CPS Pays Up for AAA as Risks Rise in its Subprime Auto ABS

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Subprime auto lender Consumer Portfolio Services (CPS) is paying a steep premium for rising levels of risk in its second securitization of the year.

The CPS Auto Receivables Trust (CPSART) 2017-B is issuing bonds totaling $225.17 million, including $101.66 million in senior Class A notes rated triple-A by both Kroll Bond Rating Agency and S&P Global Ratings. To secure these top ratings, the sponsor had to offer initial credit enhancement of 56.8%, and that’s targeted to rise to 62.15%.

That’s significantly higher than levels offered by CPS on previous transactions. In fact, it’s higher than levels offered by most of the firm’s peers, according to Kroll. Only one other subprime lender Kroll has rated,  Santander Consumer USA, has offered levels above 50% for a senior tranche of notes.

The higher CE level comes as the Irvine, Calif.-based lender pools together more loans with weaker  FICO scores (average 568), lower weighted-average loan-to-value ratios (112.83%) and more extended-term financing.

Both ratings agencies have increased net-loss forecasts for the transaction than in CPS's prior deal. S&P has a CNL range of 18-19% for the deal, for example, compared to 17%-18% for CPS’ deal issued in January. KBRA’s range is 17.25-19.25%.

The transaction is the 25th overall for CPS since 2010. CPS underwrites loans for new and used vehicles sold at partnering independent and franchise dealerships. CPS acquires the loans from the dealers and quickly securitizes many of them. The average seasoning is under one month for four of the past five CPS deals. 

A key difference for the enhancement level in the latest deal is the shift in overcollateralization features in the latest transaction. The initial OC figure of 2.1% is an increase from CPSART 2017-A’s initial 1.75%, as is the target OC of 7.45% (up from 5.15%). The OC floor, however, is to be maintained at the target level, whereas the 2017-A deal had a floor of 2.5%.

In its report, S&P pointed out the lower percentage of borrowers from CPS’ higher credit-tiered customers in comparison to its previous securitization. The top-four categories of borrowers decreased to 71.4% from 75.14% in January. In addition, the share of borrowers without FICO scores grew to 10.10%, the highest of any CPS pool since its 2016-B transaction in April 2016.

The CPS trust will issue five classes of notes for the new transaction, backed by loans in the collateral pool with an existing balance of $145.74 million – an average loan balance of $15,983 – plus a 19.1% coupon. The WA FICO of 568 is in line with four of CPS’ most recent deals. The transaction includes an $84.3 million prefunding account that will contribute to 36.6% of the total collateral pool for a 45-day period after the closing date.

The interest rate on the Class A notes are to be determined. In January, CPS issued senior notes with a 1.68% coupon that priced at par, with a blended coupon across all note classes of 3.91%.

While its risk elements are rising, CPS maintained a profitable fourth quarter when it reported net income of $7.5 million; the company had $29.3 million in total 2016 income of $422.3 million in revenue, a slight drop from 2015 ($34.7 million in income) as the company against boosted reserves to $178.5 million to provide for credit losses.

Its level of loan purchases from dealers dropped to $215.3 million in the fourth quarter, down from $242.1 million in the third quarter.

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