Securitization

Seasonal impact lifts March ABS performance and recoveries

NEW YORK - 

Along with some noteworthy developments about how finance companies are striving to improve the quality of paper flowing into their portfolios, the latest monthly U.S. Auto Loan ABS tracker from S&P Global Ratings contains other elements that should delight industry observers and participants.

Perhaps most notably, the analyst team at S&P Global Rating began its report by highlighting how bolstered collateral performance arrived because of “normal seasonal behavior.” S&P Global Ratings based its assessment of the U.S. auto loan asset-backed securities (ABS) market as of March.

“As tax refunds came in, consumers brought their credit obligations current and drove demand for used vehicles,” analysts said in the report shared this week with SubPrime Auto Finance News. The seasonal phenomenon caused delinquencies to decrease and recoveries to improve month-over-month. Subprime net losses also declined substantially month-over-month.

“On a year-over-year basis, the prime sector reported near stability in losses and delinquencies but recoveries weakened. Meanwhile, the subprime segment demonstrated weaker performance year-over-year with respect to net loss and delinquency performance,” they added.

Delving deeper into the numbers, S&P Global Ratings indicated that prime net losses were almost flat at 0.68 percent in March compared to 0.69 percent in February and were nearly stable relative to a year earlier at 0.65 percent.

As referenced earlier, analysts reiterated the subprime net loss rate improved “significantly” month-over-month, decreasing to 7.62 percent in March from 9.18 percent in February. However, subprime losses climbed on a year-over-year basis from 7.37 percent in March 2017.

As a supplement to its subprime index, S&P Global Ratings created the modified subprime index, which excludes certain high-loss deep subprime issuers including Santander Drive Auto Receivables Trust (DRIVE), American Credit Acceptance Receivables (ACA) and Exeter Automobile Receivables Trust (Exeter).

On a month-over-month basis, the report showed the modified subprime loss rate decreased to 6.37 percent in March from 7.24 percent in February and increased from 6.16 percent in March 2017.

“Auto losses typically decline during the end of the first quarter, largely because of seasonal factors,” analysts said. “Late payments and losses tend to peak at year's end due to holiday shopping and then decrease during tax season as refunds support consumers’ ability to bring their credit obligations current.”

When it came to recoveries, S&P Global Ratings spotting seasonal pattern there, too, resulting in improvements.

The prime recovery rate increased month-over-month to 58.74 percent in March from 53.91 percent in February. Analysts also noticed subprime recoveries picked up month-over-month, increasing to 47.45 percent in March from 39.21 percent in February.

“As expected, tax refunds led to increased demand for used vehicles and supported the month-over-month improvement in recoveries,” S&P Global Ratings said in the report. “Of note was the subprime modified composite, which excludes the three large deep subprime lenders, reporting lower recoveries (46.59 percent) than the overall subprime composite (47.45 percent), which includes these deep subprime lenders.”

Analysts went on to explain that normally these higher-loss issuers garner lower recovery rates than their lower-loss peers. However, Santander’s DRIVE platform experienced “exceptionally strong recoveries” in March with an average recovery rate of 53.90 percent across its outstanding issuances.

Looking on a year-over-year basis, S&P Global Ratings shared that prime recoveries remained lower, decreasing from 63.42 percent in March of last year.

Modified subprime recoveries decreased year-over-year, as well, to 46.59 percent.

Subprime recoveries including the deep subprime finance companies ticked up slightly from 47.30 percent in March 2017, due to strong recoveries on the DRIVE transactions.

Turning next to delinquencies, the seasonal theme continued, according to the report.

The prime 60-plus-day delinquency rate declined to 0.38 percent in March from 0.46 percent in February 2018, while remaining relatively stable year-over-year since the reading in March 2017 was 0.40 percent.

The subprime 60-plus-day delinquency rate improved to 4.28 percent in March from 5.15 percent in February. Looking on a year-over-year basis the metric still edged slightly higher from 4.04 percent in March 2017.

Analysts added the modified subprime 60-plus-day delinquency rate improved 77 basis points to 3.18 percent in March from 3.95 percent in February, but deteriorated by 15 basis points year-over-year from 3.03 percent in March 2017.

