The Flagship Credit Auto Trust 2021-3 is preparing to issue $377 million in asset-backed securities collateralized by loans extended to subprime borrowers.
Underlying loans in the transaction are sourced from a direct channel that refinances existing auto loans, and an indirect channel, in which the company buys auto contracts from car dealerships, according to the Kroll Bond Rating Agency. The indirect channel also represents a majority, 76%, of the loans in the securitized pool.
Borrowers have an outstanding average balance of about $19,924, which is expected to amortize over an average remaining period of 65 months, and at an average interest rate of 15.0%. Loans were seasoned for about five months, and borrowers have a weighted average (WA) FICO score of 596.
Used autos are in high demand, because the COVID-19 pandemic caused production delays that constrained the supply of new vehicles to the market. Such a market condition sets up a potential credit risk for the transaction, should production catch up and auto prices return to historic levels.
Borrowers with higher loan-to-value ratios tend to take longer to build equity in their vehicles, creating negative equity and increasing the risk of default, KBRA said. This time around, Flagship Credit Auto Trust has an LTV ratio of 114.7%, which is actually down from the 119.6% in the 2021-2 transaction.
While KBRA notes that prior transactions have had higher recovery rates, that trend might not be sustainable, and the rating agency opted to assume a 40% recovery rate, for the deal.
Similar to other consumer financing transactions, one of Flagship Credit’s potential credit issues stems from payment deferral programs or other forbearance measures that could delay payment of receivables to the trust.
Yet the trust has arranged diverse funding sources that KBRA says is sufficient to support the notes. For one, it features $103.3 million in unrestricted cash and $630 million of undrawn capacity under an $800 million warehouse facility from five major financial institutions. Further, KBRA noted that the trust has a solid source of liquidity and a funding position.
Flagship Credit Auto Trusts’s capital structure features five classes. The company’s expected rating assignments include ‘AAA’ to the $268 million class A notes and ‘BB’ $15.5 million class E notes.
