Honda reduces longer-term loan exposure in $1B-plus prime ABS
American Honda Finance (AHF) Corp.’s first prime auto-loan securitization of 2019 includes its lowest share of extended-term loans in any of its asset-backed deals since late 2017.
According to a presale report published Thursday by Fitch Ratings, the percentage of loans with terms greater than 60 months in the $1 billion-plus Honda Auto Receivables 2019-1 Owner Trust (HAROT) is 24.1% of the collateral pool.
That is reduced from the 24.5% level of the previous HAROT 2018-4 transaction last November, as well as 24.8% in HAROT 2018-3 issued in August 2018. Fitch says it is the lowest concentration of 61-72 months observed since the fourth HAROT transaction of 2017.
American Honda’s efforts to reduce exposure to longer-term loans in securitizations coincide with a slight uptick in repossessions and delinquencies in its $29.7 billion managed loan portfolio (as of last Dec. 31), as stated in another presale report issued by S&P Global Ratings.
AHF’s exposure to loans over five years is already one of the lowest among peer captive-finance ABS issuers. But according to presale reports, Honda’s managed portfolio that grew 6.7% last year also saw annualized net losses grow slightly higher to 0.44% from 0.4%, while delinquencies ticked higher to 1.62% from 1.39%. S&P attributes both increases to AHF’s exposure to extended-term contracts in the portfolio.
Still, the comparably reduced exposure from prior deals is having no material effect on the credit metrics of the next issue from HAROT’s historically strong shelf performance.
The $1.05 billion notes offering (which could be potentially upsized to $1.37 billion) is backed by low-interest prime loans that were mostly originated through Honda’s highest internal credit-tier channel – amounting to over 90% of either pool’s collateral balance.
Honda’s credit enhancement requirements of 2.75% remains among the lowest among prime platforms, as well, while projected loss estimates remain at historically low levels from ratings agencies. S&P’s loss range of 0.5%-0.6% is unchanged from the agency’s previous projected loss estimates in the Series 2018-4 notes. Fitch projects losses under 0.5% over the life of the next deal.
Presale reports show the smaller proposed pool with 54,079 loans would back a two-year, Class A-2 tranche of $358 million in notes; a Class A-3 tranche totaling $348 million due March 2023; and a Class A-4 tranche of $83.8 million in notes with a June 2024 maturity.
A $1.4 billion pool of 70,183 loans would have a Class A-2 tranche to $465 million, an A-3 tranche of $452 million and a Class A-4 tranche to $106.01 million.
All of the Class A tranches carry preliminary AAA ratings from the agencies.
The money market tranche will be either $263.2 million or $342 million, with F1+ ratings from Fitch and A-1+ from S&P.
The deal was underwritten by Bank of America Merrill Lynch and Pierce, Fenner & Smith.
The loans in HAROT 2019-1 were for primarily new Honda and Acura-branded vehicles, and split between 46.4% passenger sedans/coupes, and 39.5% crossover and sport utility vehicles.
The loans have an average balance of around $19,900, similar to the level for the prior HAROT 2018-4 transaction but higher than the $17,404-$18,417 range of average loan balances for prior deals dating to 2017.
Both pools are also heavily seasoned at 12.8 months, and share a weighted average annual percentage rate of 2.3%, also similar to the trust’s previous deal last year.
The low rates in the pool will benefit from a $92.5 million (or $119.97 million if upsized) yield supplement account. The trust will use cash flow from the YSA to supplement the rates under 6.35% - rates that are subsidized, or subvented, by manufacturer incentives to attract higher-credit-scoring borrowers for the captive-finance lender.
More than 90% of these borrowers (with a weighted average FICO of 771) in the 2019-1 pool pay rates under 4%.