SRLN - Subprime Lending Faces Pressure

December, 06 2023 08:55 AM SPDR Blackstone GSO Senior Loan

2023-12-06 08:55:00 ET

Summary

Rising inflation and increased costs are putting strain on consumers with lower credit scores, leading to a rise in delinquencies on consumer loans.
Delinquencies on an overall basis are increasing, with aggregate delinquencies across all loan types reaching 3.0% in September.
Tightening lending standards at midsized banks and fintech service companies, which have a higher exposure to subprime lenders, are also impacting subprime consumers.

By Brandon Mulroe

Rising delinquencies and tightening lending standards could affect subprime consumers—and investors.

When two major U.S. credit bureaus reported results in late October, their management teams observed escalating pressure on consumers with lower credit scores. The culprit? Inflation-driven increases in food, gas, housing and other costs have put strains on consumer balance sheets. This has led to a decline in the U.S. personal savings rate and a rise in delinquencies on consumer loans. For example, the portion of subprime auto loans in delinquency for 60+ days, as tracked by Fitch Ratings, was 6.1% in September. That’s higher than the prior record of 6.0% in October 1996 and exceeds highs experienced during the pandemic and the global financial crisis. It bears noting that subprime loans make up only about 14% of total outstanding auto loan balances, while prime-rated delinquencies remain low.

Still, the Federal Reserve Bank of New York noted in its third quarter report on household debt and credit that delinquencies on an overall basis are increasing, with aggregate delinquencies across all loan types increasing to 3.0%, as of September. That represents a 0.4-percentage-point increase from the second quarter and a 0.3-percentage-point increase over this time last year. Delinquency transition rates increased for all loan types, with the exception of student loans. On an annualized basis, roughly 8% of credit card balances and 7.4% of auto loan balances transitioned into delinquency—for credit cards, this represented an 0.8-percentage-point increase.

Meanwhile, the credit bureaus have reported tightening lending standards at midsized banks and fintech service companies, both of which have a higher exposure to subprime lenders than larger banks. Looking forward, the resumption of student loan payments this past October may create an additional headwind for consumers, particularly those with weaker credit scores, who by definition are in a more challenged financial position.

These developments have implications for consumer-facing issuers of non-investment-grade fixed income, as management teams have recently highlighted. For example, a quick-service restaurant issuer noted increased focused on value offerings, while the casual dining space saw traffic decelerate as potential customers chose to trade down or dine at home. In the retail sector, managements have noted greater demand for essentials rather than discretionary purchases.

As we move through the fourth quarter, we expect consumers to remain prudent in their spending habits, helping to constrain the bottom line for many issuers.

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Subprime Lending Faces Pressure

Company Name:	SPDR Blackstone GSO Senior Loan
Stock Symbol:	SRLN
Market:	NYSE

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