ACA Turns to Kroll on Latest Subprime Auto ABS

Kroll Bond Ratings Agency has been hired to rate its first American Credit Acceptance subprime auto deal. The issuer is marketing $164 million of securities backed by deep subprime auto loans.

Kroll expects to assign a ‘AA’ ratings to $101 million of class A notes issued under ACAR 2014-4. The notes are structured with credit enhancement at 53.75% and have a final maturity of July 10, 2018.

The class B securities will be rated ‘A’ and have credit enhancement at 36.75% and the class C notes will be rated ‘BBB’ and have credit enhancement at 23%. Both classes of notes are due Oct. 12, 2020. Also on offer are $12 million of ‘BB’ rated class D notes with credit enhancement at 17.25%. The notes are due Feb. 10. 2022.

ACA specializes in lending to borrowers with FICO credit scores of 500 and below, the deep pocket of subprime lending. ACA completed three previous securitizations in 2014.  

S&P rated the issuer’s previous deal, ACAR 2014-3, which was brought to market in July. The class A notes were rated ‘AA’; the class B notes were rated ‘A’ ratings and the class C notes were rated ‘BBB’.

ACA has increased the proportion of its tier 2, subprime loans in its latest securitization. The loan originated under this program tend to have shorter payment terms, higher purchase discounts, higher interest rates and higher loan-to-value ratios than the company’s tier 1 program.

The weighted average original term of the pool is approximately 60 months and the pool has an average seasoning of one month. The weighted average FICO score is 544 and the weighted average coupon is 23.92%.

The transaction includes a prefunding feature that allows up to $46.25 million, or 22.0%, of the collateral pool to be funded after closing. The prefunding period is three months but is funding is expected to be completed by January 2015.

The deal comes to market amid increased regulatory scrutiny in the subprime auto sector from various government agencies. The  Department of Justice  recently subpoenaed the two largest subprime issuers regarding past originations and securitizations. The CFPB had investigated several subprime lenders, including First Investors and DriveTime. The Federal Trade Commission has also been active in investigating policies, procedure and practices related to fair lending and customer credit reporting of subprime auto lenders.

“ACA has not been contacted by any of these regulatory authorities regarding any specific investigation,” stated Kroll. “However, since ACA originates more than 10,000 loans per year, it expects to be included in the CFPB’s supervision of auto lenders going forward”.

ACA joins what has been an active pipeline for subprime issuers. This week GM Financial priced its $975 million subprime retail auto loan ABS, AMCAR 2014-4; the 2.2-year, class A-3 notes sold at 47 basis points over interpolates swaps, yielding 1.27%. The deal's 4-year bonds priced at 160 basis points over interpolated swaps.

GM has completed 4 deals so far in 2014, totaling $4.2 billion. Year to date, retail auto-loan ABS issuance is $62 billion with subprime accounting for $18 billion.   First Investors earlier this month also announced its third deal of the year, First Investors Auto Owner Trust 2014-3.