US automakers are facing higher default risk than their European and Asian counterparts due to new structural strains in the market, experts have found.
A new report by Moody’s Analytics Asset Management has highlighted growing credit fragility across the global automotive ecosystem which is impacting the US auto production industry more than other parts of the world.
For the US, it found that the higher default risk compared to other countries is driven by weaker affordability, higher financing costs and slower normalisation of used-vehicle prices.
The average probability of default (PD) for US automakers has exceeded 10 per cent, according to Moody’s.
The report follows the high-profile defaults of US auto parts supplier First Brands and car dealership Tricolor, which have brought the challenges facing the sector into sharp focus.
The bankruptcies of the two companies have also triggered concern within the private debt market, with the twin failures unsettling parts of Wall Street’s multitrillion-dollar credit sector and prompting some investors to reduce exposure to consumer and auto lending. While some commentators pointed to these cases as evidence of cracks in the private credit industry, others have stated that they are isolated incidents of “corporate fraud”.
Read more: ‘Cockroach’ fears overblown after Tricolor and First Brands fallout
While Europe is faring better than the US, conditions remain strained due to supplier challenges, with higher leverage, liquidity pressure and private debt exposure elevating risk well before maturity profiles peak, Moody’s said.
In Asia, the outlook is more stable, supported by the growth of China’s electric vehicle market and lower PD levels. However, intense price competition is exporting margin pressure to overseas markets.
Read more: Jefferies hit by $30m loss linked to First Brands collapse
Overall, Moody’s said that post-pandemic disruption, geopolitical pressure, tariff uncertainty and higher-for-longer interest rates have weighed on the automotive value chain, creating cumulative stress that is now being reflected in credit conditions.
Original equipment manufacturers (OEMs) are facing slowing volumes and rising costs, while the transition to electrification remains uneven, more capital intensive and less supportive of margins. Moody’s added that policy reversals have undermined economies of scale across the industry.
Credit stress is emerging first in forward-looking risk indicators, with models pointing to rising risk among OEM suppliers and signs of deterioration broadening beneath the surface ahead of headline distress.
Read more: Private credit bigwigs hit back at “misinformation” over First brands collapse