Finally, S&P Global Ratings closed its latest report by highlighting how much FICO scores have improved in connection with auto paper now in the market.

Analysts determined the weighted average FICO for prime transactions issued in the first quarter reached an all-time high of 757, up from 744 in Q1 2017 and 748 for the full year.

“In aggregate, subprime lenders appear keenly focused on maintaining improvements they’ve made in credit quality that began in 2016,” analysts said.

On the subprime side, S&P Global Ratings found that the weighted average FICO improved to 586 in Q1 — the highest reading since 2009. In Q1 of last year, it stood at 575 and 578 in all of 2017.

Also, the weighted average LTV remained nearly stable at 110.71 percent compared with 110.43 percent a year earlier and 110.57 percent for full-year 2017. S&P Global Ratings pointed out the reading remained significantly lower than their post-credit-crisis peak of 114.78 percent in 2014.

At the same time, the report mentioned the weighted average loan-to-value (LTV) ratio declined to 95.69 percent from 97.16 percent in Q1 2017 and 96.14 percent for all of 2017.

S&P Global Ratings acknowledged its metrics were “somewhat” affected by AmeriCredit, which did not issue in Q1 due to a planned servicing system upgrade.

Had it issued AmeriCredit Automobiles Receivables Trust 2018-1 in first quarter rather than May, the weighted average FICO and LTV would have been 585 and 110.03 percent, respectively, according to the report.

 

Black Book’s 2018 depreciation forecast and 3 other findings from Fitch

LAWRENCEVILLE, Ga. - 

Now with one quarter of 2018 in the books, Black Book and Fitch Ratings released their latest joint vehicle depreciation report.

Along with three other major findings, Black Book forecasted an annual depreciation rate of 17 percent in 2018 as the supply of used cars and trucks increases, up from a lower-than-expected 13.2 percent experienced in 2017 due to strong sales activity stemming from hurricanes last fall. 

Three other trends included in the report were:

• New light vehicles sales volume decreased by 2 percent in 2017 to 17.14 million, below the record of 17.46 million in 2016.

• Light trucks, including SUVs, crossovers and pickups, continue to increase in U.S. new sales, constituting 65 percent of the volume compared to 57 percent in 2016 and 55 percent in 2015.

• Incentive spending by auto manufacturers grew year-over-year in 2017, ending the year at nearly $4,000 in average incentive amount on new vehicles.

2017 depreciation trends

In 2017, Black Book determined the prestige luxury car segment had the highest annual depreciation at 23.4 percent. On the other hand, editors noticed full-size pickups retained their value well throughout the year as demand of used pickups remained high, ending the year with only 5.1 percent in depreciation.

Black Book found that full-size crossover/SUV, the largest of the SUVs, had the strongest retention with a depreciation rate of 9.4 percent. Their values held up well with nearly zero depreciation in the first two quarters of the year.

Editors pointed out that sub-compact cars, the smallest of sedans, experienced the highest depreciation rate among non-luxury car segments at 17.6 percent in 2017. On the other hand, the next level up in sedans, compact cars, performed much better than in previous years.

Among the crossover/ SUVs, the smallest of the luxury crossovers, sub-compact luxury CUVs depreciated the most at 19.2 percent, according to Black Book’s analysis.

A look ahead at 2018 trends

In January of this year, editors calculated that a 2015 model year vehicle on average was valued at 51 percent in the wholesale arena as a percentage of typically-equipped MSRP. This three-year retention has dropped from 52 percent in January 2017, which at that time was for a 2014 model year vehicle.

Black Book residual value forecasts show that values of 2018 model year vehicles in January 2021 are expected to be three percentage points lower than the current retention trends averaged across all vehicle models.

At the specific vehicle segment, brand and individual vehicle level, residual values offer a different look, according to Black Book.

When economic conditions and expectations are factored into Black Book’s scenario-based residuals modeling, the trend shows a steeper drop in residual values when considering an economic downturn scenario.

The company also expects to see a slight pullback in lease penetration, as rising interest rates, declining residuals, tighter credit criteria and rising availability of off-lease used vehicle options make leasing more expensive for auto manufacturers and their captive finance companies.

