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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.

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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%.

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Auto ABS Subprime lending S&P
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