Key Takeaways
- We expect default and delinquency rates on auto loans underlying Japanese ABS transactions to remain low and stable.
- The prepayment rate has risen sharply since 2020, reaching a record 19% per annum in April 2024.
- The prepayment rate is likely to remain high thanks to rising used car prices.
Lofty prices for used cars are fueling record prepayments underpinning auto loan asset-backed securities (ABS) transactions in Japan.
S&P Global Ratings expects the prepayment rate on loans underlying ABS transactions to remain high and for the default rate and delinquency rate on them to remain low for the next 12 months. Default and two-month or longer delinquency rates have risen slightly for the last 12 months. However, we expect both rates to remain low and stable, supported by obligors' relatively high credit quality and low unemployment. Meanwhile, we view the prepayment rate as likely to remain high thanks to rising used car prices.
Observations
Default rate
We think the default rate on loans backing auto loan ABS will stay low and stable. The 12-month moving average default rate has risen slightly but remains low (see chart 1). The rate was 0.24% per annum in April 2024, up 0.07 of a percentage point (7 basis points) from a year earlier. We expect Japan's policy rate to rise gradually, reaching 1.0% in 2027. However, the direct impact of interest rate hikes on the default rate is likely to be limited. This is because underlying auto loans are based on fixed interest rates. At the same time, growth in obligors' wages lags rising inflation. Accordingly, real wages have been negative since April 2022. However, we expect defaults to remain low in the foreseeable future for the following reasons. First, many loans backing auto loan ABS transactions in this study are extended to obligors with relatively high credit quality. Second, wage negotiations in the spring of 2024 resulted in some pay increases. In addition, we project the employment rate will remain unchanged.
The standardized default rate, which indicates changes in the default rate of each transaction (see "Notes"), has been positive for nine of the last 12 months (see chart 2). This means the monthly default rate of each transaction was higher than the average default rate of the transaction. The monthly default rate on loans backing auto ABS has remained low, as noted earlier. In addition, the default rate had dropped temporarily due to restrictions on outings and provision of subsidies during the pandemic. Accordingly, we believe the increase in the default rate was a step toward normalization. This does not signal a more general deterioration in performance, in our view.
Two-Month Or Longer Delinquency Rate
The two-month or longer delinquency rate on underlying auto loans has remained low, similar to the default rate (chart 5). The delinquency rate is a leading indicator of default and often moves in a similar direction to the default rate. The two-month or longer delinquency rate, like the default rate, remained low at 0.07% in March 2024, up just 2 bps from a year earlier. The two-month or longer delinquency rate after standardization has also risen over the past 12 months (see chart 6).
Prepayment Rate
The prepayment rate has been rising since 2020 and will likely remain high for the time being given recent conditions in the used vehicle market (see chart 7). We consider auto loan prepayments to be somewhat sensitive to trends in the used vehicle market. The prepayment rate started to rise sharply in 2020. The used vehicle market stabilized following an end to a shortage of semiconductors and other parts in 2023, which has helped mitigate the rise in the prepayment rate. We have seen signs of a renewed increase in used vehicle prices.
In the asset pool in this study, the proportion of seasoned auto loans is increasing. The prepayment rate tends to rise as seasoning increases (see chart 8). This also pushes up the prepayment rate, in our view.
The latest 12-month moving average prepayment rate is about 19%, its highest level since 2002. The rate is already elevated, and we believe the probability of further increases is low. However, the prepayment rate is likely to remain high for the time being given current conditions in the used vehicle market.
Performance
Default rate
Chart 1
Chart 2
Chart 3
Chart 4
Delinquency rate
Chart 5
Chart 6
Prepayment rate
Chart 7
Chart 8
Auto loan-related indicators
Chart 9
Chart 10
Notes
- In this report, S&P Global Ratings describes the performance trend of pools of all the auto loan asset-backed securities (ABS) transactions it rates. We included data from collections through April 2024.
- In this report, transactions S&P Global Ratings rates include transactions that S&P Global SF Japan Inc. (SPSF) rates. SPSF is a registered credit rating agency under Japan's Financial Instruments and Exchange Act (FIEA) but is not registered as a Nationally Recognized Statistical Rating Organization (NRSRO) under U.S. laws. Therefore, the credit ratings assigned by SPSF are Registered Credit Ratings under FIEA but are not Credit Ratings issued by an NRSRO under U.S. laws. The ratings covered in this study include both public and nonpublic ratings.
- We calculate the index pool's performance with data in a dynamic format at certain points and also in a static format as one closed pool in which the outstanding balance of receivables declines over time. Charts in the report that show data monthly do so up to the 60th month. This is because the limited number of transactions aged over 60 months in the index pool makes it more susceptible to volatility of individual transactions after this period.
- The number of auto loan ABS transactions is limited during certain periods. Accordingly, the calculated default rate tends to be affected by specific transactions and the composition of transactions in this study. Given this, we have standardized the default rate for each transaction and have computed the deviation of default rate of each month from the average default rate of each transaction. When the standardized default rate is above zero, it shows the default rate of the month is higher than the average, while a standardized default rate below zero shows the default rate is lower than the average rate. The larger the standardized default rate, the larger its deviation from the average rate. Chart 2 shows the overall trend by calculating the average standardized default rate weighted by the outstanding balance of each transaction. The standardized delinquency rate of two months or more in chart 6 is computed the same way.
Appendix: Calculation Of Indices
Default rate (annualized)
The default rate is the weighted average of the default rates of the individual deals of the pool for a term "t".
Default rate for "t" = amount of defaulted receivables for term "t" (principal)/receivables outstanding at the beginning of term "t" (principal) x 100 x 12
Cumulative default rate
The cumulative default rate is the weighted average of the cumulative default rates of the individual deals of the pool for a term "t".
Cumulative default rate for "t" = cumulative default amount from transaction issuance to the end of term "t" (principal)/initial receivables outstanding (principal) x 100
Two-month or longer delinquency rate
The delinquency rate is the weighted average of the two-month or longer delinquency rates of the individual deals of the pool for a term "t".
Two-month or longer delinquency rate for "t" = amount of delinquent receivables (payments missed for two months or more) for term "t" (principal)/receivables outstanding at the ending of term "t" (principal) x 100
Prepayment rate (annualized)
The prepayment rate is the weighted average of the prepayment rates of the individual deals of the pool for a term "t".
Prepayment rate for "t" = amount of prepaid receivables for term "t" (principal)/receivables outstanding at the beginning of term "t" (principal) x 100 x 12
Standardization
Standardization is to convert the data of each month into an average of zero and a variance of one using the formula below. Standardized data shows how much the data of each month deviates from the average value.
Standardized data for "t" = Data for term "t" minus average of all data of the subject transaction/standard deviation of all data of the subject transaction
Related Criteria
- Global Auto ABS Methodology And Assumptions , March 31, 2022
Related Research
- 2023 Annual Japanese Structured Finance Default And Rating Transition Study, March 22, 2024
- Japan Structured Finance Outlook: Inflation Entrenches? Jan. 11, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Toshiaki Shimizu, Tokyo + 81 3 4550 8302; toshiaki.shimizu@spglobal.com |
| Secondary Contact: | Yuji Hashimoto, Tokyo + 81 3 4550 8275; yuji.hashimoto@spglobal.com |
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