sectors.

Table 2

Chart 2

Delinquencies Benefited From Stimulus Checks And Tax Refund Season

The prime 60-plus-day delinquency rate of 0.34% in February was stable month over month, but declined from 0.40% in February 2020.

The subprime 60-plus-day delinquency rate decreased to 3.57% in February from 3.71% and 4.94% in January 2021 and February 2020, respectively, and was the lowest February rate since 2014.

Year-over-year delinquency rates improved, especially in the subprime sector (by 137 bps to 3.57% from 4.94% a year earlier), reflecting not only the seasonal tax refunds that started to roll out in February but also the benefits of the federal stimulus aid paid to many consumers in January.

Extensions rates for certain large subprime securitizers remained higher than levels seen prior to the COVID-19 pandemic, which helped keep delinquencies lower than they would be otherwise. An improving economy with lower rates of unemployment and tighter underwriting standards likely contributed to the improvement as well.

Based on the New York Fed Consumer Credit Panel and Equifax credit data, subprime loans originated with a FICO score of less than 620 declined approximately 13% for the last three quarters of 2020 to $81.5 billion from $93.8 billion a year earlier. Meanwhile, loans with a FICO score of 720 or higher increased approximately 2% over the same time to $231.2 billion from $226.8 billion for the last three quarters of 2019.

Table 3

Chart 3

Extensions Decreased Month Over Month; Still Above Pre-COVID-19 Levels

Extensions declined for two months in a row following increases for four consecutive months in the subprime sector (including public and 144a transactions) and two months in the prime sector.

Subprime extensions decreased to 2.85% in February 2021 from 3.92% a month earlier. However, they were still higher than the February 2020 rate of 2.47% prior to the COVID-19 pandemic (see table 4 and chart 4). These higher year-over-year extension rates were concentrated among public issuers (specifically, Santander issuances: DRIVE saw a year-over-year increase of approximately 174% and Santander saw a year-over-year increase of 78%). Subprime 144a issuers reported near-stable year-over-year extensions of 3.30% in February 2021 compared with 3.38% a year earlier.

Meanwhile, prime extensions declined to 0.40% in February from 0.46% in January and increased eight basis points from 0.32% in February 2020.

We believe the $600 stimulus checks obligors received in January, the onset of tax rebates in February, and the lower levels of unemployment have eased the financial burdens of many consumers, thus bringing February's extensions down to their lowest levels since the pandemic started. However, it's clear that some pockets of the population are still affected, as reflected by higher extensions than those from one year ago. We believe this is issuer-specific, as some issuers have reported stable to lower year-over-year extensions (see table 4).

Table 4

Auto Loan ABS Rating Activity And Revised Loss Expectations

In March, we revised our loss expectations and took the following rating actions:

• Four upgrades and 16 affirmations on five Ford Credit Auto Owner Trust transactions (see "Ford Credit Auto Owner Trust Ratings Raised On Four Classes, Affirmed On 16 From Five Transactions," published March 12, 2021).
• Twenty-nine upgrades and eight affirmations on 15 Drive Auto Receivables Trust transactions (see "29 Ratings Raised, Eight Affirmed On 15 Drive Auto Receivables Trust Transactions," published March 15, 2021).
• Seven upgrades and three affirmations on two World Omni Select Auto Trust transactions (see "Seven Ratings Raised And Three Affirmed On Two World Omni Select Auto Trust Transactions," published March 30, 2021).

These rating actions resulted in 40 upgrades and 27 affirmations in March 2021 (see table 5).

Table 5

We lowered our revised expected cumulative net losses (ECNLs) on the 22 transactions we reviewed in March (see tables 6-8). We believe government stimulus, enhanced unemployment pay, and record-high recovery rates have contributed to these transactions performing better than we had originally expected. In addition, government-mandated payment deferrals for up to a year on federally insured mortgages and federal student loans have made it easier for certain consumers to make their vehicle payments.

