First Investors pays up for AAA on subprime auto ABS
First Investors Financial Services has increased the investor protections on its next offering of bonds backed by subprime auto loans.
The $226.4 million First Investors Auto Owner Trust 2017-2 is the sponsor’s second deal of the year and its 21st overall. The senior notes, provisionally rated AAA by Kroll Bond Rating Agency, benefit from initial credit enhancement (CE) of 29.5%, building up to 34%; that’s an increase of almost three percentage points from the same tranche of the prior deal (26.7%, targeting 31.45%).
Three subordinate tranches also benefit from higher initial CE of 23.29% for the Class B notes (vs 20.85%) ; 14.3% for the Class C notes (vs 12.25%); and 7.03% for the Class D notes (vs 5.5%).
The additional CE offsets higher expected cumulative net losses on the collateral. Kroll expects these to be in the range of 9.70% - 10.20%, in its base case scenario, up from 9.30% - 9.80% for the previous deal.
The presale report does not explicitly state why Kroll expects higher losses; however it notes several differences between the two deals, including the introduction of a prefunding account of up to $25 million, or 11% of the collateral that may be acquired after the close of the deal.
The transaction involves about $202 million of receivables as of the June 30 cutoff date, amounting to an average balance of $20,162 per borrower. The average interest rate on the loans is 13.83% for buyers with average FICO credit scores of 587 and a loan-to-value ratio of 122.39% on their vehicles (a figure that continues to be slightly lower with each successive First Investors securitization).
Another change is a shift in the mix of origination channels. The collateral for the 2017-2 transaction has a lower proportion of loans originated by indirect program, 76.95% vs 78.47% in the previous deal. The proportion of loans originated via direct programs rose to 23.05% from 21.53%.