“We expect vehicle depreciation to increase and residual values to decline in 2018 as used vehicle supplies increase while overall demand stabilizes,” said Anil Goyal, executive vice president of operations at Black Book.

“Consumer demand at the vehicle segment level may see more volatility, and as such lenders should analyze and measure portfolio equity on a regular basis to assess risk within their portfolios,” Goyal continued.

US Auto ABS outlook for 2018

Fitch’s prime asset performance is projected to continue normalizing but remain well within recessionary levels.

Analysts indicated prime annualized net losses (ANL) will get closer to the 1-percent range in 2018. Loss severity is a focus in 2018 as high used vehicle supply and reduced used-vehicle demand will constrain recoveries.

Fitch explained that extended-term contracts (lasting longer than 60 months), which comprise a large majority of all prime and subprime ABS pools securitized, remain a key risk next year, particularly if early defaults increase on these riskier loans and drive the pace of losses higher.

Fitch added subprime asset performance will be pressured in 2018 at or near prior recessionary levels, with the weakest performance attributed to the smaller and less seasoned finance companies, whom ABS platforms Fitch does not rate.

Analysts went on to mention the risk to subprime finance companies may accelerate as auto sales decline and competition ramps up, forcing them to further loosen credit standards to gain or hold market share.

Overall, Fitch expects severity to remain as the main factor impacting ABS performance, especially as more used supply puts pressure on recovery rates in auto ABS pools during 2018.

“Despite a relatively stable outlook for auto lease ABS asset performance in 2018, it is evident that increasing lease returns in 2018 will place more pressure on residual performance throughout the year,” said Hylton Heard, senior director at Fitch Ratings.

The Black Book-Fitch vehicle depreciation report is available here.

Losses slow within subprime ABS space

NEW YORK - 

S&P Global Ratings used two words in a single sentence that finance companies catering to consumers with soft credit histories should be tickled to see.

A recent report published by S&P Global Ratings indicated collateral performance in the U.S. subprime auto loan asset-backed securities (ABS) sector appears to have stabilized in 2017 after having deteriorated for four straight years.

On an aggregate basis, analysts calculated that average monthly annualized subprime losses rose only 2 percent in 2017, compared with spiking 18 percent in 2016.

And analysts also noticed 60-plus-day delinquencies were nearly stable, “albeit at relatively high levels,” according to the report.

“Loss levels for subprime auto loan ABS issued in 2016 are in line with those issued in 2015, whereas losses for securitizations issued in 2015 are trending 18 percent higher than for those issued in 2014,” S&P Global Ratings said.

“Most of the 12 issuers that issued subprime auto loan ABS in the first half of 2017 had either stable or improved cumulative net loss performance relative to their 2016 issuances,” the report continued.

Analysts explained many issuers attribute the deterioration in recent years to competitive pressures, lower recovery rates and their expansion into different regions with new dealers. The experts pointed out that 2015 and 2016 stand out as particularly high loss years.

“In our view, many lenders started to self-correct in 2016, and by 2017, their tighter credit standards finally started to stem the rise in losses,” according to the S&P Global Ratings team led by lead analyst Amy Martin.

“Based on the subprime auto loan ABS we track, the credit quality of loans has improved with loans securitized over the past two years having higher credit scores and lower LTVs on average. For example, the weighted average LTV for securitized subprime pools declined to 110.54 percent for 2017 from 112.41 percent in 2016 and 113.1 percent in 2015,” the contingent went on to say.

The report also mentioned some finance companies have also “dramatically” reduced their loan-to-value ratios on their longer-term loans. However, analysts also acknowledged that terms do continue to lengthen due to the rising cost of vehicle ownership.

S&P Global Ratings determined the percentage of contracts with original terms greater than 60 months increased to 84.6 percent at year-end, up from 83.1 percent in 2016, and the weighted average original term increased to 69 months from 68 months over the same period.

“Despite longer terms, competition in the subprime auto finance sector appears to be waning as some large banks have scaled back their subprime lending volumes,” analysts said. “Several finance companies have also cited an improved competitive landscape, which has allowed them to lower LTVs and improve pricing without much impact on volume.

