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Good credit buoys CarMax

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CarMax Auto Owner Trust, 2019-4 is bringing $1.1 billion to the asset-backed securities market with slight decreases in overall credit enhancements, such as lower overcollateralization and lower subordination. Yet those credit enhancement changes reflect a stronger pool of loans, not increased risk-taking.

In its presale report on the deal, S&P Global estimated its expected loss range for the 2019-4 to be 2.2% to 2.3%, a range that is in line with the loss expectations for a series of deals in 2018 (2018-1, 2018-2, 2018-3, and 2018-4) and the first and third series for the 2019 vintage.

The credit quality of the 2019-2 pool was in a slightly lower range, according to S&P.

The credit quality of the 2019-4, which is expected to come to market on Oct. 23, is back in the range of previous 2018 and 2019 deals, and so are its loss expectations, according to S&P.

The credit quality of 2019-4 deal is consistent with more recent pools that had a weighted average FICO store of 702, and 30.8% of the pool had FICO scores above 750, according to Fitch Ratings.

Rating agencies assessed seven classes of notes. CarMax Auto Owner Trust 2019-4’s so-called money market tranche received ‘A-1+’ and ‘F1+’ from S&P Global and Fitch, respectively.

Further down the structure of the deal, Classes A-2/A-2b; A-3 and A-4 received ‘AAA’ from S&P Global and Fitch. The B and A classes received ‘AA’ and ‘A’ ratings, respectively, from both rating agencies, and the investment-grade ‘D’ class of notes received a ‘BBB’ rating across the board.

On the money market tranche, S&P tested whether it could be repaid by its legal final maturity date of Nov. 16, 2020. It ran cash flows using certain assumptions to delay principal collections, and assumed a zero default, with a 0.5% absolute prepayment speed, as well as checking that 11months would provide enough time for the underlying revenues to pay off the notes.

Not all aspects of the deal are without risks, however, as Fitch points out. The A-2B notes are a floating-rate class, unlike the underlying loans in the pool, which pay a fixed rate. Fitch warned that no interest rate hedge exists to mitigate the risk of rising interest rates on the note.

When stressing the notes, Fitch assumed an upward movement in interest rates, since that is likely to be the main risk that such a balance proposes.

In its primary, break-even analysis, class A notes could withstand about 12.6% in cumulative net losses before experiencing losses. Classes B, C, and D notes were resilient up to cumulative net losses of 10.6%, 8.7%, and 6.8%, respectively.

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