Auto ABS: Ready to Handle Rough Credit Terrain Ahead

SFA’s Research Corner looks at auto ABS, which in 2022 has exceeded $90 billion in new issuance, $38 billion backed by prime auto loans and $27 billion funding subprime borrowers. But economic conditions are creating challenges, the biggest of which is the Fed’s inflation-fighting rate hikes which are expected to push unemployment to 4.4% by 2023—a significant increase compared to today’s 3.5%. Additionally, the possibility of continuing price increases for consumer goods could lead to more missed payments. However, the credit fundamentals of auto ABS remain firm for various reasons—the underlying value of the assets, consumer behavior and asset recovery rates—and the asset class is well-positioned for the anticipated shift in consumer credit quality.

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