Bankruptcy-exit loans take greater role in Prestige subprime auto ABS
Prestige Financial Services is returning to the subprime auto ABS market with a new pool of mostly used-car loans with a substantially greater number of borrowers with recent bankruptcies on board.
According to ratings agency presale reports, Prestige – a Utah-based lender with a niche underwriting strategy of targeting recently bankrupt borrowers with limited options to discharge further loans – is drawing 44.5% of the loans for Prestige Auto Receivables Trust 2020-1 from among it segment of borrowers in bankruptcy protection or exiting a recently discharged bankruptcy.
That compares to just 29% from Prestige's last securitization in 2019, and the highest level for a Prestige deal since 2017.
The growing amount of recent Chapter 7 or 13 filers does not mean increased credit-risk factors; as S&P Global Ratings notes in its report, post-bankruptcy loans tend to perform better than other subprime obligations, since these borrowers are ineligible to file for bankruptcy protection to discharge further loans for at least eight years.
The agency stated it felt the credit quality of the 2020-1 pool was "slightly better" than the 2019-1 pool.
But the company has faces growing net annualized losses (7.18%) in its $1.038 billion portfolio, and both agencies have taken into account the long-term economic uncertainty from the pandemic. The reports did not detail coronavirus-related forbearance figures in the pool, although both noted Prestige has tightened underwriting guidelines.
Because of uncertainty surrounding the length and depth of the pandemic-related impact on the pool's performance, plus slowing levels of originations, the expected loss range on the deal is higher than recent vintages.
S&P applied an expected loss range of 18.25-19.25% on the deal. While that is much greater than the Prestige 2019-1 deal’s 13.25-14% initial credit-loss projection, the notes from that deal were recently revised to an 18.75-19.75% loss.
DBRS Morningstar has a cumulative loss assumption of 15.8%.
The new asset-backed bond series also have substantially higher credit enhancement levels than prior transactions. The $150.52 million in senior term notes have preliminary AAA ratings from S&P and DBRS Morningstar and will benefit from a 50.15% total initial credit enhancement that provides a cushion against credit losses on the deal – an amount nearly 750 basis points higher than Prestige’s last deal in 2019 (42.7%).
The 2020-2 pool consists of $322.6 million of unpaid principal balance across 18,507 auto loans, with another $80.6 million to be acquired during a prefunding period through January 2021. The prefunding period acquisitions, amounting to 20% of the total pool principal balance, will be funded through note sales.
The loans average $17,429 apiece on primarily used vehicles (88.4% of the pool), with a weighted average APR of 18.5% on 70-month original term contracts (Approximately 94.2% have loan terms over 60 months). The loans are seasoned an average of nine months, but still have a high weighted-average loan-to-value ratio of 132%.
Prestige is owned by The Miller Group, a consortium of companies that includes 60 auto dealerships in the Western U.S. Prestige acquires contracts from both Miller-owned and non-Miller dealerships; in fact its highest concentration of loans is Midwestern states including Illinois (9.4%), Ohio (7.8%) and Indiana (7.4%).
The deal, expected to close Oct. 22, is lead by Wells Fargo.