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Collateral quality dips for new RAC King subprime auto lease ABS

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Loss expectations are up slightly for the second retail auto lease securitization of the year for RAC King the parent company of the regional “buy here/pay here” used-car chain American Car Center.

Moody’s Investors Service published expected cumulative net losses for the $282.95 million ACC Trust 2019-1 to 31%, compared to ACC’s 2019-1 transaction which had a 30% loss projection from Moody’s.

Moody’s cited the weak credit quality of the collateral, made up of non-prime lease contracts backed by used vehicles. The weighted average FICO is lower (527) compared to the prior transaction (529), while original terms are longer (47.7 months versus 47.2%) and seasoning is lightly lighter at 3.1 months compared to 3.8 months in ACC 2019-1.

“The longer lease term and shorter seasoning could potentially lead to higher credit loss,” according to Moody’s presale report. “Owing to the weak credit quality of the collateral, credit loss is the primary risk driver for the transaction, with a large portion of the collateral expected to default before the end of the lease.”

The 31% expected loss rate is the highest among non-prime auto transactions rated by Moody’s. Kroll Bond Rating Agency, which reports the deal also has a lower comparable share of the highest-FICO Tier A obligors (28.37%) compared to 30.7% in the previous transaction.

Kroll’s base case loss assumption range is 26.2%-28.2%.

Moody’s assigned a preliminary Baa2 rating to the senior notes of the transaction totaling $167.65 million, which are supported by 42.75% credit enhancement. Kroll Bond Rating Agency had a higher preliminary rating of A on the Class A notes.

Moody’s also noted that RAC King, which does business as American Car Center, is a “small unrated” entity with limited lease origination experience that only began in 2014.

The transaction features 16,687 contracts with a weighted average FICO of 19.15% and an average remaining balance of $16,956. According to Moody’s, 80% of the cars are leased in four Southeastern states: Alabama, Florida, Tennessee and Georgia.

Unlike typical lease securitizations for new and luxury auto manufacturers, the undiscounted residual value of the vehicles (or expected resale value upon vehicle return) is a small portion (21.7%) of the pool’s overall securitized value. ACC’s lease terms also encourage borrowers to purchase vehicles at the end of term leases, with the option of a 0% finance loan to acquire the auto.

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