Higher risks weigh on Westlake's new $700M subprime ABS
Westlake Services continues to pile on the risks in its subprime auto loan securitizations, forcing the "buy here, pay here” lender to offer additional credit enhancement to offset higher expected losses.
Westlake Automobile Receivables Trust 2017-2 marks the sponsor's second asset-backed deal this year. It also represents the 28th overall auto subprime ABS in 2017, according to Finsight.
A total of $700 million in notes, will be issued, a $187.3 million money market tranche with a preliminary R-1 rating by bond rating agency DBRS and A-1+ by S&P Global Ratings. The $253.2 million in Class A senior term notes will be split between fixed- and floating-rate tranches, and have early triple-A ratings from both agencies.
Also included in the capital stack are Class B notes totaling $65.5 million that carry a provisional AA ratings; and the $86.56 million Class C notes are rated A. The Class D note series sized at $71.51 million carry a BBB rating, while the subordinate Class E series totaling $36.13 million rate a BB.
The AAA rating for the Class A notes required steep levels of credit support, as it has in most of its non-prime securitizations to date. But Westlake 2017-2's enhancement levels are the highest for recent Westlake transactions in DBRS' presale report comparisons. The senior bonds have 42.5% credit enhancement comprised of 34.5% subordination of four classes of subordinate notes, a 1% non-declining reserve account and a 7% overcollateralization level (totaling $52.7 million) which will build to 13% before stepping down to 12% after the Class A notes are paid in full.
CE has increased in each of the last four deals. Westlake’s 2016-1 deal benefited from 35.75% credit support, which rose to 37.44% for the 2016-2 transaction before breaching 42% earlier this year for the first Westlake securitization this year.
In addition to the CE, the notes will have available excess spread of 12.66% to pull from, based on the difference of a weighted average APR of 19.58% against a blended note rate of 2.93% from the capital stack and a 4% service fee.
Westlake has traditionally financed high-mileage used cars to borrowers with bad credit or no credit history, with lower average account balances than typical auto ABS portfolios (Westlake 2017-2 has an average loan balance of $11,111). That figure has grown incrementally as Westlake built out its network of franchised dealer partners (including CarMax), providing larger loans for newer, lower-mileage vehicles.
Ironically, franchised dealers' loans are saddled with lower credit quality than independent dealers. They cater to borrowers with lower average credit scores (587) than buyers at independent used-car lots (599), and also come with lengthier terms. The average remaining payment schedule of 60.16 months compared to 44.48 months for the entire Westlake 2017-2 pool.
These franchise loans also carry higher loan-to-value ratios at 113.38% compared to independents’ 104.15% LTV, and in recent years have incurred more losses for Westlake, according to DBRS.
While the average loan-to-value ratio declined slightly to 106.91% for the entire pool, the average borrower FICO score declined to 596 from 599 in the last deal. And the tranches of customers with near-prime (FICOs between 609-699) and prime (FICOs above 700) shrank to 38.44% of the collateral assets in the new transaction – below that of the 41.42% level of "gold" and "premium" customers in the first deal this year as well as five prior Westlake securitizations.
These were among the factors that prompted DBRS to increase its base-case cumulative net loss estimate for the pool at 13.6%, up from 13.3% from Westlake’s 2017-1 transaction.