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CPS adds term, prefunding risk in $196.3m subprime deal

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Consumer Portfolio Services’ latest subprime auto loan securitization is backed by slightly riskier assets, but CPS hopes to mitigate the risk by with more new-car loans and an improved mix of borrower credit profiles.

CPS Auto Receivables Trust 2017-D will issue $196.3 million in bonds backed by new- and used-car loan receivables. CPS has identified $133.4 million in assets that have been assigned to the trust thus far; up to $66 million in additional loans will be added through a significantly sized prefunding account.

The notes to be issued include a $91.4 million four-year Class A tranche with a preliminary triple-A ratings from S&P Global Ratings and Kroll Bond Rating Agency, supported by 55.3% initial credit enhancement (a small nudge up from 55% in its prior 2017-C transaction in July).

There are also four classes of subordinate notes with maturities ranging from five to seven years.

The 2017-D transaction is the fourth securitization of the year for Las Vegas-based CPS, and the 27th since 2010. The company has been issuing bonds backed by subprime loans since 1994.

CPS issues loans to borrowers with FICO scores between 475 and 650. Although it does offer some direct loans, most are originated through independent and franchise dealers and then acquired by CPS for its $2.34 billion managed portfolio.

S&P states in a presale report published Thursday that the latest pool has slightly weaker underwriting compared to CPS’ July deal. The percentage of loans in the pool originated in CPS’ top four borrower credit tiers decreased to 73.63% from 76.67%, and the amount of loans with original terms between 60 and 72 months moved up to 79% from 78%.

Longer-term loans represent more risk in auto-loan securities because they amortize more slowly, leaving borrowers underwater for longer. The average balance is $16,294 per and the term 69-month loan with an 18.9% interest rate.

CPS is also boosting the proportion of collateral that will be acquired after the deal closes to 33.3%, or $66 million, from the 29.7% level from the deal this summer. (The use of prefunding accounts can result in volatility in credit metrics as new loans are added to the pool). Another credit-negative impact is CPS securitizing less-seasoned loans at 5.57 months on average, down from 6.14% in 2017-C.

But that is likely a result of the prior deal’s inclusion of older, called collateral, amounting to 9.7% of the entire 2017-C pool. And the fewer borrowers included from the upper credit tiers didn't prevent CPS from improving the overall average weighted FICO of the pool to 573, the highest of the year. Another plus is the percentage of new cars – which historically have lower levels of defaults in securitizations – 27.76%, up from 24.53% in the July deal.

The mitigating factors prompted S&P to maintain the expected cumulative net losses between 18-19% on the new deal, similar to the projections for 2017-C. KBRA, which did not rate CPS’ prior deal, assigned this one a base-case loss range of 16.75-18.75%. CPS is experiencing higher default and delinquency rates: up to 9.64% for total delinquencies in the second quarter compared to the same period in 2016; net losses have grown to 7.77% from 7.25%.

The pool includes loans located in areas affected by Hurricanes Harvey and Irma, with 2.16% of the initial pool from Texas and 5.1% from Florida. Analysts have warned that subprime lenders could be at heightened risk of a surge of defaults and delinquencies this fall as car owners of damaged vehicles await insurance claim settlements, or who postpone payments due to repairs or job loss. But S&P's report states that "given the low seasoning on the pool, we expect that many of the loans have insurance coverage, which will help mitigate losses if vehicles were damaged.”

The deal is expected to close Oct. 18.

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Subprime lending Auto ABS S&P Kroll Bond Rating Agency