In its fourth asset-backed securities transaction, Aqua Finance Inc., is planning to issue about $775 million in notes through the Aqua Finance Trust 2021-A trust, or AQFIT 2021-A. The deal will significantly raise the percentage of loans on marine or recreational vehicles for an AQFIT transaction.
The trust has a collateral pool comprised of home improvement installment loans, plus up to 25% marine or RV loans, according to Moody’s Investors Service. In previous transactions, the collateral pools had concentrations of no more than 5% of marine/RV loans.
KeyBanc Capital Markets, Credit Suisse Securities and Goldman Sachs & Co., LLC are acting as initial note purchasers on the transaction. The capital structure includes a feature that stipulates if the class A enhancement reaches 57.7%, the transaction becomes a pro rata pay structure. This increases the average life of the senior notes and exposing the notes to additional credit risk.
A cumulative loss trigger that switches the structure back to sequential pay mitigates the risk. The other mitigation is a recovery ratio trigger, which increases the over-collateralization target from 2% to 100%.
While Aqua Finance Inc. will have the option to sell additional loans into the trust during a period of up to six months after closing, no loans for borrowers with a FICO score of less than 600 will be added during the prefunding period. Further, only 0.1% of borrowers in the pool had a FICO score of less than 500, according to Moody’s.
Borrowers in AQFIT 2021-A have a weighted average (WA) FICO score of 711, Moody’s said. The initial collateral pool has a weighted average (WA) original term of 145 months, or just over 12 years.
One credit challenge is that AFI, the originator and servicer, has a weak credit profile relative to other ABS sponsors. But a backup servicing agreement with Vervent mitigates that potential risk.
While AFI offers financing on a promotional basis, which can also impact payment on underlying loans, that potential risk is mitigated by the fact that 83% of receivables in the trust either do not have promotional periods, or those periods have already ended.
Moody’s expects to assign an ‘A3’ rating to the $599.8 million class A notes. All of the notes have a legal final maturity of July 2046.
