As the subprime auto finance company collected another workplace award, Credit Acceptance Corp. also announced an update this week involving its latest securitization.
Credit Acceptance completed a $500.0 million asset-backed non-recourse secured financing. Pursuant to this transaction, the company contributed approximately $625.1 million of loans to a wholly-owned special purpose entity that will pledge the loans to an institutional lender under a loan and security agreement.
The company said the financing has three characteristics, including:
— Bear interest at 3.13%
— Revolve for 36 months after which it will amortize based upon the cash flows on the contributed loans
— Be used by Credit Acceptance to repay outstanding indebtedness and for general corporate purposes.
Credit Acceptance explained it will receive 6.0% of the cash flows related to the underlying consumer loans to cover servicing expenses. The remaining 94.0%, less amounts due to dealers for payments of dealer holdback, will be used to pay principal and interest to the institutional lender as well as the ongoing costs of the financing.
“The financing is structured so as not to affect our contractual relationships with our dealers and to preserve the dealers’ rights to future payments of dealer holdback,” the company said.
In other company news, Credit Acceptance said it has been selected once again as one of Metropolitan Detroit’s Best and Brightest Companies to Work For. The announcement marks the eighth straight year that the company has received this honor.
Furthermore, this is the sixth workplace award that Credit Acceptance has received this year with the others being:
— FORTUNE 100 Best Companies to Work For (last six years in a row)
— Best Workplaces in Financial Services & Insurance (last five years in a row)
— Forbes Global 2000 List
— Best Workplaces for Millennials (four out of last five years)
— Crain’s Fast 50 (last six years in a row)
To see the complete 2019 List of Metropolitan Detroit’s Best and Brightest Companies to Work For, visit thebestandbrightest.com.
Coinciding with the release of its second-quarter performance, Consumer Portfolio Services also discussed a structural reorganization of sales representatives and origination staff to cater to dealerships in its origination network more effectively.
CPS reported this week that it closed the second quarter with more than 8,000 active dealers booking paper with the subprime finance company. CPS leverages a staff of approximately 250 employees located at three branches in Irvine Calif., Las Vegas and Orlando, Fla.
In an effort to improve dealer service and product “usability,” CPS said in a message to SubPrime Auto Finance News that it has reorganized its staff. Prior to making this alignment change, CPS explained dealers would generally be connected to the next available buyer from a pool when they contacted the finance company. With the re-alignment in place, CPS said dealers will work with the same staff on each of their applications and loan packages.
“Our goal is to have dealers working with the same loan origination staff at CPS whenever possible,” said Teri Robinson, who is senior vice president of originations at CPS.
“We expect this move to strengthen dealer relationships and build familiarity for dealers with CPS, plus help our staff get to know dealers better,” Robinson continued. “Dealers need support, flexibility and quick answers to their questions when they contact CPS. We’re confident they will like our improved alignment strategy.”
Also this week, CPS announced earnings of $1.8 million, or $0.08 per diluted share, for its second quarter that ended June 30. This figure compares to net income of $3.2 million, or $0.13 per diluted share, in the second quarter of last year.
The company reported its Q2 revenues came in at $86.3 million, a decrease of $13.0 million, or 13.1%, compared to $99.4 million for the second quarter of 2018. However, the company trimmed its costs as CPS said its total operating expenses for the second quarter were $83.6 million, compared to $94.7 million a year earlier.
CPS noted its Q2 pretax income for the second quarter of 2019 was $2.8 million, which represented a drop of 40.5%.compared to pretax income of $4.7 million in the second quarter of last year.
For the first six months of 2019, CPS tallied up its total revenues of $174.6 million, which were down compared to $202.9 million for the six months of 2018. That’s a decrease of approximately $28.4 million or 14.0%.
CPS pointed out its total expenses for the first six months of 2019 were $169.1 million, a decrease of $24.6 million, or 12.7%, compared to $193.7 million for the six months of 2018.
The company’s pretax income for the first six months of 2019 came in at $5.4 million, compared to $9.2 million for the same period in 2018. Net income through the first half of 2019 was $3.5 million compared to $6.3 million a year earlier.
During the second quarter of 2019, CPS said it purchased $250.1 million of new contracts compared to $243.0 million during the first quarter of 2019 and $214.7 million during the second quarter of last year.
