We all tend to see the future as an extrapolation of the present and the past. And certainly financial market regulation has reinforced this deeply human attitude, believing that past data can be used to predict future spread and default risks. But what if yesterday is yesterday, today is today and the tomorrow is unknown? The economist then switches to the language of the sailors and speaks of "unchartered waters". And that is exactly where the economy is currently sailing towards the future.
With the deep economic structural change of recent years, with the upheaval in the car industry, with the digitalisation of all processes, they have been sailing in those unchartered waters for some time now. But as long as no reef was in the way, they could live with it. US protectionism, Brexit, technical upheaval were frightening, but did not fundamentally damage the economic development.
But with COVID-19, suddenly nothing is the same anymore.
Creditreform Rating has nevertheless tried to take stock of the situation of Auto-ABS in Europe and also ventures a cautious look into the future. Already in 2018, 2019 the picture for Europe's car industry was quite mixed. On the one hand, 2019 was one of the best car sales years in a long time, but unfortunately only in Europe. In China and India, the situation was already clearly downhill before that. And the new CO2 regulation, which comes into force in 2021, was already casting its shadow in 2019. The gap between sales and production in Europe also widened further in 2019. The 20% increase in new registrations in Germany was unfortunately offset by a 9% decline in car production; the second in a row. Protectionism and costs became noticeable, as production was increasingly taking place abroad.
But new emissions of auto ABS were very high in 2019. At 29.5 billion euros, they were slightly higher than in 2018, which was already a good year, with Germany contributing 14.7 billion euros, an increase of 20.6%. As in previous years, it was clear how important ABS is for the German car market. Around 50 % of the European auto ABS emissions of the last twenty years come from Germany. It is interesting for 2019 that Santander Consumer Bank has become the leading originator of German auto ABS.
In terms of rating, the share of AAA tranches has decreased somewhat in recent years in favour of AA-rated paper.
The STS regulation, which was first applied in 2019, has - according to the report - proven its worth and undoubtedly also contributed to improving the standing of ABS.
For the future, however, the Creditreform Rating Report sees much higher risks coming to the credit markets, which will not bypass auto ABS either. Higher unemployment and lower incomes are worsening the credit quality of current portfolios; however, the transaction structures have built in sufficient buffers so that the upper tranches are relatively safe and downgrades are limited to the lower areas.
In the first quarter of 2020, new issues declined significantly and spreads widened. The European automotive sector, which has already faced fundamental structural challenges in recent years, will be particularly affected by the corona crisis, the report says.
The corona crisis itself is compared with the financial crisis of 2008/2009, although this ignores the fact that - unlike then - securitisation is not stigmatised this time. On the contrary. As also stated in the Creditreform analysis, the regulatory uncertainty about the future of ABS, which broke out after the financial crisis twelve years ago, has now been lifted and, one might add, in view of the general uncertainty on the capital markets, the upper tranches of securitisations and especially of auto ABS are likely to become more important to investors compared to their investment alternatives.