“Although we believe credit standards and the competitive environment in the sector have improved, obstacles lie ahead,” they continued. “Recovery rates will continue to come under pressure. With off-lease vehicle volume expected to reach a record 3.9 million this year, up from 3.6 million in 2017, used-vehicle values could decline further.

“In addition, as lenders increase their mix of longer-term loans, loss severities could continue to rise, and so could defaults because loans with longer terms remain outstanding longer and thus are more exposed to adverse changes in borrowers' credit conditions,” analysts went on to say.

ABS analysts find ‘encouraging trends’ in 2017 data

NEW YORK - 

S&P Global Ratings pored over the 2017 data for the U.S. auto loan asset-backed securities (ABS) sector and reported that  “a few encouraging trends emerged.”

Analysts added that December ABS performance showed seasonal patterns, resulting in upticks in metrics they watch regularly.

The firm shared this finding in a report titled, “U.S. Auto Loan ABS Tracker: Full-Year 2017 and December 2017 Performance.”

Although lower recovery rates continued to push average annual losses higher for both prime and subprime securitizations in 2017, S&P Global Ratings indicated that losses increased at a slower rate than they did in 2016. The rate of deterioration in recovery rates was also less steep than it had been, and 60-plus-day delinquencies remained nearly unchanged from the annual average for 2016, the report mentioned.

“In our view, auto lenders’ tighter credit standards for writing loans and the improved collateral mix of their securitizations is starting to pay off,” analysts said.

As underwriting standards improved, S&P Global Ratings determined that better pools were securitized in 2017 compared to those in 2016. Loan-to-value (LTV) ratios declined for both prime and subprime pools, and the weighted average FICO was at an all-time high for prime pools and at the highest level for subprime pools since 2009.

The firm also acknowledged the potential impact of hurricanes Harvey and Irma on auto loan ABS performance was on everyone's mind last year. According to the report, the ultimate credit impact on auto loan ABS transactions with high concentrations of installment contracts in Texas and Florida will be minimal.

Although the hurricanes led to higher extension rates among several securitizers with high exposures to the affected areas, lenders responded with hardship extensions, which curbed the potential rise in losses,” analysts said. “Based on our discussions with these securitizers, we believe the extensions for most of them have normalized compared to the high levels in September.”

While trends for full-year 2017 were encouraging to S&P Global Ratings, the firm pointed out that seasonal factors in December led to higher delinquencies and losses for both the prime and subprime sectors relative to November.

Analysts found that prime net losses increased slightly to 0.87 percent for December compared to 0.75% in November, and increased year-over-year from 0.77 percent as of December 2016.

“The main culprit continues to be lower recovery rate,” they said.

The prime sector recovery rate declined significantly to 45.40 percent in December 2017 compared with 50.72 percent in November and 53.25 percent for December 2016. The drop to 45.40 percent marks the lowest monthly recovery rate in the prime sector since 2009.

“Most issuers turned in lower recovery rates year-over-year, with the foreign captive finance companies that finance predominately sedans and other cars reporting more deterioration than their domestic counterparts that have heavier concentrations of trucks,” S&P Global Ratings said.

The subprime net loss rate increased month-over-month to 9.58 percent in December from 8.85 percent in November and declined a bit from 9.65 percent in December 2016.

As a supplement to its subprime composite and index, S&P Global Ratings created the modified subprime composite and index, which exclude certain high-loss deep subprime issuers (Drive, ACA and Exeter).

On a month-over-month basis, the modified subprime loss rate composite increased to 7.62 percent in December from 7.17 percent in November and remained stable compared to a year earlier.

Subprime recoveries decreased to 36.28 percent in December from 37.35 percent in November and 40.13 percent in December 2016.

The prime 60-day delinquency rate increased slightly to 0.52 percent in December from 0.48 percent in November but remained stable compared with 0.53 percent in December 2016.

The subprime 60-day delinquency rate rose to 5.49 percent for December from 5.19 percent in November and declined from 5.53 percent in December 2016.

Several companies reported lower year-over-year delinquencies, including Flagship (for most of its deals from 2013 through 2015), CarFinance (for 2013–2015 deals), and AMCAR (its 2014-1, 2014-3, 2014-4, and 2015-4 deals),” analysts said.

