Though Flagship Credit Corporation is no stranger to private asset-backed securitizations, the company recently debuted its first public deal, a $250 million auto loan-backed transaction, and plans to be a regular issuer in the public market going forward, said President and Chief Executive Officer Michael Ritter.

"I think we made a good execution," he said of their first public outing, which is also the first deal that was done under the Flagship name. The $250 million auto loan-backed deal was separated into four triple-A tranches. Prudential Securities was lead manager, while MBIA wrapped the transaction.

Flagship Credit, based in Philadelphia and established in July 1999, is a product of a merger between Franklin Acceptance Corporation, acquired in 1989 and with origins dating back to 1957, and ProCredit Inc., acquired in 1997. Both companies specialized in non-prime auto financing and were fully-owned subsidiaries of Copelco Financial Services Group.

Though this is the company's first venture into the public market, it has done several private asset-backed transactions under Franklin Acceptance. "We securitized our first deal in 1994. This is our ninth asset-backed securitization. All of them have been private to date," said Ritter. In March 1999, Franklin Acceptance and ProCredit joined forces and did a $316 million private placement securitization deal underwritten by First Union Capital Markets.

The move to the public arena was prompted by "the desire to expand our investor base, to get a little better execution, to enhance the secondary market, and also to gain name recognition for Flagship."

The company is planning to do a combination of private and public deals in the coming year. "We're going to be an active, recurring issuer. We expect to be in the market at least twice a year, if not three times a year," Ritter said.

"As we get more name recognition and history under our belt, investors will get a little more comfortable with us in terms of what our projections are and what our static pool analysis shows," Flagship Treasurer Diana Moy Kelly added.

Flagship's Niche: The Just-Below-Prime Sector

Ritter points to "the fact that we are a niche player and have a very strong product in that niche" as one of the reasons for the company's success.

The aforementioned merger brought a change in focus. Flagship has decided to concentrate on non- prime customers, though Franklin Acceptance and ProCredit did more characteristic subprime lending.

In terms of Fair Isaac Company's (FICO) method of credit scoring, a prime borrower is someone with a FICO score of 680 and above while a non-prime borrower, Flagship's target market, has a FICO score of 580 to 680. A subprime borrower, on the other hand, has a FICO score of below 580.

"We try to stay just below prime. I don't think we can compete with the large banks that are doing most of the prime lending. We've chosen not to do the subprime paper because we used to do that and feel that the cost to collect, and the risk inherent in that portfolio is not what we are interested in today. So we're trying to get the customer that has been delinquent a few times but still has a FICO in the mid-to-high 600s," said Ritter.

The non-prime market is where the company wants to emphasize its customer base in terms of credit quality, an ability to pay and an ability to pay on time. The company is currently improving the credit quality and the underwriting of its assets, Moy Kelley explained.

Moreover, Flagship has also established centralized underwriting. Before the merger, credit analysts did the underwriting from the company's regional offices. Currently, all the underwriting is done in Flagship's Philadelphia office. "It helps us ensure the consistent application of our credit guidelines," Moy Kelly added.

Solid Backing and Business Volume

Flagship originates about $50 million per month in non-prime auto paper and has a network of approximately 1,500 active dealers.

Referrals from CarMax, a subsidiary of Circuit City, comprises 20% of their business volume. "We're hoping to get about $600 million in business volume this year, and next year we expect about a billion," Ritter said.

Being a part of Copelco, a subsidiary of Japanese trading company Itochu Corp., is an advantage, Ritter added. "We are very well capitalized so we don't have to worry about liquidity. I think that's one of the biggest things we have going for us, being a subsidiary of a very large organization. And we're given significant latitude in our day-to-day operations. We're allowed to manage our business," he said.

As for exploring other asset classes, the company is sticking with the non-prime sector for the time being. "We expect to perform rather well. All indications are that the non-prime asset class sector is doing well. I don't have a crystal ball but all the key indicators say that the assets are performing well within our projected default trends so there is no reason to deviate," Ritter said.

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