Credit Acceptance Corp. (CAC) is pursuing its third senior-subordinate auto-loan securitization of 2020, providing investors with bonds backed by risky collateral as well as a long and successful track record issuing asset-backed securities (ABS).
The $563 million transaction is split into three tranches, similar to its second 2020 transaction completed in July for $482 million.
Moody’s Investors Service notes the deal’s credit enhancement, at 44.45% for the class A notes, 29.85% for the Class B notes, and 21.61% for the Class C notes.
“The credit enhancement available to the transaction allows for a significant drop in collections relative to forecast collections (that is, high losses) before each class of notes experiences a loss,” Moody’s says.
Nevertheless, the deal carries risks. Its initial pool of loans has a deep-subprime weighted average FICO score of 549. Consumers with low credit scores tend to experience greater financial hardship during economic downturns, and recent news reports suggest there’s little likelihood of additional federal stimulus before the election.
Loan performance of auto ABS will weaken due to the unprecedented spike in the unemployment rate, Moody’s says, limiting borrowers’ income and ability to service debt. It adds that lower demand and prices for used vehicles will reduce recoveries on defaulted auto loans, and borrower assistance programs to affected borrowers, such as extensions, may adversely impact scheduled cash flows to bondholders.
“As a result, the degree of uncertainty around our forecasts is unusually high,” the presales report says. It notes further that, “Our expected loss of 30% for the principal balance of the pool's retail installment contracts is based, in part, on the credit quality of the obligors and is among the highest expected loss for the auto loan- backed securitizations we currently rate.”
The rating agency also notes the deal’s 24-month revolving period, in which the issuer can use available funds to purchase additional loans, that increases the variability of the pool performance.
“Therefore, there is increased risk that collateral quality will deteriorate as the transaction revolves and adds new collateral,” Moody’s says, noting structural features that mitigate that risk including early amortization triggers.
The current deal with be CAC’s 30th securitization, and Moody’s says that the company’s strengths include a proven risk-mitigating loan origination program, and a track record of accurately forecasting collections. Nevertheless, it recently disclosed receiving subpoenas from the New Jersey and Maryland attorneys general regarding its originations and collections practices, and the Massachusetts attorney general also filed a suit in the third quarter alleging unfair and deceptive trade practices in subprime lending.
In CAC’s July ABS deal, the Class A notes priced at swaps plus 115 basis points, while the Class B notes priced at 170, and the Class C at 250.
