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Subprime Auto Delinquencies Jump 17% In July, Net Losses Soar 28%

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There was a troubling development at the end of July, when as we noted at the time, the largest US subprime auto lender delayed its Q2 earnings released due to “Accounting matters”, an event which promptly raised red flags not only over the fate of the company (whose stock plunged as a result), but the entire US subprime auto space.

This is what SC said as justification for its 10-Q filing delay:

Santander Consumer USA Holdings Inc. (NYSE: SC) (“SC” or the “Company”) announced today that it will delay the release of its Q2 2016 financial results, previously scheduled for Wednesday, July 27, 2016, because the Company’s financial statements for the quarter have not yet been completed.

The Company is in discussions with its current and previous independent accountants regarding certain accounting matters, primarily related to the Company’s discount accretion and credit loss allowance methodologies. The resolution of these matters may impact prior period financial statements and the timing of the filing of the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2016 (the “Form 10-Q”).

The Company is working diligently to file the Form 10-Q and schedule its earnings call as soon as practicable.

One month later, the accountant discussions continue, as yesterday the company provided the following terse update

Santander Consumer USA Holdings Inc. (NYSE: SC) (“SC” or the “Company”), is delaying the filing of its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (the “Form 10-Q”) beyond the August 15, 2016 extended filing date.

As previously disclosed by the Company in its Form 12b-25 filed with the Securities and Exchange Commission (the “SEC”) on August 9, 2016, the Company is in the pre-filing submission process with the SEC’s Office of the Chief Accountant, regarding the Company’s accounting treatment for consideration of net discount in estimating the allowance for credit losses. The resolution of this and other accounting matters disclosed in the Form 12b-25 is expected to impact prior period financial statements. The Company will file the Form 10-Q as soon as possible.

The Company has reviewed all critical relationships and does not foresee a material interruption in or change to normal business activities related to the delayed filing. In addition, the aforementioned accounting matters relate only to non-cash items in our financial statements. If the outcome of the pre-filing submission process is consistent with the Company’s proposed accounting treatment, the Company expects to file its Form 10-Q immediately.

So we continued to wait. Meanwhile, today Fitch released its latest auto subprime report according to which things in the auto subprime space are going from bad to worse, warning that “the seasonably slow summer months are translating to notable increases in annualized losses and delinquencies for U.S. subprime auto loan ABS.”

The details: subprime 60+ day delinquencies rose 13% month-over-month (MOM) in July to 4.59%, and were 17% higher versus a year earlier. This rate was just shy of the record peak 5.16% level recorded in early 2016.

Fitch also adds that subprime ABS annualized net losses (ANL) hit 7.39% in July rising 17% MOM, and were 28% higher year-over-year (YOY).

The summer months typically produce weaker asset performance as consumers head for vacation. Increased losses are emanating from weaker collateral pools in the 2013-2015 transactions, which have weaker credit quality including lower FICO scores, higher amounts of extended loan terms (over 60 months) and higher LTVs. Further, early defaults on extended term loans in pools are driving loss severity higher along with loss rates in 2016.

What is curious is that Fitch states that used vehicle values “continue to defy expectations in 2016 and remain healthy.” This is rather different from what we reported recently when we observed that used car prices have been sliding. Perhaps Fitch is using a different database, however despite its assessment,  Fitch expects used vehicle values will be pressured in the latter stages of 2016 and come down from current levels. “Rising used vehicle supply, including from notable increases in residual returns expected in 2016 and early 2017, will constrain values and contribute to losses rising.”

This means that the auto industry, always pressured by a substantial inventory overhang, will be hit by the double whammy of both declining residuals and the ongoing subprime crunch as increasingly more loans shift to delinquent status. It also means that it is only a matter of time, and accumulated defaults, before the only silver lining in the US manufacturing sector turns dull.

In the meantime, we eagerly look forward to Santander’s delayed 10-Q to be finally filed.

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