Subprime auto collapse?
I've had a short thesis on the collapse of the subprime auto market for a couple of years but haven't acted on it given the lack of a catalyst. With COVID-19 and the economic shutdown driving unemployment up and disproportionately impacting those on the lower end of the economic spectrum (i.e. those with worse credit profiles), my hypothesis is that there could be mass defaults on these subprime auto loans that require substantial payments at interest rates ~20%.
In normal economic times, most subprime auto lenders are insulated from defaults through rapid repossessing and auctioning of used cars. However, with the buildup of auto inventory and potential flooding of the market through bankruptcies (e.g. Hertz, smaller dealerships, etc.) to generate capaital, it could be substantially more difficult to collect at the values that are represented on subprime lender balance sheets. As a result, significant losses could cascade across the industry.
Now, I don't believe that there is the economic "contagion" factor that is systemic like the mortgage market - the subprime auto maket is only 10% of the size and doesn't have the 50x factor of CDS and CDO insurance bets that could collapse the financial system. It's not the "Big Short," however it appears the market could be headed for trouble - especially once increased unemployment benefits and stimulus checks run dry. Many large banks such as Wells have stopped lending to smaller (lower credit focused) dealerships in anticipation of market turmoil. I'm curious if we could see consolidation in this sector (i.e. bankruptcies) as we move into Q3 / Q4 covenant tests and delayed payments from subprime borrowers turn into delinquencies and defaults.
Thoughts?
THE PsYcHoLoGy, bummer your thread hasn't had a response yet. Sometimes bots are smarter than humans anyways:
Hope that helps.
You are right, Mr. Bot - it is indeed a bummer, but at least you are my friend. Appreciate the links - they were helpful.
Little late, just joined WSO.
In case you would still like some more insight into the industry, let me know. Partner at a regional subprime auto lender. Delinquencies/recoveries have been at record lows/highs the past 18 months with government stimulus/used vehicle prices increasing.
I have seen a lot of pressure on bigger lenders who need to fill their ABS and have compromised credit quality due to low inventory and artificially inflated credit scores (Covid credit reporting freeze was a blessing for some borrowers).
We anticipate delinquencies rising, higher default rates along with vehicle values coming down and these vintages being extremely painful for companies that loaded up the past year.
Thanks very much for the helpful perspective! It's been fascinating to see the tremendous credit expansion over the last year with all of the easy money flowing. I'm getting a bit worried about total leverage in the broader ecosystem and whether we are due for another deleveraging...
Just to add on to your inside baseball take on things: I just read a Manheim report on used car prices and it's frickin' scary. Used car prices up +43% since November 2020! Not only that, new car sales on a continued downtrend of -17% YoY. I think OP was smelling the blood in the water while the rest of us weren't able to smell period thanks to COVID.
https://publish.manheim.com/en/services/consulting/used-vehicle-value-i…
Following
Soooo how do you short this market
You'd short America's Car Mart, they have a lot of sub prime I think
America's car mart is particularly scary if you believe that there will be a rise in delinquencies... 400 bps lower interest rates than deep subprime average and significant covid revenue growth. A student investment group at my school recently purchased it and it left me scratching my head lol
Edit: In house financing arm as well so you can bet against used car dealerships and the underwritten loans on the balance sheet as well
Maybe they're playing the idea of TBTF coming back since they deal in a magical hot-button word called "sub-prime" that is an instant headline catcher? Regardless of it the market in question is a mere fraction in size compared to the housing market (not entirely insignificant though). They probably just read the headline about COVID sales rebounds and didn't actually do any digging in. But hey, they're students, so no harm and hopefully they'll actually learn something from it before winding up actually managing real money in a piece of the professors' pension funds.
Vitae aperiam possimus et ullam odio repudiandae rerum. Voluptas illo explicabo hic laboriosam eum. Ex eos accusantium laudantium rerum fuga rem. Atque perferendis perferendis consequuntur explicabo.
Eveniet porro quos inventore repellat. Veritatis repudiandae delectus sapiente et officiis omnis ut. Molestiae perferendis quod natus quia sed. Et molestias qui velit explicabo.
Cum qui illum fugit assumenda consequuntur et ducimus aut. Aspernatur enim ipsum accusantium. Soluta delectus laudantium at sunt. Repudiandae illum cum quidem quasi quas.
Suscipit et necessitatibus molestiae ut aliquid officiis qui. Nihil nemo libero nobis et cupiditate sunt.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...