The firm added that its modified subprime 60-day delinquency rate increased to 4.04 percent in December 2017 from 3.76 percent in November 2017 but decreased from 4.23 percent in December 2016.

Nominations now welcomed for The CEO Issue 2018

CARY, N.C. - 

It’s time again when SubPrime Auto Finance News engages with the industry for one of our most successful annual projects — "The CEO Issue."

In an ongoing effort to recognize the chief executive officers who are flourishing in today’s competitive marketplace, SubPrime Auto Finance News is asking the industry to nominate the CEOs of auto finance companies and their critical support service providers to be included in the March/April print edition that’s dubbed, “The CEO Issue.”

Between now and 5 p.m. ET on Feb. 20, nominations along with a high-resolution photograph and explanations as to why the CEO is successful can be sent to SubPrime Auto Finance News senior editor Nick Zulovich via email at nzulovich@cherokeemediagroup.com.

Here are some example questions to be answered to enhance nominations:

—What moves has the CEO made to place the company into position to be successful?

—How does the CEO cultivate a productive environment that inspires the organization at all levels?

—Why is this CEO an example of successful leader who lifts the value of not just the company, but also the entire industry?

To review the rundown of CEOs honored in last year’s issue, the digital version can be found here

SubPrime Auto Finance News publisher Bill Zadeits explained why this endeavor has become one of the highlights of the editorial calendar.

“As our industry continues to evolve, CEOs face many challenges to protect the prosperity of their organizations, not only in the present, but also several quarters and years down the road,” Zadeits said. “The auto finance industry is extremely fortunate to have some of the best leaders who handle those challenges quite well.

“Each year, our network of industry partners has raised its collective hand so we can showcase these impressive executives,” Zadeits continued. “We’re excited to learn more about each of these talented CEOs who will guarantee this $1 trillion economic pillar continues to flourish.”

Along with it being, “The CEO Issue,” the March/April edition of SubPrime Auto Finance News also will focus on both Vehicle Finance Conference hosted by the American Financial Services Association as well as the National Convention & Expo orchestrated by the National Automobile Dealers Association — signature industry events that run from March 20-25 in Las Vegas.

So if you have a longstanding relationship with or report to a CEO who should be included in “The CEO Issue,” send your nominations, images and responses to the sample questions listed above to SubPrime Auto Finance News editor Nick Zulovich at nzulovich@cherokeemediagroup.com. Nominations will be accepted through Feb. 20.

And be sure to get your copy of “The CEO Issue” delivered to your mailbox or grab one at the AFSA or NADA events. If you don’t already have one, get your free subscription by going to www.autoremarketing.com/subprime/subscribe.

Expecting growth, Westlake tops $1B with latest securitization

LOS ANGELES - 

After approaching the $1 billion securitization threshold last summer, Westlake Financial Services surpassed the mark, according to an announcement shared earlier this week.

Westlake issued its largest asset-backed securitization (ABS) of $1 billion backed by approximately $1.1 billion of automotive paper.

Vice president of finance Sean Morgan highlighted this move is Westlake’s largest securitization ever issued with an expected annualized coupon of 3.28 percent.

“Westlake’s past securitizations continue to perform, and the company is growing profitably, promoting investor loyalty and sparking interest from new investors,” Morgan said.

“With a weighted average credit spread 1.12 percent, we were on average over 30 basis points tighter than our last deal for comparable tranches,” he added.

The transaction was led by JP Morgan (structurer), Wells Fargo and Bank of Montreal.

Westlake’s previous securitization was $800 million back in August.

Executives also mentioned this is the company’s first transaction to offer a single-B rated Class F tranche, which added an additional $57 million and brought Westlake’s advance rate to 97 percent.

Westlake chief financial officer Paul Kerwin explained why the company made that move.

“Our focus in 2018 is to continue to gain market share across the credit spectrum,” Kerwin said. “The liquidity cushion provided by our ABS investors has enabled us to expand our financing options to near prime and prime credit customers in recent years.

“Based on our growth trends we expect to be back in the market in Q2 of 2018,” Kerwin went on to say.

Westlake Financial Services continues to experience growth through its nationwide dealer network. The company is active in all 50 states, including Puerto Rico, with a dealer base of more than 20,000 franchise and independent dealerships.

