US: signs of trouble across the subprime auto lending market? image

Following the last global financial recession, the US subprime auto lending market has been watched closely in recent years – with regulators and investors still concerned about its prospects.

And now new figures released this month might show why the regulators and investors have been concerned. The losses stemming from car loans tapped by bad-credit borrowers are still surging, supported at least in part by the inflation of inexperienced auto finance companies that have flooded the market in recent years. One can watch the increases of subprime borrowers having trouble making their car payments in the monthly data regarding bond deals on the New York Stock Exchange. The so-called subprime auto asset-backed securities (ABS) bundle these car loans and then sell them to large investors. The report for July’s data has shown the yearly net losses on such bonds – a measure of the cost of bad debt – have gone up by 1.45 percent during the past twelve months to 6.6 percent last month, said Nomura analysts. “The significantly weaker performance in the subprime auto sector is being driven by an increase in issuance from the lesser established issuers,” commented in a recent report researchers led by Lea Overby.

New entry bond issuers were responsible for 37 percent of the sales of subprime bonds in 2014, up from 27 percent the previous year – now the concern is that such smaller firms will fight for market share by decreasing their standards to the point they would jeopardize even established lenders in the process. That’s because most of these new competitors have some of the largest private-equity firms behind them, with the latter also under pressure to deliver relatively quick returns.

Via Bloomberg