Foursight pays up (a lot) for AAA on its latest subprime auto ABS
Foursight, the subprime auto lending arm of Leucadia, has increased the credit enhancement on its latest securitization in order to offset higher expected losses on the collateral, according to Kroll Bond Rating Agency.
After experienced higher than expected losses on its 2015 and 2016 vintage loans, FourSight raised interest rates multiple times in the past year, most recently in October 2017 and February 2018. But this was primarily on loans with higher loan-to-value ratios and longer terms. In fact, Foursight is now making more high-LTV and high-debt-to-income loans, because it stopped allowing rebates on new cars to be included in the value during underwriting.
Foursight has loosened underwriting in other ways, according to Kroll. It no longer requires a minimum time at residence and relies on minimum employment time and other variables. And it added three additional credit tiers in April 2017 (subsequent to its prior securitization) for borrowers with limited credit history. These borrowers tend to be recent graduates and represented a very small portion of Foursight’s overall origination volume in the fourth quarter of 2017, however.
Nevertheless, Kroll’s loss expectations for all of the credit tiers of Foursight’s portfolio are higher than in the prior transaction to reflect this increase in losses and changes to underwriting criteria. Kroll expects losses to range from 6.75% to 8.75% over the life of the deal, in its base-case scenario. By comparison, its base-case loss range for the 2017 transaction was 5.95% to 7.95%.
The rating agency is also concerned that the new deal has a prefunding account. Only 85% of the collateral has been identified; Foursight has another four months after the deal closes to acquire the remaining 15%, and this could introduce additional risk to the pool, although new loans must meet certain eligibility criteria.
As a result, Foursight had to up credit enhancement on the senior trance of notes to be offered by more than seven percentage points, to 36.25% from 28.7% for the comparable tranche of its 2017 transaction. Both tranches carry the same AAA ratings.
Foursight has made some changes to the capital structure of the latest deal. It will issue eight tranches of notes, up from four in the previous transaction.
Several of the credit metrics of the latest deal have actually improved. The weighted average FICO score for borrowers is higher, at 642 compared with 634 for the 2017 deal. In addition, the weighted average coupon has been increasing to 11.63% from 10.84%. The “back end” LTV also decreased, to 121.5% from 124%.
Another positive: Foursight's parent company Leucadia continues to demonstrate strong support for the company and its business plan, per Kroll. Since the 2017 transaction was completed, Leucadia contributed an additional $14 million in equity ($10 million in 2017 and $4 million in 2018) and Kroll expects it to provide an additional $14 million in 2018 to fund portfolio growth.
Foursight also has ample liquidity. In July 2017, Foursight increased its warehouse with 20 Gates from $75 million to $100 million and extended its maturity to July 2020. As of February 28, 2018, this line was approximately 91% utilized. In addition, the company has a warehouse facility with JPMorgan Chase that provides a maximum borrowing capacity of $125 million and matures in March 2019. As of Feb. 28, 2018, this line was approximately 96% utilized.