NEW YORK — Annualized net losses (ANL) on U.S. auto ABS rose again in November in a trend likely to continue into 2010, according to Fitch Ratings.

Elevated loss frequency will also pressure U.S. auto loan ABS performance in the coming year. Another likely driver will be unemployment, which Fitch projects will hit a peak of 10.5 percent by mid-2010.

“Rising unemployment coupled with low consumer credit and wage growth levels will prolong the pressure on auto ABS loss frequency,” said Senior Director Hylton Heard. As a result, Fitch expects increases in net loss rates (although below the high of 2.23 percent witnessed in January of this year). This is due to the expectation of greater stability in vehicle values in 2010.

Risk on the loss severity side remains muted due to reduced supply in the used-car market, among other factors. The Manheim Used Vehicle Value Index, which tracks the health of the wholesale vehicle market, was unchanged in November despite seasonal weakness due to new models being introduced during this period. Vehicle values remain nearly 20 percent higher than their December 2008 lows.

According to Fitch’s auto indices, ANL levels increased by 2.4 percent to 1.61 percent in November 2009 on U.S. prime auto loan ABS while 60+ day delinquencies declined by 10.7 percent from October’s level to 0.67 percent. Fitch attributes the improvement in delinquency performance, which is unusual during this seasonally weak period, to additions to the index. In November approximately $4 billion of new, less seasoned securitizations with low delinquency levels were added to the index reducing the effect of more seasoned transactions with higher delinquencies.

Rating performance has remained stable despite the declining asset performance in 2009. Fitch has upgraded 32 classes of notes through Nov. 30 of this year, compared to 36 through the same period in 2008. Fitch’s rating outlook for the auto loan asset class is stable for 2010.

Fitch’s indexes track the performance of over 100 transactions totaling $52.6 billion worth of prime and subprime auto ABS. Prime loans compose 81 percent, and subprime loans the remaining 19 percent.

CHICAGO & NEW YORK – Fitch Ratings assigned a ‘CC/RR6′ rating to Ford Motor Company’s issuance of $2.875 billion seven-year senior unsecured convertible notes, a positive ratings outlook.

The Positive Outlook reflects the better-than-expected progress on Ford’s cost reduction program, production and inventory discipline that has resulted in solid pricing performance and continued market share gains. Although Fitch expects a weak rebound in industry sales in 2010, Fitch expects that cash drains will be materially reduced and comfortably within Ford’s liquidity position.

Fitch expects that industry sales will show only modest improvement in 2010, based on macroeconomic factors, including increased unemployment, reduced wealth, consumer spending pressures and a higher savings rate. Other factors muting a rebound in industry sales include more limited financing capacity, potential increases in gas prices and evolving consumer thinking that may stretch average vehicle age. Nevertheless, the combination of Ford’s cost reduction efforts and price performance has led to sharply reduced cash drains in a trough environment.

Fitch expects that even if U.S. industry sales were to remain flat at roughly 10.5 million vehicles in 2010, Ford’s cash drain would be less than $5 billion. As U.S. industry sales climb above an 11.5 SAAR rate, Ford should be able to achieve positive free cash flow.

Although cost reductions should continue to be realized through fourth-quarter-2010, the step change in fixed cost reductions have largely been completed, and margin expansion going forward will need to be derived primarily from capacity utilization and scale efficiencies associated with increases in industry volumes. The recent contract talks demonstrate, however, that full labor-cost parity may still be a challenge.