DriveTime, Flagship launch combined $633M in subprime auto ABS
DriveTime Car Sales Co. and Flagship Credit Acceptance Corp. launched offerings for a combined $633 million in bonds backed by subprime auto loans Wednesday. They add to the $1.84 billion already offered this year by Santander Consumer USA, Exeter Finance and Consumer Portfolio Services.
That puts the market slightly behind last year's pace. By comparison, in January 2018, six subprime auto ABS deals totaling $3.23 billion were priced.
DriveTime, based in Tempe, Ariz., continues to focus on (slightly) higher-quality borrowers - those with higher incomes and higher FICO scores, an effort that began early in 2018. This allowed it to offer less credit protection on the senior tranche of notes of its latest deal.
The $373.5 million DT Auto Owner Trust 2019-1 is backed by $450 million in loans originated at DriveTime dealerships in 27 states. According to S&P, the percentage of borrowers lacking a FICO score in the pool was only 12.55%, roughly half the 22.94% in the prior deal. And the percentage of loans to the top three internal credit tiers at DriveTime dropped to 80.5%; that was down from an all-time high of 82.9% in 2018-3 transaction.
The average borrower FICO is still planted in the deep subprime space at 543, but is up from 542 in DriveTime’s 2018-3 transaction last August and 530 in the 2018-2 transaction that was the most recent DriveTime issue rated by DBRS.
Last year, DriveTime began targeting these nonprime borrowers with newer, lower-mileage used cars. It also boosted the percentage of extended-length loans of 67-72 months to 64.1% from 61.6% in the prior deal, but is offset by more shorter-term loans in the lower credit grades, according to S&P.
S&P expects a “somewhat faster paydown” of the pool in the latest deal, due to a higher percentage of obligors (75% of the pooLast year, DriveTime began targeting these nonprime borrowers with newer, lower-mileage used cars. That boosted the percentage of extended-length loans of 67-72 months to 64.1% from 61.6% in the prior deal, but is offset by more shorter-term loans in the lower credit grades, according to S&P.
S&P expects a “somewhat faster paydown” of the pool due to a higher percentage of obligors (75% of the pool) who make higher payment frequencies than monthly accounts.
Five classes of notes will be issued in the transaction; the $183 million senior tranche of Class A notes benefit from 61.3% credit enhancement and carry preliminary triple-A ratings from S&P Global Ratings and DBRS. By comparison, the triple A rated tranche of DriveTime's prior securitization (DTAOT 2018-3) had 66.5% credit enhancement.
A $42.75 million Class B tranche maturing in April 2023 is double-A rated, while a $58.5 million Class C tranche due November 2024 is rated A. A triple-B Class D tranche is sized at $56.3 million and due November 2024 as well, while a double-B rated Class E tranche of notes totaling $34.9 million is due February 2026.
Despite the improvements in credit quality, both S&P and DBRS expect losses for the latest deal to be in the same range as the previous deal; that's 25.8%-29.5% for S&P and 28.5% for DBRS.
DriveTime's managed portfolio of loans stood at $4.6 billion as of Sept. 30, 2018, down from $4.7 billion the same point in 2017. Delinquencies over 30 (9.93%) and 60 (5.76%) days were up slightly from last year, but net charge-offs have dropped to 10.5% of average end-of-month principal from 11.27% from the same period.
Flagship's latest deal also benefits from collateral with slightly better credit quality than that of its prior deal, though Kroll Bond Rating Agency expects losses over the life of the $280 million Flagship Credit Auto Trust (FCAT) 2019-1 to be only slightly lower, at 11.9%. That compares with 11.95% for the prior transaction, but it marks the third transaction with lower loss projections compared with the previous deal.
DBRS’ loss projection for the latest deal is nearly the same, at 11.8%.
This is Flagship's 26th securitization and the 15th since its merger with online direct lender CarFinance.com. It has a lower percentage of loans with terms of over 60 months (87.8%) versus prior deals that have exceed 90%, as well as a growing percentage of near-prime buyers.
The 2019-1 pool also has 10.69% of its borrowers with FICO scores over 650, compared to 10.05% in FCAT 2018-4 and only 8.8% in Flagship’s second 2018 ABS pool from last May.
Flagship targets borrowers with limited or troubled credit history with FICOs ranging from 500 to 675.
The 8,268 loans in the initial pool have an average balance of $20,886 with an average APR of 16.3%, in line with FCAT 2018-4. The lower percentage of 60-plus-month loans helped drive the weighted average original term of the poll to 70.3 months from 70.7 months.
The 2019-1 pool is less seasoned at 0.5 months vs. 0.7 months.
Most of the loans in the pool (81.2%) were acquired from indirect originations at more than 11,000 franchise and independent auto deals; the remainder are direct loans issued through its CarFinance-branded website. Most of the loans remain for used cars (74.6%), a level than increased from 71.3% and 69.7% in Flagship’s two prior deals.
The capital structure includes a $166.8 million Class A tranche with preliminary AAA ratings from Kroll and DBRS, benefiting from 37.4% credit enhancement building to a level of 43.55% as principal is paid down. Four subordinate classes of notes totaling $93.2 million have a ratings range of single-A to double-B from both agencies.
The transaction has a prefunding account that will fund up to 20% of the final pool balance through the end of March. The initial balance is $172.7 million, not including the prefunding balance.