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Exeter's subprime auto ABS earns 1st Triple-As from S&P, Moody’s

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A boost in credit enhancement has helped specialty auto finance lender Exeter Finance break through the AA ratings ceiling with S&P Global Ratings — and also obtain its first-ever rating from Moody’s Investor Service.

Exeter, which is backed by the Blackstone Group, is no newcomer to the securitization market. The $550 million Exeter Automobile Receivables Trust (EART) 2018-1 is its 17th transaction since 2012.

Until recently, S&P capped its rating on the senior tranches of deals at AA, despite the fact that they benefited from considerable credit enhancement of 43.5%. And Moody's did not rate any of its previous deals. DBRS alone has assigned an AAA to the company's auto loan bonds.

S&P cited a number of reasons for lifting the rating cap, including the fact that Exeter started turning a profit in 2017 and the fact that the early performance of deals completed in 2016 and 2017 has been better than that of its 2015 deals. Both the 2015-2 and 2015-3 transactions breached performance triggers, though both have since been cured.

Factors “that have contributed to the ratings cap in the past, namely several years of net losses at the corporate level and high management turnover, have abetted," the rating agency stated in its presale report.

But it doesn't hurt that Exeter significantly increased the credit enhancement on the senior notes of its latest deal, either. The $261 million of Class A notes to be issued are supported by 56.95% credit enhancement. That's up13.45 percentage points from the comparable tranche of the prior deal, which was rated AA by S&P.

The credit enhancement on the Class A notes includes subordination of 49.65% of the junior notes, a 2% reserve account and an initial overcollateralization of 5.3% slated to build to a target of 14.25%.

Four classes of subordinate notes will also be issued: $86.2 million in Class B notes due 2022 with double-A ratings from S&P and DBRS, plus an equivalent Aa1 from Moody’s; Class C notes due 2023 sized at $81 million with a A/Aa3 ratings; a BBB/Baa2-rated tranche of Class D notes also due 2023 totaling $92.1 million; and six-year Class E notes tranche of $29 million rated BB by S&P and DBRS (no ratings from Moody’s).

Excess spread is estimated at 15.07%, which is slightly decreased from Exeter’s previous deal.

Many of the pool's collateral characteristics are in line with those of Exeter's prior deals, the ratings agencies reported. The lightly seasoned loans (four months, on average) carry an average balance of $16,222 per account at 21.89% APR on an average of 70-month original terms.

However, the weighted average FICO of 567 is lower than those of 2016-2017 securitizations by Exeter, and the latest deal includes a higher percentage of deep subprime borrowers with FICOs under 540 (28.4%, compared to a range of 23.5%-27% in 2016-2017 transactions).

On the plus side, the loan-to-value ratio is similar to past deals at 110.6 and the pool includes a higher percentage of new-car loans (28.6%) than Exeter's previous offerings.

DBRS and Moody’s expected cumulative losses of 19.5% and 20%, respectively, over the life of the transaction. S&P’s 20-21% range of cumulative net loss expectations is unchanged from the agency’s review of Exeter’s 2017-3 transactions.

In the past calender year, Moody's has initiated ratings on a number of subprime auto securitizations, including CIG Financial last November and Credit Acceptance Corp. in June 2017. Moody's has also rated post-crisis deals from Santander Consumer USA, GM Financial (on the AmeriCredit platform), and DriveTime.

Citigroup is lead structuring agent on the deal, expected to close on Jan. 31.

As of Sept. 30, the Irving, Tex.-based lender serviced a portfolio of approximately 230,000 auto loan contracts with an outstanding balance of $3.4 billion. The total percentage of delinquencies of the portfolio is down at 17.2% and net losses of 9% have improved over 2016, but are still higher than 2012-2015 levels.

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Auto ABS Subprime lending Moody's S&P DBRS Morningstar