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Ford looks to follow Fed recommendations on ABS Libor replacement

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Ford Motor Credit is planning ahead for the potential demise of the Libor benchmark in its next prime auto-loan securitization, according to an S&P Global Ratings presale report.

In Ford’s newly launched, billion-dollar-plus Ford Credit Auto Owner Trust (FCAOT) 2019-B bond offering, the captive finance lender for Ford Motor Co. has added new “fallback” language that would establish a replacement benchmark rate for Libor on the single floating-rate tranche in the transaction – should the cessation of the London interbank offered rate take place during the life of the deal.

According to a S&P, Ford’s fallback language closely follows the voluntary guidance of the New York Fed’s Alternative Reference Rates Committee, which on May 31 recommended a future term rate (still to be determined) as a replacement benchmark - when needed - based on the Fed’s fledgling Secured Overnight Funding Rate (SOFR).

The change would only impact the Class A-2B variable-rate tranche in the transaction, and will have no apparent impact on ratings since the notes are expected to be repaid before the projected 2021 cessation of Libor (the notes' final legal maturity is February 2022). Also, the tranche makes up only around 16% of the aggregate note balance of $1.05 billion (or $1.3 billion if the deal is upsized at closing).

Ford’s deal would be among the first securitizations to include the ARCC’s recommended benchmark replacement plan since the Fed working committee published its final recommendations last month. Covenant Review reported earlier this month an unnamed industrial leveraged-loan issuer was the first corporate borrower to incorporate a SOFR-rate derivation as a benchmark replacement for proposed amended contract language in its deal documents. That change request was based on the ARCC’s recommendations published in April for syndicated loans and high-yield bonds.

The Class A-2 notes (which also include a companion fixed-rate tranche) are the senior-most term notes in the deal, and have preliminary AAA ratings from S&P and Fitch Ratings. They will total a combined $346.02 million, or $432.52 million if the deal is upsized at closing.

Also receiving triple-A treatment are the fixed-rate Class A-3 notes due October 2023 totaling $346.06 million or $432.56 million, and the fixed-rate Class A-4 notes maturing in October 2024 totaling either $105.02 million or $131.02 million.

Two subordinate Class B and C note classes sized at a combined $52.46 million or $75.9 million provide support to the three term-note tranches as well as a money-market tranche of either $203 million or $254 million (rated A-1+ by S&P and F1+ by Fitch).

The senior notes benefit from 5.25% credit enhancement.

The notes will back either a $1.14 billion in receivables from 40,029 loans, or $1.43 billion across 50,141 accounts. The two pools are similar in credit metrics, including a weighted average FICO of 736, WA APR of 3.35%, original terms of 65.2 months, and seasoning of 8.6 months.

The pools are predominantly new-car loans (approximately 89% of the collateral balance) originated mostly for light-duty truck and SUV/crossover vehicle purchases (87% of the pool).

Expected net losses are unchanged from the prior FCAOT transaction this year. S&P estimates a range of 1%-1.2%, while Fitch has a forward-looking cumulative net loss proxy of 1.6%.

FCAOT 2019-B is Ford Motor Credit’s second prime-loan securitization of the year.

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Prime auto ABS LIBOR SOFR Ford Motor Credit