CPS credit quality improves, but pandemic risks remain in new deal
Consumer Portfolio Services is placing more credit enhancement and stronger borrower credit profiles behind its third securitization of deep subprime auto loans this year.
But the portfolio of loans still faces the prospect of higher loss levels than prior deals, in the view of Moody’s Investors Service, due to the macroeconomic effects of the pandemic.
The $260 million CPS Auto Receivables 2020-C, via Citigroup, is a securitization of mostly high-APR, low-equity used-vehicle loans, representing the lender’s 86th securitization in its long history of tapping the asset-backed market to offload loans to investors. (The specialty auto finance company was founded in 1991, and has issued about $14.6 billion in term ABS bonds since 1994).
According to a presale report from Moody’s the credit quality of the transaction is slightly improved from recent deals, with a higher weighted average FICO of 572 and a lower average loan-to-value ratio of 114%.
But “although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. Specifically, for auto loan ABS, loan performance will weaken due to an unprecedented spike in the unemployment rate that may limit the borrower’s income and their ability to service debt,” Moody’s report stated. In addition, softening used-vehicle prices due to lower demand may reduce recoveries on defaulted auto loans, “also a credit negative.”
Borrowers may also be growing increasingly reliant on loan extensions, which interrupt scheduled cash flow to noteholders. Also stressing the deal is CPS’ standing as a “financially weak” servicer and sponsor, which is mitigated by its backup servicing arrangement with Wells Fargo, as well as the high level (25% of the closing pool balance) of the transaction’s pre-funding account – meaning a quarter of the pool’s receivables will come from accounts that will be added after closing.
CPS largely targets borrowers with troubled credit history, and markets its loans through relationships with independent and franchise dealers. It services all the loan contracts it purchases from dealers.
The initial pool involves $196.29 million in notes across 11,584 contracts, with a WA annual percentage rate of 19.27%. The loans have average original terms of 69 months, and are seasoned an average of four months. Approximately 79% of the loans are for used vehicles.
While those loans have to meet minimum eligibility requirements to be added, Moody’s notes this adds uncertainty to the collateral characteristics that could lead to greater volatility as they are added for up to 45 days after closing.
Moody’s is estimating 23% cumulative net credit losses to the deal, based on expected defaults and recoveries. That is four basis points above Moody’s estimate for the previous (and pre-COVID) CPS transaction that it rated in January.
DBRS Morningstar assumed 18.55% losses on the expected pool composition.
Moody’s and DBRS Morningstar have applied preliminary triple-A ratings to a $107.77 million Class A notes tranche in the transaction, which has a March 2024 final principal maturity. The senior notes benefit from 59.55% credit enhancement.
CPS will market five subordinate tranches we all, with due dates ranging from 2025 to late 2027.