Westlake’s current portfolio of $6.2 billion includes originated auto installment contracts and leases, portfolio purchases and dealer floor plan lines of credit.

CPS finalizes first securitization of 2018, totaling $190M

LAS VEGAS - 

Last week, Consumer Portfolio Services announced the closing of its first term securitization of 2018. 

Officials highlighted the transaction is CPS’ 27th senior subordinate securitization since the beginning of 2011 and the 10th consecutive securitization to receive a triple “A” rating on the senior class of notes from at least two rating agencies. 

In the transaction, qualified institutional buyers purchased $190.0 million of asset-backed notes secured by $193.6 million in automobile receivables originated by CPS. 

The sold notes, issued by CPS Auto Receivables Trust 2018-A, consist of five 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.

CPS Auto Receivables Trust 2018-A
Note Class Amount Interest Rate Average Life Price S&P Rating DBRS Rating
 A  $88.5 million  2.16%  .76 years  99.99832%  AAA  AAA
 B  $31.5 million  2.77%  1.95 years  99.99632%  AA  AA
 C  $26.9 million  3.05%  2.66 years  99.97596%  A  A
 D  $23.1 million  3.66%  3.49 years  99.98720%  BBB  BBB
 E  $20.0 million  5.17%  4.14 years  99.99278%  BB-  BB

 

Officials indicated the weighted average coupon on the notes is approximately 3.46 percent.

The company explained the 2018-A transaction has initial credit enhancement consisting of a cash deposit equal to 1.00 percent of the original receivable pool balance and over-collateralization of 1.85 percent.

CPS added the final enhancement level requires accelerated payment of principal on the notes to reach over-collateralization of the lesser of 6.80 percent of the original receivable pool balance, or 18.50 percent of the then outstanding pool balance.

Officials went on to mention the transaction utilizes a pre-funding structure, in which CPS sold approximately $121.3 million of receivables last week and plans to sell approximately $72.3 million of additional receivables during the month. 

“This further sale is intended to provide CPS with long-term financing for receivables purchased primarily in the month of January,” the company said.

Additional subprime paper impacts November ABS readings

NEW YORK - 

S&P Global Ratings described what more subprime paper flowing into the auto loan asset-backed securities (ABS) market did to its readings for November.

According to a report published this week, the overall ABS market enjoyed some “mild” improvements in November. Analysts determined that prime collateral performance showed little weakness in losses, delinquencies and recoveries. In addition, the first-quarter 2017 prime vintage is performing better than the 2016 annual vintage.

Although subprime experienced a rise in delinquencies from October, S&P Global Ratings explained this figure was partially attributed to concentration among a few issuers.

Analysts reported that prime net losses declined slightly month-over-month and year-over-year to 0.66 percent in November 2017 from 0.72 percent in October 2017 and 0.70 percent in November 2016.

On the subprime front, S&P Global Ratings noticed the net loss rate decreased to 7.76 percent in November from 7.98 percent in October and 8.44 percent in November 2016. The firm indicated the lower figure is due to several issuers reporting improved performance.

Analysts also mentioned the high volume of new subprime auto loan ABS deals entering their composite since November 2016 has also contributed to the year-over-year reduction. As of November, 32 new deals with a total collateral amount of approximately $19.27 billion were added to the index. This pushed the outstanding collateral amount for November up to approximately $36.42 billion compared with $33.59 billion a year earlier.

“The rise in new issue deals diluted the year-over-year weighted net loss rate because the transactions have lower losses and contribute higher value to weights during their initial stage,” according to S&P Global Ratings.

Analysts went on to mention that from January 2001 through December 2017, upgrades of U.S. auto loan ABS have outweighed downgrades by nearly 52-1.

In 2017, S&P Global Ratings upgraded 322 U.S. auto ABS tranches, affirmed 374, and downgraded none. Of the 322 upgrades, 100 tranches were from prime transactions, and 222 were from subprime.

Latest securitizations by Credit Acceptance and CPS approach $550 million

LAS VEGAS and SOUTHFIELD, Mich. - 

Credit Acceptance and Consumer Portfolio Services each pushed out securitizations recently, and the combined total offered by the auto finance companies that specialize in subprime paper reached nearly $550 million.

