Subprime auto lender Flagship Credit Acceptance is raising credit enhancement levels and trimming its riskier loan tiers in its first asset-backed deal for 2017.
According to presale reports issued Tuesday, Flagship has launched plans to sell $301.52 million in bonds backed by a pool of new and used car loan receivables containing its highest level of credit support among recent deals.
Flagship Auto Credit Trust 2017-1 has also sharply curtailed some of the riskier loans the lender has included in past deals, such as loans to "thin file" and deep-subprime borrowers. Also being thinned is the percentage of loans in the pool exceeding 72 months.
The transaction’s $170 million tranche of senior Class A notes due 2021 has a preliminary ‘AAA’ structured finance rating from KBRA, Standard & Poor's and DBRS. Unlike the $340 million 2016-4 deal from last November, the A series will not be split between a fixed- and floating-rate tranche.
The Class B notes, rated ‘AA’, are sized at $44.6 million, followed by $36 million in Class C notes (rated ‘A’) in the payments waterfall. The subordinate Class D and E notes total $50.92 million (rated ‘BBB’ and ‘BB’, respectively, KBRA and DBRS). S&P assigned a 'BB-' to the surbordinate E notes.
The collateral pool contains 12,742 accounts with an aggregate principal outstanding balance of $313.26 million.
FCAT 2017-1 is the subprime lender’s third-consecutive asset-backed deal to earn a triple-A rating, which the lender first achieved with the $448 million FCAT 2016-3 in August 2016. The higher rating was granted after ratings agencies lauded the stellar performance of a recently paid off 2012 portfolio that had net losses of 10.26% that were far below initial projections of 14%.
But since that deal transpired, Flagship has initiated crucial changes to its underwriting criteria and asset-backed portfolio structure, as both operational and securitization losses grew in recent deals. Flagship has added more than 100 employees to its servicing and collections units because of the surging losses, according to KBRA. It has also ceased lending “thin file” clients with no credit history or scores.
At year's end 2016, Flagship's percentage of delinquencies, repossessions and bankrupt assets in its $3.1 billion managed portfolio had creeped up to 12.73% from 10.64% in 2015. Net charge-offs of $159.97 million are nearly triple that of 2014's level ($55.53 million).
For example, the 2017-1 pool's concentration of loans issued to borrowers with FICO scores less than 550 dropped to 14.45% from 15.08%. Loans to customers with FICOs under 499 fell to 2.66% of the 2017-1 pool, compared to 4.49% and 4.97% in the trust’s two prior bond issues.
Outside of the reduced deep-subprime exposure, the pool’s characteristics are in line with prior FCAT deals. Ratings agencies report a weighted average loan balance of $19,668, an average coupon of 15.58%, an average FICO of 594 and LTV of 119.19% in the pool.
FCAT 2017-1 is the smallest collateral pool among the five most recent asset-backed deals on the platform. But the portfolio has the highest initial CE senior note level (47.73%) compared to those transactions, including FCAT 2016-4 building CE to 42%.
Hard-target enhancement level for the Class A notes is 52.48%, according to KBRA, consisting of overcollateralization, subordination, a cash reserve account and excess spread. The initial and target credit enhancement is higher at all levels of classes.
S&P calculated an available of 50.95% credit support for the Class A tranche.
A considerable structural change in the latest deal is the inclusion of a three-month prefunding period. Prefunding is a feature Flagship has not attached to a deal since FCAT's first ABS of 2015. That allowance will permit a three-month period in which Flagship can add up to 20% of the collateral pool (approximately $62.7 million) before April 7.
Cumulative net loss expectations have nudged up only slightly in the new deal. KBRA placed the loss range between 11.5%-12.5%, compared to 11-11.5% range for its first securitization in 2016, which sold $459 million worth of notes. DBRS’ CNL estimate is 11.4% for the deal.
Flagship appears to be growing wary of the six-plus year loan. In early 2016, the lender went to market with an asset-backed that contained a slice of loans with 73-78 month loan terms that comprised 6.47% of a $446.6 million portfiolio (FCAT 2016-1). That level was whittled down to just 1.43% by the launch of its fourth securitization last year.
The latest deal narrows that exposure slightly to 1.42%.
The collateral also upsized on the percentage of direct loans in to the pool to 13.53% from 12.85%. The direct loans, issued through the online CarFinance.com channel, historically have had fewer losses, according to S&P.
FCAT 2017-1 is the 18th for Flagship overall, and the seventh securitization of loans originated and serviced by both Flagship’s indirect dealer finance channel and the direct online operations of CarFinance. Both firms are units of an asset management affiliate of private equity sponsor Perella Weinberg Partners, and were merged in 2015.
The deal is slated to close Feb. 2.