NEW YORK -- Fitch Ratings said late Tuesday it downgraded four series of asset-backed securities supported by car loans issued by Mitsubishi Motors Corp.'s U.S. finance arm.
The four series of bonds, issued in 2001 and 2002, have suffered from rising losses and delinquencies at levels higher than Fitch's initial estimates, the rating agency said, adding that it may cut the ratings on another 2002 series.
On June 9, Standard & Poor's Ratings Services downgraded different classes of these four ABS deals.
"General economic weakness and soft wholesale prices for repossessed vehicles have exacerbated the problems causing increased default rates and higher loss severities, conditions Fitch does not believe will improve in the near term," Fitch said in a statement.
These bonds are backed by various types of car loans including "balloon" loans and "deferred payment" loans made by Mitsubishi Motors Credit of America (MMCA).
A balloon loan typically involves small payments for a short period of time and one lump-sum payment for the remaining amount of the principal at a specified time.
Deferred payment loans made by MMCA allow borrowers to delay making the first payment beyond 300 days, Fitch said.
Many of the balloon loans made by MMCA were to car buyers with poor or "subprime" credit histories, who default in higher numbers in a weak economy, according to Fitch.
Moreover, holders of these MMCA balloon loans have the option to return their cars when the last and the biggest payment is due. Given the big "balloon" payment and low prices of new cars, turn-in rates of used Mitsubishi cars are expected to be very high, Fitch said.
MMCA is losing money because of the high returns on its used cars and weak prices it can fetch by selling them in the auction market, according to Fitch.
The Mitsubishi U.S. finance arm has made efforts to improve the performance of these loans. It hired Systems & Services Technologies Inc. (SST) to service 85,000 subprime loans and hired more people for its own servicing operations.
Delinquencies on MMCA's car loans fell during the spring collection period, a time when consumer credit performance improves historically, Fitch said.
But the May data showed that loan delinquencies and defaults rose again, "calling into question the longer term effectiveness of the changes implemented by MMCA," it said.