Exeter Finance and Flagship Credit Acceptance are marketing a combined $800 million of bonds backed by subprime auto loans, according to rating agency presale reports.
EART 2014-3 is Exeter's seventh term asset-backed transaction and will issue $500 million of securities backed by retail installment sales contracts for new and used automobiles and light-duty trucks.
Citigroup Global Markets is the lead structuring manager.
Standard & Poor’s has assigned a preliminary AA’ rating to the senior class of notes with a legal final maturity of January 2019.
Among the deal’s strengths, according to S&P, is the fact that Exeter has multi-year committed funding: the company has a warehouse facility from five banks,(Wells Fargo, Deutsche Bank, Citibank, Goldman Sachs, and Barclays, totaling $1.65 billion. The facility matures in September 2017.
It also benefits from having Wells Fargo Bank as the backup servicer.
However, S&P is concerned that the company has only recently become profitable and is growing rapidly. As of June 30, 2014, the managed portfolio increased by approximately 80% to $2.45 billion since last year. “While the growth is slower than in the past and rapid growth is typical for relatively new subprime auto finance companies, we are concerned that its growth may have come at the expense of credit quality,” the presale report states.
S&P also pointed to some differences in collateral used for this deal and Exeter’s previous deal. The weighted average loan-to-value (LTV) increased to slightly, 111.22% from 110.81% and the weighted average FICO decreased to 562 from 570. Moreover, the percentage of loans with a FICO of less than 540 increased to 32.56% from 26.90%.
On the plus side, the portion of loans backed by new vehicles increased to 20.87% from 17.49%.
However the portion of loans with a term of 61-72 months increased to 86.88% from 82.25%. Longer term loans are riskier because there is a greater chance that a lender would not be able to recover the principal of a loan in the event of default
Flagship is also marketing the $329.98 million Flagship Credit Auto Trust 2014-2.
Wells Fargo Securities is the lead underwriter.
Like Exeter, Flagship has adequate funding; in addition to capital provided by its sponsor Perella Weinberg Partners, the company has three warehouse facilities provided by Wells Fargo, Barclays, and Goldman Sachs, which provide in aggregate $425 million in warehouse lines.
And unlike Exeter, the company has posted positive net income since 2012.
S&P is concerned about gaps in its historical performance data, however. “The company has essentially operated for approximately nine years (if we include the period before its "restart"); however, its static pool and portfolio data have performance gaps resulting from both the company scaling back its operations in February 2009 during the credit crisis when warehouse funding became scarce and expensive, and its former majority owner ceasing to make capital contributions.,” the report states.
S&P assigned a preliminary AA’ rating to the senior class, which benefit from subordination of 26%.
The rating agency also noted that military auto loan contracts, at closing, will represent approximately 11.77% of the initial aggregate pool compared with 15.06% in the prior transaction, which it views as a positive.