The larger of the two developments was from Credit Acceptance, which on Thursday announced the completion of a $350.0 million asset-backed non-recourse secured financing.  Pursuant to this transaction, the company contributed vehicle installment contracts having a net book value of approximately $437.6 million to a wholly-owned special purpose entity, which will transfer the paper to a trust. The result was the issuance of three classes of notes:

Note Class Amount Average Life Price Interest Rate
 A  $233,600,000   2.58 years  99.99188%  2.65%
 B  $62,800,000  3.41 years  99.97321%  3.21%
 C  $53,600,000  3.71 years  99.98411%  3.48%

Credit Acceptance indicated the securitization will accomplish three objectives, including:

—Have an expected annualized cost of approximately 3.2 percent including the initial purchaser’s fees and other costs

—Revolve for 24 months, after which it will amortize based upon the cash flows on the contributed loans

—Be used by the company to repay outstanding indebtedness

“We will receive 6.0 percent of the cash flows related to the underlying consumer loans to cover servicing expenses,” company officials said. “The remaining 94.0 percent, less amounts due to dealers for payments of dealer holdback, will be used to pay principal and interest on the notes 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,” they added.

Meanwhile over at CPS, the company announced the closing of its fourth term securitization in 2017 earlier this month.  The transaction is CPS’ 26th senior subordinate securitization since the beginning of 2011 and the ninth consecutive securitization to receive a triple “A” rating on the senior class of notes from at least two rating agencies. 

In the transaction, CPS highlighted that qualified institutional buyers purchased $196.3 million of asset-backed notes secured by $200.0 million in automobile receivables originated by CPS.  The sold notes, issued by CPS Auto Receivables Trust 2017-D, consist of five classes. 

Officials indicated ratings of the notes were provided by Standard & Poor’s and Kroll Bond Rating Agency, and were based on the structure of the transaction, the historical performance of similar receivables and CPS’s experience as a servicer.

Note Class Amount Interest Rate Average Life Price S&P Rating KBRA Rating
 A  $91.4 million  1.87%  .75 years  99.99875%  AAA  AAA
 B  $32.5 million  2.43%  1.95 years  99.99125%  AA  AA
 C  $27.9 million  3.01%  2.65 years  99.97725%  A  A
 D  $23.8 million  3.73%  3.48 years  99.98753%  BBB  BBB
 E  $20.7 million  5.30%  4.13 years  99.97785%  BB-  BB-

CPS mentioned the weighted average coupon on the notes is approximately 3.39 percent.

The company also noted the 2017-D transaction has initial credit enhancement consisting of a cash deposit equal to 1.00 percent of the original receivable pool balance and over-collateralization of 1.85 percent.  The final enhancement level requires accelerated payment of principal on the notes to reach overcollateralization of the lessor of 6.80 percent of the original receivable pool balance, or 18.50 percent of the then outstanding pool balance.

CPS went on to say the transaction utilizes a pre-funding structure, in which CPS sold approximately $133.4 million of receivables today and plans to sell approximately $66.6 million of additional receivables during October. 

“This further sale is intended to provide CPS with long-term financing for receivables purchased primarily in the month of October,” officials said.

Editor’s note: Watch for upcoming reports as the executive teams from both Credit Acceptance and CPS discuss company results from the third quarter.

Davis & Gilbert experts finds 4 signs of subprime auto ABS market vulnerability

NEW YORK - 

As S&P Global Ratings noticed collateral performance in the U.S. subprime auto loan asset-backed securities (ABS) market deteriorated moderately on a sequential basis in August, Davis & Gilbert’s Insolvency, Creditors’ Rights & Financial Products Practice Group fears investors could be in for a surprise if that market segment makes a more notable move.

First, S&P Global Ratings indicated the subprime net loss rate increased to 7.95 percent in August 2017 from 7.38 percent in July but decreased year-over-year from 8.35 percent. This development is largely because a high volume of new subprime auto loan ABS deals have entered its composite reading since last year, which increased the outstanding balance of the collateral.

Between August of last year and the same month this year, analysts noted about 35 new deals with a total collateral amount of approximately $17 billion were added to their index. These additions pushed the outstanding collateral amount up to approximately $35.6 billion compared to $32.0 billion a year earlier.

