JPMorgan Chase is returning to the auto-loan backed securitization market after a 14-year absence, looking for investors to share in some of the credit risk of its surging vehicle-loan portfolio.
According to a report from Fitch Ratings, JPMorgan (NYSE: JPM) is marketing nearly $200 million in investment-grade (but non triple-A rated) notes that are part of an overall $1.8 billion credit-linked note transaction.
The offered notes entitle investors to a pro rata share of principal and interest payments the bank will receive from a reference pool of $1.8 billion in new- and used-car loans.
All of the loans were originated and are serviced by the bank’s Chase Auto division. The deal is Chase's first asset-backed transaction of prime vehicle-loan originations since 2006.
The bulk of the notes being issued in the deal– the $1.5 billion Class A tranche ($1.5 billion total) – are being retained by the bank and will be unrated. Fitch is rating five tranches of subordinate notes, all but one with preliminary investment-grade ratings.
The largest tranche, which includes Class B certificates totaling $141.6 million, has an AA rating – which is tied to the bank’s own Fitch issuer-default rating of AA (negative outlook) since the notes are general obligation bonds of JPMorgan Chase.
The loans designated for the Chase Auto Credit Linked Notes, Series 2020-1 transaction represent just a portion of JPMorgan Chase’s $18.4 billion managed portfolio of U.S. auto loans, according to data from Fitch’s report. But the new investible pool is being launched after the bank’s second-quarter earnings report showed monthly auto loan-and-lease originations in June surged 20% on a year-over-year basis, resulting in a monthly volume record of $3.7 billion.
“April saw the lowest level of loan and lease originations since the financial crisis, but activity rebounded sharply in May and June,” said bank chief financial officer Jennifer A. Piepszak, during JPMorgan Chase’s second-quarter earnings call on July 14. “And in fact, June ended up the best month for auto originations in our history,”
Investors in the CRT notes will receive fixed-rate coupon interest payments and pro rata shares of principal receivables on 82,854 accounts, most of which are prime loans issued to borrowers with clean credit histories and high FICO scores (with a weighted average 769 FICO from the reference pool).
Besides prime-quality obligors, Chase Auto also can tout low delinquency rates (past-due payments over 30 days) that remain at historically low levels (0.7% as of April) despite the outbreak of COVID-19 and the related economic downtrun this spring.
Still, the ratings agency noted concerns that pandemic-related job losses and other economic stresses on borrowers in the near term could result in rising levels of payment-relief requests. JPMorgan Chase excluded loans with deferments in place from the Series 2020-1 reference pool. But the loans could still be granted extensions at a later time, and become among the 7.4% of auto-loan accounts in JPMorgan’s managed portfolio that have been granted extensions, Fitch's report stated.
If delinquencies and deferrals lead to a shortage in expected cash receivables to the bank, JPMorgan would halt principal payments to investors under terms of the deal if net credit losses in a given month were to exceed a pre-established cap, according to Fitch.
Unlike typical auto ABS transactions, the CRT structure of the deal does not provide investors with full recourse to assets for recovery in the event of default.
While JPMorgan Chase has been absent from the post-crisis auto-loan securitization industry, the institution was an active issuer between 1996 and 2006 (including under its former Chase Manhattan Bank nameplate). The last rated securitization of Chase Auto-originated loans sponsored by the bank was the $1.2 billion Chase Auto Owner Trust 2006-B in September of that year.
But Chase remained active in auto lending over the past decade. It forged a U.S. captive finance partnership with Japanese automaker Mazda between 2009 and 2019 while building its indirect channels to more than 12,000 franchised dealers across the country.
General Motors, Ford and Chrysler-brand autos are among the vehicles represented in the Series 2020-1 pool. The third-largest model share in the pool involves loans for Tesla electric vehicles, making up 9.21% of the reference pool’s loans.
