U.S.

Consumer ABS Performance Remains Relatively Stable Amid Rising Rates

Primary Credit Analyst: Erkan Erturk, PhD, New York (1) 212-438-2450; erkan.erturk@standardandpoors.com Secondary Credit Analysts: John Anglim, New York (1) 212-438-2385; john.anglim@standardandpoors.com Amy S Martin, New York (1) 212-438-2538; amy.martin@standardandpoors.com Mark M Risi, New York (1) 212-438-2588; mark.risi@standardandpoors.com Ildiko Szilank, New York (1) 212-438-2614; ildiko.szilank@standardandpoors.com Frank J Trick, New York (1) 212-438-1108; frank.trick@standardandpoors.com

Table Of Contents
Credit Card Demand Remains Tepid But Auto Loan Growth Continues Apace U.S. Consumer ABS Performance Should Stay On Track

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U.S. Consumer ABS Performance Remains Relatively Stable Amid Rising Rates
(Editor's Note: Standard & Poor's Ratings Services' conducts periodic meetings to enhance the flow of communications among various ratings disciplines, including U.S. consumer asset-backed securities. These meetings are intended to share, and incorporate into our research and analytics, various macroeconomic and consumer credit trends. Our report here on the most recent meeting draws on our own and participants' views.) U.S. consumer ABS collateral performance remains strong as both the labor markets and the economy continue to strengthen. Standard & Poor's Ratings Services expects real GDP growth of 2.0% this year and 3.1% in 2014. Tempering this, however, are easing underwriting standards and ongoing market uncertainty about regulatory changes and the volatility of future interest rates and ABS bond spreads. Although the market is keeping an eye on these concerns, Standard & Poor's expects them to have a limited effect on consumer ABS collateral performance and ratings, which remain generally stable for all asset classes, including transactions backed by auto retail loans and leases, credit card receivables, and student loans. The exception is the performance of private student loan ABS (as opposed to Federal Family Education Loan Program [FFELP]), which has been relatively more volatile since the economic downturn. However, some transactions in this segment have shown signs of stabilization in the past six to 12 months. Standard & Poor's has a stable rating and performance outlook on FFELP student loan ABS, given the U.S. government's guarantee. We have observed that private student loan ABS interest rate spreads continue to tighten for new debt issuance, given the strong investor interest and appetite for higher yields. Overview Collateral performance and rating stability remain strong for the U.S. consumer ABS market, with the exception of private student loan ABS. U.S. consumer debt appears to be at a manageable level, as bankruptcy filings are slowing and consumer defaults are near historical lows. Easing underwriting standards, interest rate-induced spread volatility, and new regulations are ongoing concerns for the consumer ABS market. Standard & Poor's outlook on the U.S. economic recovery is positive, and we project 2.0% GDP growth for 2013. Recent numbers show some headwinds still exist, with the biggest risk being the government's inaction on tackling the federal budget and mounting federal debt. Consumer deleveraging since the downturn has resulted in more manageable consumer debt levels in recent years, and the latest Standard & Poor's/Experian composite consumer default index was 1.34% in June 2013, down from 1.52% a year ago. Auto defaults remained low, at around 1% in June, which is where they were a year ago. Bank card defaults fell 56 basis points to 3.41% from a year ago. Consumer bankruptcy filings for the first half of 2013 were 13% lower than at the same time last year, and we expect them to continue falling in 2013 in response to the improving consumer economic outlook.

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U.S. Consumer ABS Performance Remains Relatively Stable Amid Rising Rates

Credit Card Demand Remains Tepid

The recent rise in consumer credit outstanding is due in large part to increased student debt (which is now nearing $1 trillion) and auto loans. On the other hand, credit card debt remains suppressed, mainly because of banks' focus on prime borrowers, who are generally convenience users (i.e., they maintain a steady balance or pay off their balance each month). U.S. consumer credit rose a seasonally adjusted $19.6 billion in May 2013 to $2.84 trillion after a $10.9 billion gain in April, according to the Federal Reserve. Non-revolving debt (mainly auto and student loans) was up $13 billion to $1.98 trillion after April's $10 billion gain. Revolving credit (mainly for credit cards) was up $6.6 billion in May to $856.5 billion following an $800 million increase in April. As of June 2013, credit card ABS losses were near historical lows, and credit cardholders' payment rates were near an all-time high. A key factor underlying the strong collateral quality in the credit card master trusts is that issuers have generally not added many new accounts to their existing ABS trusts in the past several years, which has resulted in highly seasoned pools with high FICO scores and stable collateral performance. Performance could deteriorate if issuers change the composition of accounts by adding or replacing existing accounts with ones that have less seasoning, lower FICO scores, or higher utilization rates.

But Auto Loan Growth Continues Apace

For the auto loan ABS sector, risks may come in the form of easing underwriting standards and declining used-vehicle values. Used-car inventories are growing as an increasing number of vehicles come off lease and trade-in volumes rise in tandem with new-vehicle sales growth. Moreover, rising interest rates and widening spreads on the ABS bonds have led to reduced excess spread, although this has been compensated for by greater subordination and overcollateralization (so-called "hard credit enhancement"). Delinquencies and losses for both securitized and non-securitized auto loan portfolios (managed portfolios) have risen year-over-year, although not beyond what we would expect to see during an economic recovery. In addition, we are starting to see an increase in auto loans that have an original term longer than 72 months. Subprime auto loan originations and ABS issuance continue to grow steadily. Some finance companies are returning after having curtailed financing during the credit crisis, and new players are also entering the market. The increased competition is promoting weakening underwriting standards, which we believe will lead to small increases in delinquencies and net losses later this year. Nonetheless, we expect subprime auto ABS ratings to remain generally stable. Lower used-vehicle values could weigh on auto lease ABS performance early next year, following several years of strong residual/recovery performance. Yet, despite the weaker auto values, we expect our ratings to remain generally stable.

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U.S. Consumer ABS Performance Remains Relatively Stable Amid Rising Rates

U.S. Consumer ABS Performance Should Stay On Track

Broadly speaking, the collateral backing U.S. consumer ABS--particularly auto loans and credit card receivables--has shown strong, stable credit performance. We expect this trend to continue for the remainder of 2013, which should contribute to stable ratings for the sector. Still, we are continuing to watch how--or whether--rising interest rates, volatile spreads, easing lending standards, and regulatory uncertainties will influence issuance volumes and collateral performance down the road.

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