“The rise in new-issue deals diluted the weighted net loss rate year over year because the transactions have lower losses and contribute higher value to weights during their initial stage,” S&P Global Ratings explained in a report shared with SubPrime Auto Finance News.

“As these transactions age, losses will increase — a trend we also often encounter in companies' managed portfolio loss statistics. As a result, we believe static pool vintage analysis provides more meaningful insight into actual performance trends,” analysts continued.

Meanwhile, the growth of the subprime auto ABS market is what’s concerning Davis & Gilbert partner Joseph Cioffi, an authority on loan and securitization markets. Cioffi has found that credit enhancements supporting subprime auto asset-backed securities (ABS) do not necessarily provide the same level of protection as credit enhancements supporting pre-financial crisis era subprime residential asset-backed securities (RMBS), “leaving them more vulnerable to market shifts and shocks than many realize.”

 These observations were made on a newly launched blog, the Credit Chronometer, in which Cioffi and team will be analyzing economic, market and political events that shape the legal landscape, and impact loan and structured credit markets, including those for auto loans, marketplace lending (peer-to- peer), student loans, mortgage loans and Property Assessed Clean Energy (PACE) financing.

In a blog post, Cioffi noted that the subprime mortgage collapse left clues for the future of subprime auto ABS.

“Credit enhancements in those deals could not always fully absorb losses from the real estate crash, and its impact on loan performance and recoveries,” Cioffi said. “Subprime auto ABS makes no such mistake regarding vehicles, but the corollary to the assumption of never ending real estate appreciation may be the presumed continued performance by auto loan borrowers.”

Cioffi has a warning for those who structure deals with too heavy a reliance on excess spread. “There are a number of hazard signs on this front, including easier credit as a result of softness in the auto sales market, growing household debt and now, a new potential disruptor, climate change.”

While the auto finance industry spent consider effort refuting thoughts about a “subprime bubble” and correlations to the mortgage meltdown, Cioffi elaborated about his analysis in a message to SubPrime Auto Finance News.

“The term ‘bubble’ has expanded to become a loaded term that pushes folks to the extreme edges of the debate, leaving no room for anyone to see the other side,” Cioffi said. “A bubble means that the value isn’t there to support the pricing, and for subprime auto, the question often gets answered at too high a level. It has resulted in a lot of endless loop type of questioning that hasn’t advanced the industry — experts cherry-pick similarities or differences to subprime mortgages to support a position either way. 

“At Credit Chronometer, we’ve taken a more disciplined approach by identifying 10 factors that contributed to the subprime mortgage crisis — key indicators of crisis that exist within lending practices, securitization practices and the underlying auto market — and we’re continuing to gauge their presence in subprime auto,” he continued. “When you look at the indicators of crisis objectively you could better determine pricing – in many situations the securities could better reflect the risks.”

As Cioffi explained, the Credit Chronometer presents the “Subprime Auto Loan Crisis Chronometer” to depict the risk of a crisis, which Cioffi defines as a “battle over loss allocation.” As events impact the subprime auto market, the Subprime Auto Loan Crisis Chronometer’s bright yellow gauges will show the current level of risk. As of today, the Subprime Auto Loan Crisis Chronometer is set at:

• Lending practices: Moderate-High 


• ABS practices: Moderate 


• Auto market: High 


• Risk of loss allocation battles: Moderate 


To avoid a subprime auto crisis, Cioffi urges, “Investors should recognize that relative to subprime RMBS, overcollateralization rates are not exceedingly high, given the equity cushion that was assumed to have existed in homes backing RMBS. Although investors have demanded credit enhancements that correlate to pool risk, a combination of loose lending and rising negative equity creates the prospect that risk allocation battles are on the horizon.”

SubPrime Auto Finance News closed its opportunity with Cioffi by asking how investors balance the search for yield against the risk in auto ABS?

“As we note in our analysis found on the Credit Chronometer site, lending practices are divided at this point, with some chasing riskier borrowers and others following a more conservative approach,” Cioffi said. “The main thing is for investors to be aware of where the collateral comes from.  Risk is not necessarily a bad thing, so long as it is disclosed so that it could be appropriately priced.”

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