The company's receivables totaled $2.399 billion as of June 30, an increase from $2.393 billion as of March 31 and $2.329 billion as of June 30 of last year.
CPS mentioned its annualized net charge-offs for the second quarter constituted 7.82% of the average portfolio as compared to 7.58% for the second quarter of last year. Its delinquencies greater than 30 days (including repossession inventory) represented 14.83% of the total portfolio as of June 30 as compared to 10.07% as of June 30 last year.
“We are pleased to report that this quarter represented our fourth consecutive quarter of year over year increases in quarterly originations volume,” said Charles Bradley, Jr., chairman and chief executive officer.
“In addition, since Q3 of 2018, we have seen consecutive quarterly increases in the coupon rates on new receivables and lower fees paid to dealers,” Bradley added in a news release.
And in other company news released this week, CPS also announced the closing of its third term securitization of 2019. The transaction is CPS’ 33rd senior subordinate securitization since the beginning of 2011 and the 16th consecutive securitization to receive a triple-A rating from at least two rating agencies on the senior class of notes.
In the transaction, the finance company qualified institutional buyers purchased $243.5 million of asset-backed notes secured by $244.1 million in automobile receivables originated by CPS.
The sold notes, issued by CPS Auto Receivables Trust 2019-C, consist of six classes. Ratings of the notes were provided by Standard & Poor’s and DBRS, and were based on the structure of the transaction, the historical performance of similar receivables and CPS’s experience as a servicer.
|Interest Rate||Average Life
|Price||S&P Rating||DBRS Rating|
CPS said the weighted average coupon on the notes is approximately 3.36%.
The finance company mentioned the 2019-C transaction has initial credit enhancement consisting of a cash deposit equal to 1.00% of the original receivable pool balance and over-collateralization of 0.25%.
CPS added the transaction agreements require accelerated payment of principal on the notes to reach overcollateralization of the lesser of 6.00% of the original receivable pool balance, or 16.00% of the then outstanding pool balance.
The company went on to say the transaction utilizes a pre-funding structure, in which CPS sold approximately $161.1 million of receivables at inception and plans to sell approximately $83.0 million of additional receivables during August.
This further sale is intended to provide CPS with long-term financing for receivables purchased primarily in the month of July, according to the company.
Collateral performance in the subprime U.S. auto loan asset-backed securities (ABS) sector in May was mixed, according to the most recent S&P Global Ratings report.
Analysts discovered subprime auto loan ABS month-to-month declines in both losses and recoveries during May. However, S&P Global noticed losses rose year-over-year and delinquencies increased both month-over-month and year-over-year.
Meanwhile, in the prime space, analysts noticed the data was generally positive in May. Even with recoveries receding, prime losses declined for the month, reaching their lowest level so far this year. S&P Global Rating pointed out this situation is not unusual, however, as losses often reach their lowest annual levels in May.
Overall, prime delinquencies and losses were stable year-over-year, according to the report.
Some of the key takeaways from the report include:
• U.S. prime auto loan credit losses improved month over month to 0.41% from 0.43% and were stable year over year.
• Subprime auto loan losses also improved month over month to 6.34% from 6.60%, but they increased from 6.00% year over year.
• Recoveries weakened month over month for both segments. But while prime recoveries worsened year over year, declining to 66.78% from 70.57%, year-over-year subprime recoveries saw a slight improvement, rising to 48.90% from 48.42%.
• The prime 60-plus-day delinquency rate was essentially flat both month-over-month and year-over-year at 0.36%, but its subprime counterpart increased to 4.51% from 4.31% in April and from 4.29% a year earlier.
“In June, we lowered our expected cumulative net losses for two deals, raised them for nine and maintained them for four,” analysts said. “We also took rating actions on four CPS Auto Receivables Trust transactions and on Sierra Auto Receivables Securitization Trust 2016-1.”
This week, Westlake Financial Services finalized another securitization above $1 billion, setting a new company record in the process.
Westlake announced the closing of its 19th asset-backed securitization (WLAKE 19-2) at $1.2 billion. This latest securitization is the largest ever in Westlake history and the fifth consecutive issuance of more than $1 billion.
