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CarMax pays up (again) for AAA on prime auto loan ABS

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CarMax was compelled to increase investor protections in its next prime auto loan securitization due to increase in risk factors and rising defaults in the collateral for recent transactions.

CarMax Auto Owner Trust 2017-3 will issue total of $1.1 billion across eight tranches of notes. The four senior term tranches benefit from initial credit enhancement of 7.61% that is targeted to build to 8.21%.

It is the highest of any CarMax securitization dating back to 2014, and had the third consecutive bump in initial CE for a CarMax transaction this year after the 5.75% level for its fourth deal in 2016 was raised to 6.85% in CAOT 2017-2 and 6.45% in CAOT 2017-1.

Presale reports from S&P Global Ratings and Fitch Ratings point to slightly lower credit quality, such as a decrease in overall weighted average FICO (704, down from CAOT 2017-2’s 708) and a rise in the percentage of longer-term loans over 60 months (60.09%, vs. 56.7% previously) in the collateral.

But CarMax, like many auto lenders, is also seeing a rise in delinquencies and defaults that surpassed cumulative net loss expectations in recent securitizations. S&P recently revised upward the expected CNLs for eight outstanding CarMax asset-backs dating back to 2013. (All still fell within enhancement levels and have not required a downgrade).

“Recent performance data also show softness in recovery rates and an uptick in delinquencies, which could persist going forward” said S&P, in its report.

The new deal has an expected loss range of 2.15-2.25%, in line with recently upsized estimates from S&P on recent-vintage CarMax ABS deals, according to S&P.

The eight tranches to be issued in the latest transaction include a $224 million money-market tranche and four senior tranches maturing between September 2020 and November 2020 with preliminary triple-A ratings from S&P and Fitch.

CarMax noted in a regulatory filing that it might upsize the bond package to $1.375 billion if market conditions permit.

Bank of America Merrill Lynch, MUFG and Wells Fargo are joint bookrunners.

The sponsor intends to maintain a horizontal 5% strip of notes from each of the four senior and three subordinate classes for risk-retention purposes.

According to presale reports, the credit deterioration of the pool also involves a lower percentage of borrowers with prime FICO scores above 700 (now 47.67%, vs. 49.78% in CarMax’s second securitization this year), as well as loans underwritten to the best qualified buyers through CarMax’s proprietary lending platform: the percentage of consumers falling into this bucket with the highest internal credit scores of CarMax’s proprietary lending platform decreased to 50.4% from 52.6%.

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