ABS Credit Migration Update

Abstract

Defaults and downgrades are concentrated more heavily in certain areas of the asset-backed securities (ABS) landscape than in others. ABS from certain vintages display markedly higher frequencies of defaults and downgrades than ABS from others. In particular, the frequency of defaults and downgrades rises steadily in vintages from 1993 through 1998 and then gradually declines. It remains to be seen whether the declining frequencies represent real improvement in the credit performance of newer vintages or whether the newer vintages will “catch up” with the poor performers of the late 1990s. Among the major asset classes, ABS backed by student loans and bank credit cards display the lowest frequencies of adverse credit migrations. Deals backed by home equity loans display somewhat higher frequencies than they did a few years ago, but most defaults and downgrades are concentrated in deals from a small number of issuers. Not surprisingly, ABS backed by manufactured housing loans and aircraft receivables display the highest frequencies of adverse credit migrations. Market spreads on ABS backed by different asset classes appear to capture this effect reasonably well.