Heightened regulatory scrutiny isn’t putting the breaks on subprime auto lending.
Yet another player, GO Financial, is tapping the securitization market to fund more loans, according to a presale from Kroll Bond Rating Agency.
GO Financial Auto Securitization Trust 2015-1, the originator’s first public, rated securitization, is backed by deep subprime, with the underlying borrowers posting an average FICO of 546. As is common with subprime loans, the vehicles they’re buying are used, which bodes ill for recovery value.
But the deal’s risk is mitigated by a heavy cushion against losses. The trust will issue about $180 million of securities backed by $257 million of loans, translating to an overcollateralization of roughly 30%.
The deal is split into three tranches. Class A notes, adding up to $128.6 million, are rated A’ by KBRA; B notes, for $30.9 million are BBB’; and C notes, for $20.6 million, are BB.’ The maturity is a little under two years for the A piece, and roughly 2.5 years for the others.
Including the O.C., initial hard credit enhancement levels of 51.50% for the Class A notes, 39.50% for the Class B notes, and 31.50% for the Class C notes. As loans amortize, enhancement should rise.
These high CE levels were necessary for the deal to obtain investment grade ratings on two of its tranches, given that KBRA has a base-case loss expectation of 34%-37% for the entire transaction.
GO originates and buys used-vehicle installment contracts from a network of independent and franchised third-party dealers. This market “can be riskier since third party dealer submit applications on behalf of the borrower/customer,” KBRA said.
As GO has expanded its dealer base in the past two years, losses have also risen.
The company has only been operating for three years. This would typically be a major weakness but KBRA points out that its technology, system and practice are similar to DriveTime, which owned GO until spinning it off in December 2013. The owners of DriveTime, which has been an active securitizer, still control GO Financial.
GO Financial’s management team have on average 16 years of experience in the business, with some having worked at DriveTime.
GO Financial has a $200-million revolving warehouse facility with Deutsche Bank and three unrated securitizations outstanding. The upcoming securitization will help take out the bulk of the facility.
DriveTime settled with the Consumer Financial Protection Bureau on Nov. 19 2014 after an investigation by the agency of dubious collection practices. The lender agreed to make changes.
A number of auto lenders have recently been the targets of investigation by the U.S. Department of Justice or the CFPB regarding their subprime lending and securitization practices. These include First Investors, GM Financial and Santander, which just relaunched its platform for securitizing deep subprime loans.
Editor's note: an earlier version of the story misstated the providers of the $200-million warehouse facility.