Optimism is growing amid the signs of containment of the COVID-19 pandemic.
But the pandemic still wields a potentially lingering impact on economic recovery, particularly on higher-risk borrowers.
This week, Moody’s Investors Service projected elevated credit-loss expectations for a new subprime auto-loan securitization from Veros Credit, even though the new deal has several improved credit metrics compared to the company’s prior ABS offering in March 2020.
Moody’s credit-loss expectations of 24% is an increase of 1% against the lender’s previous ABS offering in March 2020 – even though Moody’s noted that the $220.4 million Veros Auto Receivables Trust (VEROS) 2021-1 deal has stronger collateral credit-quality than the earlier deal such as lower loan-to-value ratios (118% from 122%) and higher average FICOs (581 from 564).
“Even though the collateral composition improved compared to the last deal,” Moody’s noted in a presale report, “we increased our expected loss assumption primarily to account for the economic disruption and likely deterioration in pool performance.”
Overall trends suggest the coronavirus spread is abating, with the Centers for Disease Control reporting a near ten-fold decrease in new COVID-19 cases in the U.S. since the start of the year.
But Moody’s maintains a “heightened degree” of uncertainty on its economic forecast amid the ongoing pandemic. “[F]or auto loan ABS, loan performance will continue to benefit from government support and the improving unemployment rate that will support the borrower’s income and their ability to service debt,” the report stated. “However, any softening of used vehicle prices will reduce recoveries on defaulted auto loans.
“Furthermore, any elevated use of borrower assistance programs, such as extensions, may adversely impact scheduled cash flows to bondholders.”
VEROS 2021-1 includes used-car loans with seven months of seasoning, an average remaining balance of $14,166, and with APRs averaging 21.15%.
The pool secures three classes of notes to be issued by the Veros Trust, including a $161.39 million Class A tranche with preliminary single-A ratings from Moody’s and Kroll Bond Rating Agency.
