Delinquencies on subprime auto debt packaged into securities reached a high not seen since October 1996, as late payments continued to worsen in February, according to Fitch Ratings.

The number of car borrowers who were more than 60 days late on their bills in February rose 11.6 percent from the same period a year ago, bringing the delinquency rate to 5.16 percent, Fitch wrote Monday in a report. During the financial crisis delinquencies peaked at 5.04 percent, Fitch wrote.

“This isn’t an issue of whether the bonds will be repaid in full,” Kevin Duignan, global head of Fitch’s securitization group, said in an interview. Rather, it’s a question of whether investors will be faced with uncertainty that is inconsistent with high investment-grade ratings, he said.

Access to the securitization market is vital for small and mid-sized subprime lenders. If that’s blocked because of investor concerns, it could become difficult for these firms to fund themselves and finance their servicing operations.

Vicious Cycle

“Our concern isn’t necessarily individual transaction performance, but how a group of mid-sized and smaller issuers could be exposed to funding risk at the same time, and which results in unanticipated consequences for investors,” Duignan said. “You could see a vicious cycle” where investors stop buying from smaller companies, which would then be forced to cut back on their servicing costs, resulting in even more loan losses, he said.

Investors expect delinquencies on subprime deals to be high, said David Castillo, a managing director at Odeon Capital Group, a broker-dealer that trades auto asset-backed securities. “But that’s exactly why investors are attracted to the debt -- the riskier the borrower, the higher the yield.”

Fitch expects the performance of prime and subprime auto asset-backed securities to improve in the coming months as tax refunds kick in. But the firm said the seasonal rebound could be more muted than in prior years. That’s partially because used-car prices are expected to fall, as record volumes of lease contracts expire and the resulting flood of inventory cuts the recovery values on lenders’ repossessions.