Fitch: High Gas Prices Driving SUV/Truck Values Lower in U.S. Auto ABS

Business Wire,  July 8, 2008  

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NEW YORK -- High gas prices are taking their toll on the recovery values of sport utility vehicles (SUVs) and trucks, leading to higher loss severity on defaulted loans in many U.S. auto loan asset-backed securities, according to Fitch Ratings.

Already eroding wholesale values on larger vehicles appear to have been pushed over the edge by the practical and psychological impact of $4 gas. The resulting increase in loss severity, along with the present economic pressures on consumers already driving default rates higher, will place negative pressure on the subordinate bonds of certain auto ABS transactions. Most at risk are those transactions originated since mid-2006 that also have large exposures to the SUV and truck segments. Many of the 'Big-Three' U.S. captive finance companies transactions fall into this category.

U.S. auto manufacturers' vehicle sales in particular, are heavily weighted towards SUVs and trucks. A typical domestic auto ABS transaction has an average SUV and truck concentration of 60-75% of the pool, exposing those pools to a higher impact from the decline in vehicle values. Non-U.S. manufacturers such as Honda, Hyundai, and Nissan, on the other hand, tend to have lower concentrations of these vehicle types, typically less than 50% and in some cases as low as 20% reflecting their differing product mix.

The Manheim Used Vehicle Value Index, which Fitch uses as a gauge of health of the wholesale or used car market exhibited a 21% drop in the value of large-pickup trucks and a staggering 24% decline in large-SUVs on a year-over-year basis. With trends already negative, historically high gas prices appear to be causing an accelerated decline in these vehicle values. 'The $4 gas threshold is likely the primary culprit in the one-month drop of 10% in used SUV and truck values witnessed this month, one of the largest monthly declines ever,' said Managing Director John Bella.

The combined impact of moderately increasing defaults and rapidly increasing loss severity, with recent trends in loss severity moving from an historical average of 50% to nearly 60%, has driven Fitch's ANL index up by 78% over the same time last year. Despite the dramatic drop in SUV and truck values, Fitch has not yet seen any evidence that default frequency has been directly impacted as some had feared. The 'walk-away' behavior demonstrated by subprime mortgage borrowers does not appear to be driving defaults in US auto ABS.

In its rating analysis of auto ABS transactions, Fitch has and continues to take into account the negative trend in wholesale vehicle values, particularly for SUVs and trucks. Base case loss proxies are derived on a pool specific basis in order to reflect the differing collateral mix from transaction to transaction. Fitch forecasts loss proxies by SUVs/truck and car segments in addition to separately considering other stratifications including credit tier and loan structure. In its analysis, Fitch stresses recovery rates for the overall pool as well as increasing loss severities for the SUV and truck segments.

While Fitch applies significant stress to defaults and recoveries, the unprecedented drop in vehicle values over the past three months could cause actual net losses to be in excess of Fitch's initial expectations for certain pools. In these cases, negative rating actions on certain subordinate bonds become more likely.

Fitch is in the process of reanalyzing transactions with higher exposure to declining SUV and truck values. As a result certain transactions have been placed 'Under Analysis' on Fitch's SMARTView pages or on Rating Watch Negative. Further analysis may lead to additional rating actions, including Rating Watches and downgrades.

For more information regarding Fitch's views on declining vehicle values and its impact on loss severity in auto loans, refer to the following two special reports published by Fitch earlier this year (both available at www.fitchratings.com):

--'U.S. Auto ABS Loss Rates & Wholesale Vehicle Values: Traveling in Inverse Lanes';

--'Loss Severity In Auto Loan ABS Under Pressure in 2008'.

In these reports Fitch outlines the correlation between the wholesale vehicle market and Fitch's auto annualized net loss (ANL). indexes, concluding that weaker wholesale vehicle market prices depress vehicle recovery rates and ultimately increase loss levels. The Loss Severity report also addressed key areas affecting loss severity including lengthening loan terms (longer than 60 months), and loan-to-value (LTV) ratios.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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