Are There Signs Of Trouble Across The Subprime Auto Lending Market?

In recent years, subprime auto lending has attracted a lot of attention, and new data may show why regulators and investors remain concerned.

Losses on car loans that are taken out by bad-credit borrowers are continuing to increase, in part due to the flood of inexperienced auto finance companies that have entered the market in recent years. A rise can be seen in the subprime borrowers that are struggling to make car payments in monthly data on bond deals sold on Wall Street. Subprime auto asset-backed securities (ABS) bundle together car loans and then sell them to big investors.

Reports for July indicate that annualized net losses on such bonds, which are a measure of the cost of bad debt, rose 1.45 percentage points over the past year to reach 6.6 percent last month, according to Nomura analysts.

What is driving this rise?

“The significantly weaker performance in the subprime auto sector is being driven by an increase in issuance from the lesser established issuers,” said Nomura researchers in a report.

According to Nomura’s data, smaller, newer bond issuers fueled 37 percent of the sales of subprime bonds last year, up from 27 percent in the previous year. That share is unchanged for 2015.

The concern is that as the small upstarts compete for market share, they’ll lower their standards too much and pull down established lenders with them, thereby creating even bigger problems for the future. Many of the newer players are backed by the biggest private-equity firms, which are under pressure to produce relatively quick returns.

According to data compiled by Bloomberg, approximately $16.8 billion of bonds backed by subprime auto loans have been sold so far this year. This has helped speed car manufacturers’ increasing sales figures, which may top 17 million this year for the first time since 2001. However, concerns remain about how much farther credit standards can fall in order to keep this going.