Subprime Auto Has `Credit Issues,' Top ABS Analyst at BofA Says

(Bloomberg) -- There may be trouble ahead for the debt fueling America’s car addiction.

Securities backed by certain auto loans have “some real fundamental credit issues,” according to Chris Flanagan, a top-ranked analyst who specializes in structured finance at Bank of America Corp. The dangers lurk in subprime deals and in bonds supported by car rentals, Flanagan wrote in a note dated June 9. By contrast, the rest of the U.S. economy appears to be on strong footing, with the recovery intact, he said.

Car loans have prompted a wave of consternation in recent months as defaults pick up. Most analysts have argued that the securities themselves are not at risk, and that investors are highly unlikely to suffer writedowns. But ratings companies have begun to ask questions about lenders’ underwriting and whether market conditions, such as low rates, have encouraged looser lending standards. Policy makers and regulators are meanwhile concerned that borrowers are being taken for a ride.

Flanagan was ranked first by Institutional Investor in 2007, 2008 and 2009 for four types of asset-backed securitization, including consumer loans and real estate mortgages. He wrote extensively throughout the financial crisis, often focusing on mortgage bonds and collateralized debt obligations -- and what made those markets implode. He’s been with Bank of America since 2009 and now primarily writes about mortgage debt.

While the market for auto loans is substantially smaller and less intertwined with the financial system than subprime mortgages once were, Bank of America data show funding costs for bonds backed by car loans have risen over the past month. Spreads are however still relatively tight versus historic levels, the data show.

To contact the reporter on this story: Matt Scully in New York at mscully17@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Rachel Evans