“Our largest ever ABS is an indication of our company’s continued growth and increasing market share,” Westlake Financial Services chief financial officer Paul Kerwin said in a news release.
“We expect this growth to continue and plan for another large ABS before the end of the year,” Kerwin continued. “I would like to thank our capital markets and treasury team for executing another successful deal.”
During this securitization, Westlake acknowledged market trade tensions caused a rally in treasuries, leading Libor rates to plummet 0.65% compared to Westlake’s February deal. Despite these factors Westlake pointed out that the company was able to secure investor confidence, with returning investors accounting for 33 of the transaction’s 36 total participants.
“Despite the market pitfalls, Westlake was able to close the ABS with a strong outlook for our investors,” said Franka Bicolli, director of treasury of Westlake Financial Services.
“We added three new investors to our large pool of consistent participants. We also increased our spread concession by 0.08%, placing the overall rate 0.58% lower than our February transaction,” Bicolli continued.
Westlake Financial Services continues to experience growth through its nationwide dealer network. As one of the largest privately held automotive lenders, the company is active in all 50 states plus Puerto Rico, with a dealer base of more than 20,000 franchise and independent dealerships.
Westlake’s current portfolio of $8.3 billion includes originated auto loans and leases, direct-to-consumer loans, portfolio purchases and servicing and dealer floorplan lines of credit.
Colonnade Securities offered an extended examination of the below-prime auto finance industry this week, identifying what the independent investment bank focused on the financial services and business services sectors believes are four factors currently impacting the space most.
According to the report, the fundamentals of the below-prime auto finance industry have not deteriorated significantly, but the sector is now out of favor with traditional financial sponsors. In part, Colonnade cited four factors, including:
— Past aggressive underwriting has led to elevated delinquencies for some firms
— Private equity investors have hit the horizon of disappointment
— Bifurcation of the below-prime auto finance sector
— Access to capital
Colonnade explained a wave of investments in 2010 through 2012 led to heightened competition and looser underwriting, followed by a spike in delinquencies and losses. The result is a significant decrease in new equity capital available to the sector, according to the report.
“While banks that lend to the below-prime auto finance industry are more cautious and selective, senior debt availability remains strong for performing industry participants due, in large part, to the asset-backed securities market,” Colonnade said in a news release.
The investment bank added in the report, “The impact of liberal standards has been revealed in the performance of the asset-based securities issued by a few significant issuers.
Colonnade contends the industry has bifurcated between large providers with total receivables of more than $300 million and small below-prime auto finance firms. Colonnade insisted those large, well-run players continue to grow profitably while a few smaller firms have failed.
“These larger firms have invested in automated credit decisioning and data analytics that reduce static pool losses,” Colonnade said in its report. “The larger firms are also able to hire and retain skilled leaders and technical people needed to implement a tech-forward operation. “In addition, large firms have made significant investments in compliance staff and infrastructure.
“The second segment of the industry consists of smaller players that have not achieved critical mass and do not have the resources to invest in credit/analytic technology,” the bank continued in the report.
Colonnade recapped that few M&A transactions have been completed in recent years, although there have been some capitulations (business exits/liquidations). Several of the large, successful firms are still seeking change of control as their private equity owners run through their investment horizons.
“Sponsor-owned firms will eventually be sold due to the 10-year liquidation schedule of the typical private equity fund,” Colonnade added in its report.
Colonnade expects to see an uptick in mergers and acquisitions activity in the industry over the next 18 months as private equity investors are forced to take their properties to market.
“There will be transactions, but the valuations are unlikely to meet the original expectations of the investors,” the investment bank said in a news release. “These market dynamics will create compelling investment opportunities for long-term, yield-oriented investors, such as family offices and other non-traditional financial sponsors.”
Davis & Gilbert partner Joseph Cioffi reiterated his position that subprime auto finance portfolio performance is expected to deteriorate soon.
Cioffi first made that assertion through a 360-degree market study released by Credit Chronometer, a microsite he authors. Nick asked him to elaborate during this podcast recorded during the National Automotive Finance Association’s annual conference in June in Plano, Texas.
The full episode can be found below.
You can also listen to the latest episode in the window below.
Please complete our audience survey; we appreciate your feedback.