Subprime Auto ABS Issuance Surges Even as Delinquencies Hit Record Levels

Subprime auto credit is showing an unusual combination of rising borrower stress and heavy new securitization.
Delinquencies are reportedly at record levels, yet issuance of subprime auto asset-backed securities is on track for its largest year on record.
Volumes are already approaching what would normally represent a full year of issuance, with several months still remaining.
These securities package auto loans into bonds that are then sold to investors seeking income.
The concern is that investors are buying exposure to pools of borrowers at the same time repayment performance is deteriorating.
That does not automatically mean a credit crisis is imminent, since ABS structures include different levels of credit protection and losses are distributed unevenly across tranches.
Still, rising delinquencies combined with accelerating issuance is a risk worth watching, particularly if unemployment rises or used-car values weaken further.
Exposure can also reach broader portfolios indirectly through bond funds, pensions and other institutional vehicles that allocate to structured credit.
The key question is whether higher yields are adequately compensating investors for the deterioration in underlying borrower quality.