Honda feels the impact of COVID-19 in new prime ABS offering
Ratings agencies are projecting slightly increased bond losses for American Honda Finance Co.’s next auto-loan securitization, as the threat of pandemic-related economic disruptions outweighs the automotive captive finance lender’s stellar ABS track record.
Both Moody’s Investors Service and S&P Global Ratings project slightly higher losses for Honda Auto Receivables 2020-2 Owner Trust (HAROT), a minimum $970 million pool of prime auto loans originated for new and used Honda- and Acura-branded vehicles at U.S. franchised dealerships.
The loss projections of 0.75% (Moody’s) and a loss range of 0.9%-1.1% (S&P) are still among the historically low levels for Honda, a longtime securitization sponsor with 79 prior ABS transactions dating back to the early 1990s.
But the worsening economic conditions for the second quarter, as well as unknown recovery prospects for the latter half of the year, prompted Moody’s to raise is expected cumulative net loss on the deal by 25 basis points over what it projected for the prior HAROT transaction that priced in February.
S&P did not rate HAROT 2020-1, but the new deal’s loss range nearly doubles the 0.5%-0.6% range it estimated for HAROT 2019-4 last November.
Like other issuers, Honda is facing the growing risks from the coronavirus outbreak, in which rising unemployment levels will impact some borrowers’ ability to repay, as well as softening used-vehicle prices that could reduce the amount of recoveries from repossessed vehicles.
The loans are nearly all new-car accounts (91%), split between those for Honda- (91%) and Acura-branded (9%) vehicles sold through U.S. franchised dealerships of Honda Motor Co.
The historically low losses for Honda’s ABS offerings allow a continued low credit-enhancement level of 3.5%, in comparison to other prime auto-lender securitizations. That is slightly higher than previous deals, but that is due only to a higher reserve account of 1% of the initial pool balance.
All prime auto ABS issuers have increased their reserves backing note payments since the COVID-19 outbreak led to mass business closings and shelter-in-place orders in March that led to a brief pause in auto ABS issuance.
But deals from automakers’ U.S. captive finance companies (including those for Nissan, Hyundai, Ford, Toyota, Volkswagen and General Motors) kicked back into gear in April after Federal Reserve announced on March 23 that the AAA-rated securities of new-issue auto-loan securitizations were among eligible its Term Asset-Backed Securities Loan Facility.
Administered by the New York Fed, the TALF program finances ABS notes for private investors at predetermined rates designed to keep liquidity flowing in the securitization market and free up lender capital to underwrite more consumer and business loans.
Similar to most of its recent transactions, American Honda’s new deal will include three tranches of senior term notes all carrying preliminary triple-A ratings from both agencies, and a money-market tranche with each agency’s highest short-term ratings (A-1+ for S&P, P-1 for Moody’s).
The sizes of the tranches will be determined by whether the deal is upsized at its expected May 27 closing date. The Class A-1 one-year tranche will be either $183 million or $253 million; the approximate two-year Class A-2 and four-year Class A-3 tranches will both carry either $342 million or $476 million in notes; and the Class A-4 tranche due October 2026 will be sized at either $80.37 million or $110.79 million.
The pools themselves will feature high weighted average borrower FICOs (776), a weighted average APR of about 3.28%, with 12 months of seasoning. American Honda will utilize either a $38.25 million or $53.1 million cash yield-supplement account (funded by note proceeds) to increase the yield on the pool, supplementing the discount rates given to certain borrowers below the minimum 5.1% rate set by the deal’s documents.
Besides the increased reserve account, another change in the deal compared to prior transactions is an increased concentration of borrowers from Honda’s highest credit tier (grade-A) to 80.42%.
Honda’s managed portfolio totaled $30.6 billion as of Dec. 31. With annualized net losses of 0.48% - four basis points higher than a year earlier. Total delinquencies were up to 1.72% from 1.62%.
The deal is underwritten by BofA Securities.