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Fitch Offers Crash Test of Manufacturer Bankruptcy Effect on U.S. Auto ABS.

NEW YORK -- Given the current state of the U.S. auto industry and manufacturer rating downgrades that have occurred throughout 2006, it is no surprise that the impact of an auto manufacturer bankruptcy on the performance of U.S. auto ABS transactions continues to pervade investors' thoughts, according to Fitch Ratings. The likely sequence of events and potential impact of a manufacturer bankruptcy on various auto ABS asset types are discussed in the following commentary.

In particular, investors have focused their inquiries on transactions issued by entities related to Ford Motor Company (Ford; rated 'B' with a Negative Outlook by Fitch) and General Motors Corporation (GM; rated 'B' and on Rating Watch Negative). Each of Ford and GM, through finance company subsidiaries Ford Motor Credit Company (FC) and GMAC LLC (GMAC), respectively, has been consistently securitizing their auto loan, auto lease and dealer floorplan finance originations and are two of the largest issuers of auto ABS in the US.

While ABS transactions have been structured to be bankruptcy-remote and excluded from consolidation into a manufacturer's bankruptcy estate, the type of asset collateralizing the transaction can expose investors to magnified risks that will likely result from a manufacturer bankruptcy. A key risk facing investors in auto-related ABS is the impact to wholesale vehicle values leading up to and during bankruptcy proceedings, which could result in higher loss severity in defaults and vehicle repossessions. A second key risk is a potential negative impact on servicing quality, which may deteriorate due to cost-saving measures and which could drive delinquencies and, ultimately, losses higher. With respect to GMAC, however, the recent completion of a sale of a 51% ownership interest to a consortium led by Cerberus may mitigate some of this servicing risk in GMAC ABS transactions. (For more information, see 'Fitch Upgrades GMAC LLC to 'BB+' & ResCap to 'BBB'; Outlook Positive', dated Nov. 30, 2006 and available on the Fitch Ratings web site at www.fitchratings.com).

It is important to note that Fitch's rating process simulates the stresses of higher loss rates, increased delinquency rates and decreased recovery rates, among others. In addition, for dealer floorplan transactions, cash flow analysis also simulates a manufacturer bankruptcy resulting in an early amortization, slowing vehicle sales and increased dealer defaults. The revolving nature of dealer floorplan ABS present investors with additional manufacturer risk through vehicle sales rates and dealer defaults, which are factors less likely to impact performance of the static pools securitized in auto lease and auto loan ABS. As a result, dealer floorplan ABS is the most exposed to the risks associated with manufacturer bankruptcy. Auto loan ABS is at the opposite end of the risk spectrum in terms of manufacturer exposure as the concern here is the issue of loss severity resulting from lower recovery values. Auto lease ABS falls between dealer floorplan ABS and auto loan ABS given the residual value risk inherent in these transactions. Servicing risk is present with all three asset types.

Dealer Floorplan ABS:

Dealer floorplan ABS transactions are backed by loans made to dealers to finance vehicle inventories. The transactions are revolving and rely on the dealer network's ability to sell vehicles to repay the underlying loans, which cash flows are used to repay investor principal. Many of the dealer floorplan ABS transactions presently outstanding have a manufacturer bankruptcy trigger as an early amortization event. Early amortization events in dealer floorplan ABS provide the mechanism for principal repayment to investors upon an adverse event. If a trigger event occurs, a rapid amortization or a cash accumulation period begins. During these periods, collections would be allocated to repay investor principal instead of being reinvested in new floorplan receivables.

Following a manufacturer bankruptcy, the anticipated decline in wholesale values, slowing sales and increased dealer defaults would be represented in a reduced monthly payment rate (MPR), which measures the portion of outstanding receivables repaid each month and approximates the length of time necessary to repay investors. MPR declines would expose investors to a longer period of time required to accumulate sufficient collections to repay principal; however, the vehicles would continue to secure the ABS. Significant losses in these transactions would likely require a combination of events, such as manufacturer bankruptcy, accompanied by a decline in wholesale values. Other examples would include finance company bankruptcy, accompanied by a servicing disruption; significant dealer defaults and collateral that is sold out of trust (SOT), or a case where the vehicle is sold but sales proceeds are not used to repay the dealer loan. Fitch's rating analysis for dealer floorplan ABS incorporates stresses of MPR, default rates, recovery rates and lags, and purchase rates, among others to simulate the bankruptcies of the manufacturer, the finance company and multiple dealers.

Auto Lease ABS:

The primary risks present in auto lease ABS transactions are credit risk and residual value risk, both of which would likely be affected by a manufacturer bankruptcy. Similar to auto loan ABS, which is discussed below, the credit loss component reflects lessee defaults. The residual value risk reflects the risk that the base residual value is greater than the market value of the vehicle at the time of disposition for vehicles not purchased by the lessee. The risk of servicing deterioration is also present in auto lease ABS transactions.

Pressure on wholesale values following a manufacturer bankruptcy would increase the loss severity as recovery rates would be negatively impacted. Similarly, realization rates on residual values would be expected to experience decreases, magnified by the potential temporary increase in turn-in rates as a higher percentage of lessees choose to return vehicles at lease end rather than exercise the purchase option. Fitch's rating analysis for auto lease ABS incorporates stresses of credit losses, residual value realization rates, recovery rates and turn-in rates, among others.

Auto Loan ABS:

Auto loan ABS transactions, like those backed by auto leases, typically have no performance or structural triggers tied to a manufacturer bankruptcy. The main bankruptcy related risks facing investors in auto loan ABS are increased exposure to severity of credit losses and the potential for servicing deterioration. Given the obligor credit profiles represented in prime auto loan ABS, an increase in loss frequency is not expected following a manufacturer bankruptcy. Fitch's rating analysis for auto loan ABS incorporates stresses of delinquency rates, loss frequency and severity, and recovery lags, among others.

Conclusion:

While considering the implications for ABS transactions arising from a manufacturer bankruptcy, it is important to underscore that auto-related ABS transactions are presently performing within expectations, with certain deals performing better than originally expected. The performance demonstrated by the sector has been a product of consistent originations and underwriting practices, and adequate servicing. Furthermore, a stable economy, combined with stability in certain segments of the wholesale vehicle market, has aided consistent ABS performance in 2006 despite the manufacturers' weaker credit profiles. For the first nine months of 2006, Fitch issued 58 upgrades and zero downgrades in the auto ABS sectors. In May, Fitch affirmed the US dealer floorplan ABS portfolio; in August, Fitch reviewed the US auto loan ABS portfolio; and in December, Fitch reviewed the US auto lease ABS portfolio.

Please refer to the following press releases for additional information, both of which are also available at www.fitchratings.com:

--'Fitch Affirms US Dealer Floorplan ABS Transactions & Issues Portfolio Review' (May 11, 2006);

--'Fitch Reviews US Auto Loan ABS Portfolio' (Sept. 13 2006).

Fitch will continue to closely monitor the performance of wholesale vehicle values, business operations and servicing capabilities within the auto ABS sector.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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