MNI: REPEAT: DBRS See Remote UK Sub-prime Car Loan Threat

Repeats Story Initially Transmitted at 15:00 GMT Oct 12/11:00 EST Oct 12

--DBRS Sector Specialists Play Down Fears Of GFC-style Impact

--Evidence of Used Car Market Picking Up New Car Slack

By Jamie Satchithanantham

     LONDON (MNI) - Fears UK lenders are over-exposed to sub-prime car loans and

pose a systemic risk are overblown, two senior sector specialist have told

Market News International in an exclusive interview.

     "The lending that goes on is not considered sub-prime lending, and if there

are any low quality borrowers, there may only be minor amounts within a UK

securitization," said Gordon Kerr, Senior Vice President and Head of EU

Research, Global Structured Finance, at credit ratings agency DBRS.

     Fears were stoked after parallels were drawn to the 2008 global financial

crisis which itself was sparked by widespread defaulting on sub-prime mortgage

loans, sanctioned prior to the burst of the US housing market bubble.

     Such a direct comparison of the two markets, however, is difficult to make.

Firstly, the value of a vehicle is almost always going to move only in one

direction, down, commencing at the point of purchase. 

     Secondly, the size of the markets differ vastly. At around stg1.3 trillion,

the size of the stock of mortgage debt is larger than that of auto credit by a

factor of around 20. 

     More than this, however, the exposure to sub-prime in the UK-auto space is

vastly lower than the levels seen in the US residential mortgage market prior to

the Great Recession and this channel of financial risk should be mild, according

to Kerr.

     "It's no way near any kind of excessive levels that you would've seen in

the US residential mortgage market," said Kerr.

     "They're not largely extending out to poor quality borrowers. They may be

extending out maturities, increasing residual value exposure, and promoting

greater use of PCP agreements, but I don't think that they are pushing out into

something that is 'alarm-bells-ringing' kind of level, yet" he added.

     Though a definitive number is hard to come by, industry experts have placed

the proportion of sub-prime exposure in the UK automotive ABS market

considerably lower at around the 3% mark.

     CHANGING CONSUMER HABITS SEE INCREASING PCP DEALS

     The rise in popularity for PCP lending, where consumers purchase cars on

hire purchase and may or may not decide to buy the car at end of the contract,

has been a major factor behind increased concerns over the growing size of

outstanding car finance.    

     However, consumers moving to PCP might simply just be part of a broader

shift in consumer behaviour, according to Alexander Garrod, Senior Vice

President, EU ABS, at DBRS.

     "Rather than buying something in full, they're renting it. The PCP product

supports that social mentality now which is 'I'm happy to pay a monthly

payment'," he said.

     "So there is a bit of a cultural shift as well and if that culture suddenly

changes then you could see sudden changes in behaviour," he added.

     While the sub-prime threat remains remote, what will test the stability of

the auto finance sector is the underlying strength of the used car market.

Stable used car prices restrain the pressure exerted on the collateral that

these lenders rely upon to make PCP deals function. Once prices begin to tumble

more than expected the entire framework becomes subject to stress.

     At present, however, there are no indications of that happening. On the

contrary, demand for used cars appears to have strengthened.

     "Our recent research has highlighted that used car sales are going up so

there is a demand for used car vehicles and we would consider the used car

vehicle market fairly liquid in the UK although it is restricted somewhat

geographically compared to mainland Europe," said Garrod.

     DOWNGRADE RISKS?

     When asked what could pose a downgrade threat to any of the 15 deals that

DBRS currently rates, Garrod outlined the ongoing themes that were being

monitored. Alongside a "sudden shift and a sustained shift" in used car prices

the continued squeeze on household incomes that has accompanied the rise in

inflation since the UK's decision to leave the European Union was earmarked as

something that warranted further analysis.

     "Whilst credit performance has been very good for auto ABS in the UK over

the last few years and defaults at historic lows, there is almost this indirect

risk of earnings falling, debt levels rising and whether going forward customers

will have the ability to maintain those payments on their auto loan contracts

that have three or four years left until duration," Garrod said.

--MNI London Bureau; +44 203-586-2226; email: jamie.satchithanantham@marketnews.com