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Subprime Auto ABS Grows as Lenders Chase Margins

The subprime auto finance business has grown during the past two years as new lenders compete to make loans with rates of about 17 percent annually, while being able to finance themselves at an average rate of less than 2 percent, Moody’s Investors Service said in a July 17 report. With losses ranging from 1 percent to 3 percent, originators collect annual spreads of about 12 percent, according to the New York-based firm.

Asset-backed securities tied to vehicle debt have been buoyed the past three years by rising used car values, which boost recovery rates on defaulted debt and ease losses for bondholders. Used vehicle values rose to a record in May 2011 before leveling off, according to Manheim Auctions Inc. Manheim’s used vehicle index fell 3.2 percent in June from a year ago.

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. rose for the first time in four days, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, adding 1.5 basis points to a mid- price of 106.7 basis points as of 11:23 a.m. in New York, according to prices compiled by Bloomberg.

via Bloomberg.

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