Exeter Finance Corp. has upped credit enhancement for its latest subprime auto loan securitization to compensate for an increase in losses on recently originated loans.
The deal, Exeter Automobile Receivables Trust 2016-1, will issue $350 million of fixed-rate notes with preliminary rating from Standard & Poor’s.
Barclays Capital is the underwriter.
S&P expects cumulative net losses for the transaction to range as high as 19.50% of the principal balance; that’s up from 18.50% for the sponsor’s previous transaction, completed just three months ago in October 2015. In its presale report, the rating agency cites higher losses on Exeter’s recent origination vintages and securitizations and the continued weakness in its managed portfolio performance. Total delinquencies for Exeter’s managed portfolio rose to 16.14% as of Sept. 30, 2015 from 13.82% a year earlier.
The annualized net charge-offs also increased to 7.17% from 6.12% for the same period.
The rating agency noted that delinquencies continue to climb despite various staffing changes, technology upgrades, and another servicing center opening in Clearfield, Utah in June 2014.
Some of the credit metrics of loans backing the latest deal are slightly better than those of loans backing the previous deal. The weighted average FICO score of borrowers increased slightly, to 575 from 573, and the portion of loans with no FICO score decreased, to 6.43% of the pool from 6.64%. The portion of loans backed by new vehicles, when tend to hold their value better than used vehicles, increased to 15.20% from 14.72%. The weighted average seasoning increased slightly to approximately 2.7 months from 2.5 months. And the portion of loans with a term of 61-72 months decreased to 86.82% from 88.82%. Longer term loans tend to be riskier because they amortize more slowly.
Adding to risk, however, the weighted average loan-to-value ratio increased slightly, to 113.06% from 112.92%. (Loans can exceed the value of a vehicle being purchased when borrowers have not finished paying off their old loans; the balance of the old loan is rolled into the new loan.)
S&P assigned a ‘AA’ rating to the senior tranche, which matures in July 2020. That’s the same rating assigned to the senior tranche of Exeter’s October deal. In order to earn this rating, however, Exeter had to offer credit enhancement of 44.75%, up from 39.75% for the senior tranche of its pervious deal.