Subprime auto loan asset-backed securities (ABS) from 2022 have gotten off to a rough start; they are on average performing worse than prior vintages. The first-quarter 2022 vintage, with 6.11% in cumulative net losses at month 15, is reporting a nearly 160 basis-point increase in losses relative to 2021’s vintage losses of 4.53% at the same performance month. The elevated losses on the subsequent 2022 quarterly vintages, particularly second-quarter 2022, relative to the 2015-2017 vintages at the same performance month is a more ominous sign though. Issuers, however, have responded by tightening credit standards and reducing loan origination volumes, which bodes well for future performance.

While some non-investment-grade classes on certain 2022 subprime auto loan ABS have been downgraded and others were potential downgrade candidates (having been placed on Credit Watch negative), some of the more senior classes from these transactions were upgraded. The sequential-pay structures and components of credit enhancement (non-amortizing funded reserve, subordination, overcollateralization, and excess spread) of these transactions facilitate the rapid growth in credit enhancement (as a percentage of outstanding collateral) at the senior tranche levels, thereby supporting upgrades even in the midst of modestly higher-than-expected losses.

“This growth in credit enhancement feature due to the sequential payment structure and components of credit enhancement has given rise to the sector’s long-standing track record of upgrades exceeding downgrades by a wide margin even during stressed economic periods,” said S&P Global Ratings’ credit analyst Amy Martin.