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With new management at the helm, Exeter Finance Corp. spent the past year trying to halt a slide in credit quality, profits and the performance of its $3 billion-plus subprime auto loan portfolio.

It’s a work that remains in progress.

The Irving, Tex.-based lender’s latest securitization, the $400 million Exeter Automobile Receivables Trust (EART) 2017-1, boasts a collateral pool with better credit metrics than its previous transactions. The shining of the wheels includes higher annual percentage rates, a greater percentage of new-car loans and Exeter’s largest-ever concentration of 600-plus FICO borrowers.

Yet Standard &Poor’s and DBRS still demanded additional investor support in order to assign the same ratings as previous deals. They are concerned about rising delinquencies and charge-offs in the lender’s loan inventory.

In presale reports issued Thursday, both rating agencies shackled the new EART deal with projections for a larger cumulative net loss (CNL) than any of the sponsor’s previous 13 deals dating to 2012. S&P also  casts doubt on a near-term turnaround at Exeter, despite the fact that it has received over a half-a-billion dollars in capital support from majority owner The Blackstone Group.

“In our view, the company's rapid growth from 2011 through 2014 came at the expense of credit quality as delinquencies and losses have risen dramatically,” S&P states in its presale report. “While the company has taken a number of steps to address credit quality, we have yet to see a significant and sustained improvement in performance.”

S&P expects CNL for the 2017-1 deal to be in the range of 19.75%-20.75%, up significantly from 18.5%-19.5% for EART 2016-3, completed in October. It cited the “continued weakness” in portfolio performance and higher losses that have ranged between 19% and 23% for securitizations since mid-2014.

DBRS’ estimate for CNL is in that range, at 19.65%.

The agencies differ, though, on the ratings for the senior notes, a $244.02 million Class A tranche. DBRS has again assigned a preliminary ‘AAA’ rating, while S&P weighed in with an ‘AA’, a two-notch difference that the agencies have displayed in previous Exeter transactions.

The remainder of the deal, led by Wells Fargo as structuring manager, includes $60.32 million in Class B notes, $49.31 million in Class C notes and $46.35 million in Class D notes. Those notes are rated ‘A’, ‘BBB’ and ‘BB’ by both agencies, respectively.

In order to achieve those ratings, Exeter increased Class A subordination slightly to 36.85% of the initial receivables, which helped raise the initial hard credit enhancement to 44.35%, compared with Exeter’s prior deal. Overcollateralization is set initially at 5.5% of the pool (or $23.28 million) with a target of 16%. Exeter is including a CNL trigger that could boost the OC target to 20.5% should excessive losses occur.

Excess spread is 13.35% for the deal, as well, and Exeter will fund a non-amortizing reserve account equal to 2% of the initial pool balance.

The notes are supported by receivables from $370.37 million in aggregate principal auto loans balances. Those 22,801 loans have a weighted average seasoning of five months, a principal balance of $16,244, and an all-time high average APR of 20.78.

Also at its peak is the percentage of new car loans in the pool, 23.97%, and customers with 600-plus FICO scores (28.33%, compared to 26.59% in Exeter’s previous deal).  Like other subprime issuers, Exeter is reducing its extended-term loan offerings, as it decreased the percentage of loans between 61 and 72 months to 84.36% of the portfolio.

Exeter is launching the deal as the total delinquencies in its portfolio have climbed to 18.57% as of Sept. 30, 2016, up from 16.14% from the same point in 2015. The 90-day plus delinquency breached the 3% level in the third quarter to its highest post-crisis level (3.17%) and annualized net charge-offs increased to 9.53% from 7.17% the year prior. 

Exeter has slowed originations, with its managed portfolio of 210,000 loans declining in size by 4% in 2016 to $3.06 billion. The deliberate reduction came as the company continued to address issues of its recent closing of 46 branches in order to build centralized underwriting and credit decisions under chief executive Jason Grubbs. Grubbs, a former Santander USA president and chief operating officer, joined Exeter last February. 

According to reports, Blackstone continues to support Exeter with funds to expand growth. Besides $472 million in investments to date, Blackstone has $125 million reserved to support Exeter’s future growth. Exeter also has a $600 million multi-year line of credit from a bank consortium led by Citibank.



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