Daily Management Review

Flitch Introduces Updated ‘U.S. Auto Loan ABS’ Criteria Specific To Asset Related Issues


10/22/2015


Flitch Ratings updates its report on specific asset related criteria for the “U.S. Auto Loan ABS”.



On the 15th of October 2015 Fitch Ratings published an updated report on its “Asset-Backed sector specific criteria”. As per BusinessWire the updated version of the report does not contain any “material changes”; therefore the company expects to meet “no impact” on its “outstanding ratings”. The prior report was titled “Rating Criteria for U.S. Auto Loan ABS” which was dated 10th April 2015.
 
The report is the representation of an analytic approach taken by the company of Flitch for rating “prime and nonprime U.S. Auto Loan ABS”. Moreover, it also outlines the “unique” nature of “these transactions”. In addition, the report also gives the details of “key rating drivers associated with U.S auto loan ABS” which are as follows:
 
“Collateral Performance”:
The collateral performance has been expected to be one of the “key rating driver(s)” that will be assessed by flitch with the help of “an analysis of an originator's historical static pool” which will process “securitization data” like defaults, recoveries, prepayments, delinquencies, net losses and loss timing.
 
“Macroeconomic Risks”:
Given the fact that “economic environment” is crucial for the ABS ratings of auto loans, Fitch also takes the economic strength into consideration which leaves a scope for “future expectations” as well. The said feat will be regulated by measuring the “key macroeconomic indicators”.
 
“Forward-Looking Approach to Derive Base Case Loss Proxy”:
The base proxy loss will be arrived at after examination of “fully amortized historical vintage loss curves”, whereby incomplete “vintage curves” will be extrapolated, the future expectations will be scrutinised and compared with “relevant previous vintage data” if any available and finally the “relevant pool credit characteristics” will be weighed. Moreover, the “previous recessionary vintages” will enable a safety margin into the base case, “adding” future unemployment anticipations that might affect the “wholesale vehicle market conditions”.
 
“Payment Structure”:
The structure of transaction that results in the cash flow plays a major role in “credit enhancement (CE) adequacy”, which in turn determines the ratings. According to BussinessWire:
“Fitch uses a Microsoft Excel-based internal cash flow model customized to reflect the transaction payment structure and tests the impact of stressing various assumptions, including prepayments, default timing, recovery rates and recovery lag. The output of the cash flow modeling is reviewed to assess whether the rated bonds are fully paid, in accordance with the transaction documents, in each stress scenario associated with a bond's rating”.
 
“Legal Risks”:
When there is a legal uncertainty it translates into a “threat to the availability of cash flows” whereby affecting the rating. In order to take appropriate measurements, Flitch has introduced “legal analysis” that reviews the “legal structure and legal opinion” that comes from the “originator”. Consequently, it is ensured that the cash will not be the result of bankruptcy, insolvency or lack of security priorities.
 
“Counterparty Exposures, Including Seller/Servicer Operations”:
In case any counter party involved in the transaction turns out to be “a source of credit or performance weakness”, the transaction comes under a risk. Therefore, Flitch also attaches “a review of the counterparties of an auto loan ABS transaction”. The said review comprises “operational” and “corporate” reviews. It is only then, the 'Counterparty Criteria for Structured Finance and Covered Bonds' of Flitch ensures “consistency”.





References:
www.businesswire.com
 







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