US SF WRAP-Longer loans add to auto ABS worries

By Joy Wiltermuth

NEW YORK, Aug 27 (IFR) - Borrowers are taking out longer loans to buy cars, a new report said on Thursday, adding to worries about the quality of the collateral underpinning auto ABS securitizations.

More than 16% of used cars purchased in the second quarter were with loans of six and seven years, Experian Automotive said - an all-time high up from under 15% in the same period of 2014.

For new cars the figure was almost 29%, a whopping increase from just under 20% a year ago.

"Anything over five years has a higher chance of losses," Fitch Ratings analyst Hylton Heard told IFR. "This is something we are watching."

The report comes near the end of a summer that has seen push-back from investors on new auto loan ABS issues.

When used car seller CarMax (NYSE: KMX - news) came to market in early August with a US$1bn prime loan trade, its senior slices priced nearly on top of a US$1bn auto bond backed by much riskier subprime collateral.

Its loans had an average remaining term of 64.31 months, levels that a Fitch pre-sale report noted indicated slightly weaker credit quality versus comparable bonds.

Fitch says that none of the auto bonds it has rated over the past 10 years have suffered a loss due to weakness in collateral quality.

But some on the buyside feel they are not being sufficiently compensated for the increased default risks.

Tracy Chen, a global investment manager at Brandywine Global, said she is avoiding new prime and subprime ABS issues, in part because bond spreads are not wide enough for the weaker structures she is seeing.

But Chen told IFR she also has longer-term worries about the auto sector, and said she has been buying credit protection on General Motors (NYSE: GM - news) .

In particular, she is concerned that a slowdown in China will impact growth in other countries - and consumer demand in general.

"We are not very bullish on the auto industry," Chen said. "China slowing has a huge impact on the industry." (Reporting by Joy Wiltermuth; Editing by Natalie Harrison and Marc Carnegie)