Table 6

Table 7

Table 8

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Appendix III: Auto Tracker Methodology And Definitions--Frequently Asked Questions

How do you define prime auto loan ABS?

We generally categorize prime auto loan ABS transactions as those backed by loan pools with initial expected cumulative net losses (CNLs) of 3.00% or less, average FICO scores of 700 or higher, and annual percentage rates (APRs) of 0.00%-5.00%.

How do you define subprime auto loan ABS?

We generally categorize subprime auto loan ABS transactions as those backed by loan pools with initial expected CNLs of at least 7.50%, average FICO scores of less than 620, and APRs that exceed 14.00%.

How do you calculate the monthly net loss rate?

The monthly net loss rate is annualized. It equals each transaction's net loss rate weighted by the transaction's ending pool balance for the current month over the aggregate ending pool balance of all transactions included in the index.

We only allow a transaction to enter the composite starting in its fourth month outstanding. Transactions usually have zero or low losses during their first three months, which dilutes the composite figures.

How do you calculate the monthly recovery rate?

We calculate recoveries by taking the recovery amount reported (which typically includes all recoveries, including disposition proceeds, post-disposition proceeds, and any other reported recoveries) over the gross loss amount for the current month. We then weight each transaction's recovery percentage by the transaction's ending pool balance for the current month over the aggregate ending pool balance of all transactions included in the index.

We only allow a transaction to enter the index starting in its fourth month outstanding. During a transaction's first three months, unusually high or low recoveries are reported, leading to a spike in the composite figures.

How do you calculate the monthly 60-plus-day delinquency rate?

We calculate delinquencies by taking each transaction's 60-plus-day delinquency amount over the ending pool balance for the current month. We then weight each transaction's 60-plus-day delinquency percentage by the transaction's ending pool balance for the current month over the aggregate ending pool balance of all transactions included in the composite.

We only allow a transaction to enter the composite starting in its fourth month outstanding. During the transaction's first three months, zero or lower delinquencies are reported, which dilutes the composite figures.

What is the Auto Loan Static Index (ALSI)?

Our ALSI monitors the credit performance of securitizations that were originated in the same year on a weighted average basis. The number of months displayed for each vintage is generally determined by the last point that all securitizations for that time period have a data point. We calculate the prime and subprime ALSI CNLs by taking the weighted average of the CNLs of the transactions that were completed in the same time period (generally a year). Each transaction's CNL is weighted by its initial pool balance over the aggregate initial pool balance of all the transactions included in the index for that period. In the subprime ALSI, transactions from Byrider Finance LLC (doing business as CarNow Acceptance Corp.), Credit Acceptance Corp., and DriveTime Automotive Group Inc. are excluded because they do not have the typical indirect auto loan business model.

Which transactions are included in the prime, subprime, and modified subprime composites and indices?

For a list of the transactions included in our prime, subprime, and modified subprime composites and indices, see "U.S. Auto Loan ABS Tracker: March 2019," published May 23, 2019. However, note that we subsequently added S&P Global Ratings-rated transactions that have since closed, most prime transactions that closed and were not rated by S&P Global Ratings from 2016 through the present, and most Santander Drive Auto Receivables Trust and AmeriCredit Automobile Receivables Trust transactions not rated by S&P Global Ratings.

Related Research

• Seven Ratings Raised And Three Affirmed On Two World Omni Select Auto Trust Transactions, March 30, 2021
• 29 Ratings Raised, Eight Affirmed On 15 Drive Auto Receivables Trust Transactions, March 15, 2021
• Ford Credit Auto Owner Trust Ratings Raised On Four Classes, Affirmed On 16 From Five Transactions, March 12, 2021
• U.S. Auto Loan ABS Tracker: January 2021 Performance, March 9, 2021
• U.S. Auto Loan ABS Is Navigating Through COVID-19 With Better-Than-Expected Performance, Feb. 10, 2021