Exeter Finance has reduced investors protections in its latest subprime auto loan securitization, despite the fact that the credit quality of the collateral has deteriorated, by some metrics.


The senior tranche of notes to be issued in the $400 million Exeter Automobile Receivables Trust 2017-3, are rated AA by S&P Global Ratings and AAA by DBRS. (The agencies were also split on senior-note ratings for Exeter’s two other transactions this year.)

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The class A notes have a total hard credit enhancement of 43.5%, a decline from the 46.5% for the comparable tranche of the company's prior deal, completed in April. the drop stems from a lower subordination level on the senior notes (36.5% from 39.75%).

Overcollateralization is slightly up at 5%, but target overcollateralization is expected to build to 14% with the aid of an expected excess spread to 15.33% - well above the 14.35% level from 2017-2.

Also in the capital stack are $66.3 million in Class B notes (rated single A by both firms), $54.7 million in Class C notes (rated triple B) and $32.6 million in Class D notes (rated double B).

The lower credit enhancement for the senior notes comes despite a rise in the average loan-to-value ratio (111.9% from 110.6%), a decrease in average subprime borrower FICO scores (566 from 573), and the decline in the number of car buyers with FICOs over 600 (21.5% of the pool, down from 25.64%).

But S&P is still expected cumulative net losses to be from 20.1%-21.1%, the same range as for Exeter's prior deal, but up from t 19.8%-20.8% for the company's first deal this year. DBRS expects losses to be lower, at 19.75%.

Some mitigating factors include a slight boost in new-vehicle loans of 20.85% from 19.37% and a rising level of borrowers with higher scores within Exeter’s own internal proprietary underwriting system (230 from 224). S&P also noted a key factor was the increase in loans which were collateralized with at least one payment already on the books (77% of the pool), with the weighted average seasoning of the deal now at 2.33 months compared to 1.85 months previously.

DBRS has noted that Exeter has been experiencing lower levels of losses on more recently originated loans compared with 2015. Exeter has also seen fewer losses in its originations since peaking in 2015 following the company’s rapid market expansion from 2011 through 2015 that “came at the expense of credit quality,” according to S&P.

The ratings agencies also noted the new deal has a higher step-up target overcollateralization rate of 17.8%, a rise of 50 basis points, that is triggered in the event of the deal breaching certain performance triggers (which occurred earlier this year with a pair of 2015 Exeter securitizations, bptj without downgrade consequences).

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