Flagship Credit Acceptance’s third subprime auto loan securitization of the year is the company’s first-ever to earn a triple-A credit rating at issuance.
Both Standard & Poor’s and Kroll Bond Rating Agency have issued preliminary ‘AAA’ ratings on two senior tranches of Flagship Credit Auto Trust 2016-3, a $400 million asset-backed deal of new and used auto loans originated by Flagship and CarFinance Capital LLC (a predecessor lender that merged with Flagship in January 2015).
Neither agency had issued higher than a preliminary or final ‘AA’ rating for Flagship’s previous 10 auto securitizations dating back to 2012, nor CarFinance’s five deals since 2013. Only a select number of Flagship’s early-vintage deal notes have subsequently been upgraded to AAA as the loss and default risks in the portfolio subsided.
The two senior note tranches are a $180.95 million Class A-1 series due 2019 and a four-year, $63.95 million Class A-2 notes issuance. Each is supported by 42% subordination, according to Kroll.
The subordinate tranches include $43.88 million in Class B notes due 2021, rated ‘AA’ by both S&P and Class C notes totaling $55.10 million due 2022 that both agencies rated ‘A’; Class D notes (‘BBB’ by each agency) sized at $38.77 million, and Class E (‘BB-‘ by S&P, ‘BB’ by Kroll) totaling $17.35 million.
In prior Flagship transactions, the most senior notes on transactions through the FCAT platform were graded at an ‘AA’ rating, below that of fellow experienced subprime lenders such as Santander Consumer USA, Consumer Portfolio Services, DriveTime Financial and AmeriCredit which regularly package ‘AAA’-rated deals.
(Last week, S&P and Fitch Ratings assigned provisional ‘AAA’ ratings to nearly $554 million in Class A notes in AmeriCredit Automobile Receivables Trust 2016-3).
Flagship has continued to show “very stable and consistent performance” of its asset-backed transactions in the past year, according to S&P. In particular, the ratings agency cited the oldest of these deals (FCAT 2012-1) that “is performing better than our initial expectations,” noted S&P.
Kroll noted in its report that the cumulative net losses of all 15 FCAT and CarFinance remain below the initial base case loss expectations from the initial deals’ ratings.
Another plus is that Flagship recently completed its business integration efforts with CarFinance that fully combines the companies’ origination and servicing operations, according to Standard & Poor’s. In May, Flagship amended and renewed it $1 billion warehouse facility with three lenders, according to presale reports, with 70.7% of the facility available as of June 30.
Several new subprime lenders have been hard-pressed to earn even double-A ratings, as the subprime lending arena faces increased default pressures and borrower credit deterioration in 2016. Flagship has settled into the mid-subprime sector, which are consumers with scores above the deep-subprime ceiling of around 550 FICO.
The collateral pool of FCAT 2016-3 as of the cutoff date for the transaction was $311.18 million. The average FICO of the borrowers in the pool is 597, with 71-month terms and loan balances of $19,198. The weighted average coupon is 15.21%, a rate slightly higher than average coupons for borrowers of recent deals with First Investors Auto Owner Trust and AmeriCredit Automobile Receivables Trust.
In comparison to its previous transaction, FCAT 2016-3 has its highest percentage of loans granted to consumers with FICO scores between 550-649 (71.72%). It has higher average loan balance, a higher loan-to-value average and a lower coupon than the prior 2016-2 transaction from April. The new portfolio also has a higher percentage of vehicles (23.39% to 20.26%) tied to new vehicle purchases.
Seasoning on FCAT’s last two transactions has dwindled to a single month, and the underlying loans of 2016-3 have more than 75% tied to used vehicle purchases.
Flagship Credit Acceptance has approximately $3 billion in its managed portfolio of outstanding direct and indirect loans sold through dealers and online through the legacy CarFinance.com Web site.
The deal, with Deutsche Bank serving as lead underwriter, is expected to close Aug. 11.