Fresh off the heels of the second-quarter synthetic auto loan securitization, CARSS Finance 2004-A, Banc of America Securities structured the next step of auto loan ABS, although it's unlikely to be copied by The Street. With the inaugural Global Execution Auto Receivables Securitization (GEARS) trust, BofA is offering - almost exclusively to European investors - the double-A through double-B plus rated cashflows of $2 billion in prime auto loans, originated by Bank of America, N.A.
The investor base for the GEARS 2004-A deal is more akin to that for a CDO, sources close to the transaction reported, with the involvement of typical CDO equity investors participating in the preferred equity E1 and E2 tranches, which collectively make up 0.5% of the transaction.
The $1.85 billion in triple-A rated senior notes, with both fixed- and floating-rate payment structured, is being retained by BofA. Also structured into GEARS is an unusual interest-only senior class, more frequently seen in the mortgage ABS sector, which will also be retained by BofA.
Starting with the first interest distribution, the IO notes will pay a yet-to-be determined amount, based upon a present-value calculation, through January 2005. Interest is payable monthly, beginning Sept. 15. The IO class sits high in the payment waterfall, behind only the servicing fee, and trustee and transfer agent fees.
GEARS uses a modified pro-rated, shifting payment schedule, which would become sequential upon the breach of cumulative loss triggers imbedded in the transaction. If the breached trigger is cured, the payments return to the original pro-rata payment priority. Double-B plus rated E1 and E2 equity classes receive the remaining cashflows.
Cumulative loss triggers are initially set at 0.05% and step up 25 basis points steadily through the first 40 months (3.3 years) and top off at 2.75% after the 49th month (3.9 years) for the remainder of the transaction. GEARS has an expected tenor of eight years. The longer life of GEARS is due to the increase of extended term auto loans seen of late.
Initial credit enhancement for the triple-A classes is 7.25% in subordination plus a target reserve account set at 1.75, fully funded at closing at 1.00%. Senior notes can withstand greater than six times expected base-case losses, with the double-A rated B notes safe up to 4.81 times assumed losses. Single-A plus rated C class notes are safe through 3.65 times assumptions and the triple-B subordinates can sustain 2.16 times assumed losses. The equity shares erode upon a 1.93 times expected base case loss.
The collateral, originated by Bank of America, are similar in nature to the loans referenced in the CARSS synthetic transaction, and GEARS was modeled assuming collateral behavior is in line with CARSS.
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