Canadian auto securitization market appears to have weathered storm: DBRS

By Kristine Owram, The Canadian Press

TORONTO - A number of safeguards have helped the Canadian market for securities backed by auto loans and leases weather the economic storm, which in turn could help consumers get financing for new cars, credit rating agency DBRS says.

The auto securitization market - which packages vehicle loans and leases as well as loans for dealerships into securities that can be sold -has been relatively healthy through the recession due to "preventive medicine" including "prudent planning and robust structures," DBRS said in a commentary Thursday.

And the fact that investors have been able to maintain a healthy degree of confidence in auto securities could help boost credit availability for consumers looking to buy a new vehicle, said Tim O'Neil, DBRS' vice-president of Canadian structured finance.

"With these structures continuing to perform well, it means that you can see the consumers are continuing to pay their loans and despite an increase in delinquencies and defaults there is enough enhancement in the AAA-rated transaction to prevent investor loss, so far," O'Neil said in an interview.

"If the asset class continues to perform, investors may have more confidence in this type of financing. This may result in more available financing for customers."

General Motors' financing arm, GMAC Financial Services, said the Canadian auto financing market continues to be in much better shape than in the United States.

"From our perspective, financing or credit for retail purchases of automotives in Canada continues to be reasonable," GMAC spokesman Tony Sapienza said.

"The credit has not really been restricted as much as it has in the U.S."

And the Canadian Automobile Dealers Association said that while credit for dealerships remains tight, things are improving for consumers.

"The business-to-business credit remains the primary concern of dealers as opposed to the consumer credit that's available, either in dealerships or through their own financial providers," said association spokesman Huw Williams.

"We're not into the Wild West of easy credit by any means - people are able to function in the marketplace as a consumer, but as a business the credit situation is still tight."

DBRS said delinquency and default rates on auto-related asset-backed securities have increased over the last 18 months due to the recession, but this was "not cause for alarm."

Many transactions have a built-in "early warning signal" that alerts investors if delinquencies among the assets in the securities increase beyond normal fluctuations, the report says.

In addition, structured loan products in the Canadian auto securitization market are protected from creditors if the company selling the loans or leases goes bankrupt, providing additional investor assurances.

And automakers' finance arms are usually required to sell more in loan receivables to banks than they receive back in funding, which acts as a safeguard if defaults or delinquencies increase dramatically.

"In order to get $100 million of funding, they may sell $120 million of auto loans so there are additional loans available to fund any losses that might occur," O'Neil said.

The report also says auto finance companies have adopted a more conservative underwriting approach since the recession began, with the average credit score of consumers increasing due to the general lack of credit availability.

O'Neil's report commended the auto securitization market's built-in oversights and safeguards for helping to offset the effects of the recent economic volatility.

"If, as many say, the worst is over, then the auto structures will have weathered the storm," O'Neil wrote.

"Alternatively, if there is more and worse volatility in delinquencies and losses to come, there is still room in the structures to maintain current ratings."

Earlier this month, Ford Credit Canada said it completed a securitization of a pool of retail conditional sale contracts for proceeds of $700 million - further indication of the health of the Canadian auto securitization market.

It became increasingly difficult to borrow money in late 2008 as banks tightened up their lending in response to the collapse of financial institutions in the United States and the market meltdown.

Frozen credit markets were a major factor in slumping vehicle sales in both Canada and the U.S., which served to exacerbate the recession and forced major automakers Chrysler and General Motors into bankruptcy protection.

Most automakers' financing arms were forced to increase the credit score necessary to get a lease or loan to protect themselves from defaults after the financial meltdown.

This created a vicious cycle, making it harder for consumers to lease or buy new vehicles.

To help remedy this situation, Ottawa said it would buy up to $12 billion in securities backed in part by loans and leases on vehicles. The dealers association described the move as "an evolving success" that hasn't yet reached its full potential.