CPS expands use of prefunding in 1st subprime auto ABS of 2018

Deep subprime auto lender Consumer Portfolio Services (Nasdaq: CPSS) is making its debut 2018 securitization with a greater emphasis on higher-FICO borrowers – but a growing reliance on its platform’s prefunding feature, which allows it to add collateral after closing.

CPS Auto Receivables Trust 2018-A will issue $190 million of notes backed by predominantly used auto loans underwritten by franchised and independent car dealers.

The senior, $88.5 million tranche of Class A notes to be issued carries preliminary triple-A ratings from S&P Global Ratings and DBRS. It benefits from 55.3% credit enhancement, unchanged from CPS’ fourth deal in October 2017 – as is the 60.3% target level CE.

The pool of loans at the cutoff date totaled $121.3 million, with plans to add additional loans CPS will acquire through a $72 million prefunding account comprising 37.3% of the total pool. That is the highest-ever in set-aside funds for CPS, according to S&P, up from $66 million (or 33.3%) of the pool from CPS’s 2017-D transaction. Prefunding accounts can carry additional risk for investors they can be used to purchase assets that perform worse than existing loans already added to the pool.

The prefunding period will be through March 2 for the transaction, which is underwritten by Citigroup and expected to close Jan. 16. The deal is the 30th since 2010 for CPS, which has continued to build on a bevy of investor demand for subprime ABS paper.

CPS, for the second year in a row, is the first subprime lender to bring an asset-backed transaction to market for the calendar year.

CPS is launching its new deal in a year following a slowdown in both origination and securitization offerings. Much of the pull back is driven by tightened underwriting the Irvine, Calif.-based lender has introduced in the wake of growing levels of delinquencies in the subprime sector and in its own $2.34 billion managed portfolio.

Total delinquencies for CPS were up to 10.27% in the third quarter, up from 10.05% the year prior. Growing losses are also being reflected in CPS’ older loans that have previously been assigned to securitization vehicles – indicating growing tail-end risk for used vehicles issued with long-term loans. Last year S&P elevated the expected cumulative net losses on 10 of CPS’ outstanding portfolios issued between 2013 and 2016.

S&P has assigned an expected CNL of 18-19% for the new deal; DBRS forecast a base-case CNL rate of 17.4%.