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Conn's lowers credit enhancement on consumer ABS as losses stabilize

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Losses on Conn’s consumer loans are stabilizing, and the electronics and appliance store chain sees an opportunity to reduce the level of credit enhancement for its latest securitization.

Cumulative defaults on Conn’s managed portfolio have increased with each successive vintage from fiscal year 2012 through 2017 as the company aggressively expanded its originations. However, there are early indicators that losses for the fiscal year 2018 vintage are leveling off - albeit at a higher level, according to Fitch Ratings. The rating agency expects losses to reach 25% of the $446.5 million in collateral over the life of the transaction. That’s the same level of losses Fitch is forecasting for a deal completed in August 2018.

While loss expectations are unchanged, Conn’s is lowering the amount of credit enhancement for its latest deal, the $381.8 million Conn’s Receivables Funding 2019-A. The senior tranche of notes to be issued, which has a preliminary triple B rating from Fitch and Kroll Bond Rating Agency, benefits from 43.5% credit enhancement; that’s down 5.0 percentage points from 48.5% for the senior tranche of Conn’s most recent deal, completed in August 2018.

Credit enhancement on the Class B notes has also been reduced, to 29% from 32%; and on the Class C notes, to 15% from 15.5%.

All of the notes have a final maturity of October 2023.

Credit Suisse Securities is the lead underwriter.

Most of the reduction in credit enhancement was accomplished by issuing a larger proportion of senior notes; the Class A notes have subordination of 28.5% (the percentage notes that rank below them in terms of payment priority), down from 33% for the Class A notes of the 2018 deal. Similarly, subordination for the Class B notes has fallen to 14% from 16.5% for Conn’s 2018 deal.

Overcollateralization, another form of credit enhancement that benefits all three classes of rated notes, has also fallen to 14.5% from 15% for the prior deal.

Despite the lower initial overcollateralization, Class A, B and C noteholders benefit from a change in the way excess cash is directed once the OC builds to 23%. In the past, any funds left over after making interest and principal payments would then be directed to most subodrdinate tranche, which is unrated and is being retained by Conn's. In this deal, however, excess cash will will be used to pay down additional principal on the A, B and C notes.

The reserve account for the new deal is 0.50% of the initial principal balance, unchanged from the prior deal. It will be funded at closing.

Many of the credit characteristics of the loans used as collateral for the notes are similar to those of Conn’s previous deal. The weighted average FICO score of the borrowers is 607 vs 608 for the prior deal, and 11.8% of the loans have scores below 550 or no score, up from 10.8%. The average balance of the loans is higher at $3,303 vs $3,098. The weighted average term of the loans is 35.4 months, down slightly from 35.2 months, and the weighted average seasoning has increased to 4.9 months from 3.7 months.

Unlike previous securitizations, the latest does not include any loans from an equal-pay-no-interest program, where the borrower pays equal monthly payments and no interest as long as they remain current. This program was discontinued by Conn’s in early 2016 but the loans were included in all previous deals, per Fitch.

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Consumer ABS Subprime lending