SBX Capital SBX Capital

The region is experiencing a technology revolution, every industry is still in its infancy

Based on ride-hailing networks and the shift from gas-powered to electric vehicles, ARK believes that the risks to auto loans, the
asset-backed securities supporting them, and their underlying collateral are not well understood and could cascade through the
global auto ecosystem.

Understanding the concept

The percent of auto loans delinquent by 90 days or more has been rising for almost four years and is approaching levels last
seen during the Global Financial Crisis (GFC) in 2009, as shown below. During the GFC, most consumers and businesses
prioritized the servicing of auto loans over their mortgages because, in the absence of ride-hailing, they relied on vehicles to
keep their jobs and businesses going. Now working from home, they seem to be prioritizing mortgages and home equity (HE)
loans over auto and credit card debt.

Interestingly, it appears that the coronavirus crisis also has caused a surge in used car sales as people opt out of public
transportation. ARK believes that this short-term spike in demand is not the harbinger of a long-term trend, especially now that
ridesharing offers an alternative to car ownership. Soon, autonomous ridesharing should make the negative case for used cars
even stronger.

THE PROCESS

Because of their performance during the GFC, the industry seems to have been lulled into believing that auto loan delinquencies will top out at roughly 5%. In our view, however, they could double or more, approaching the level of mortgage loans or even credit cards in 2009-2010.

Handed $40 billion earlier this year to buy global stocks, the PIF will plow the same amount into 
 the domestic economy next year and again in 2022. The fund intends to play a role in refocusing 
 the economy toward underdeveloped industries like tourism and diversifying away from crude.

If our analysis is correct, then car dealerships are in harm’s way. Service, financing, and insurance account for roughly 70% of
their gross profits, as shown below. Given much lower maintenance than that for gas powered autos, we believe EVs are likely to
damage dealers’ servicing business while default rates hit their financing business. As a result, in early June Wells Fargo put an
end to new loans for independent car dealerships.