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Called collateral boosts credit metrics of CPS' next subprime auto ABS

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Consumer Portfolio Services’ third subprime auto loan securitization of the year includes a significant portion of collateral from three transactions completed in 2013 that are being called, and that is contributing to the overall credit quality of the transaction, according to S&P Global Ratings.

Loans originally securitized in 2013 account for some 11.4% of the initial collateral for the $230 million CPS Auto Receivables Trust 2018-C, and losses on this “highly” seasoned collateral are likely to be lower than for the rest of the pool. By comparison, the Series 2018-B transaction did not include any collateral from called deals.

That’s not the only improvement in credit quality, however. Other significant changes in the collateral include an increase in the percentage of loans originated in CPS’ top four credit tiers (Preferred, Super Alpha, Alpha Plus, and Alpha) to 79.43% from 73.58% for the previous transaction. The percentage of loans originated under CPS' lower credit tiers (Standard, Delta and First-Time Buyer) decreased to 20.57% from 26.42%.

In addition, collateral that is “prefunded,” and will be acquired after the transaction closes will represent approximately 29.6% of the collateral pool, or $71 million, down from $70 million (34%) for series 2018-B.

The weighted average original mileage is lower at 37,748, versus 40,291 for series 2018-B.

One change that is not for the better, however, is a “modest” increase in the percentage of loans with original terms of 61-72 months to 79.07% from 78.68% for the prior transaction.

In its presale report, S&P stated that it views the composition of the initial pool of collateral as “generally better” than that of series 2018-B. “In addition, the pool will be subject to better overall eligibility requirements,” it states. Loans in the top four credit tiers must account for at least 77% of the aggregate pool, up from 71.5% for series 2018-B, and the percentage of loans originated under Delta and First-Time Buyer programs will be limited to 7.5% and 4% of the pool, respectively, down from 9.25% and 4.5% for series 2018-B.

Accordingly, S&P expects cumulative net losses on the collateral pool to be between 17%-18%, down from 18%-19% for the 2018-B transaction.

The lower expected losses allowed CPS to reduce the level of credit enhancement for noteholders. Total initial hard credit enhancement decreased by 160 basis points for class senior A notes, while it increased to 80 basis points, 10 basis points, 85 points and 245 basis points for the subordinate tranches of classes B, C, D and E respectively.

The subordination for classes A, B, C and D decreased by 405 basis points, 165 basis points, 235 basis points and 160 basis points, respectively.

And the initial overcollateralization increased to 4% from 1.55%.

Both S&P and DBRS expect to assign triple-A ratings to the Class A notes due September 2021, double-A ratings to the Class B notes due July 2022, single-A ratings to the Class C notes due June 2024 and triple-B ratings to the Class D notes due June 2024. There is also a tranche of Class E notes due September 2025 rated B+ by S&P and BB by DBRS.

Citigroup Global Markets is the underwriter.

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Auto ABS Subprime lending