First Investors Financial Services, a post-bankruptcy financing specialist in subprime auto loans, is concentrating a high proportion of direct consumer loans in its next securitization effort, in a move ratings agencies say mitigates other higher-risk collateral features.
The $231 million First Investors Auto Owner Trust 2021-1 transaction includes a 47.3% share of direct loans that the company has underwritten through direct channels with borrowers (including via a partnership with LendingClub) for mostly used-car financing.
That compares with a 40.08% share in First Investors’ previous ABS transaction from 2020. Direct loans are typically refinanced accounts and hold lesser risk than the point-of-sale, indirect financing contracts underwritten or acquired through dealerships, according to presale reports from S&P Global Ratings and Kroll Bond Rating Agency.
The increased level of direct loans counters the the increase in riskier elements such as the larger proportion of longer-term loans (67-72 months) over First Investors' prior dea last yearl. These extended-term loans make up over 75% of the loan balances in the 2021-1 pool.
There is also a significant decrease in comparative seasoning of the 2020 and 2021 collateral pools: the new transaction contains loan contracts with an average age of four months since originatiion, versus the nine-month average in last year’s deal.
S&P has an expected loss range of 11.75%-12.25% for First Investor's new deal, an increase from the 10.75%-11.25% in projected losses for the 2020-1 transaction. S&P cited the lesser seasoning and the boost in longer-term loan collateral.
Kroll, in contrast, lowered its base-case loss range for the new deal, from 10.3%-10.8% against 10.4%-10.9% for last year's loan pool. Kroll's report pointed out that First Investors tightened underwriting standards initiated at the onset of the COVID-19 outbreak last spring, as well as the expanded size of the indirect originations in the latest collateral pool.
Those efforts, alongside federal stimulus and unemployment assistance programs to borrowers, have helped shave delinquencies and net losses in a downsized managed portfolio that fell under $1 billion by year’s end.
Both ratings agencies have issued preliminary AAA ratings to a Class A tranche of notes totaling $170.36 million, which are supported by 27.75% credit enhancement.
Kroll noted the deal has a lower volume of loans issued to borrowers with recent bankruptcies, who are limited in making future Chapter 7 claims. The loans for previous bankruptcy filers carries higher interest rates and performs better than subprime loans to borrowers without prior bankruptcies.
First Investors is also operating under new ownership, after parent firm FIFS Holdings Corp. was acquired by funds affiliated with Gallatin Point Capital and minority investor Jacobs Asset Management. The new owners are backing plans to expand the lending business in 2021 “as well as to accelerate its portfolio acquisition capabilities and third-party servicing segment,” according to Kroll.
