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Honda's car-centric pools buck truck trends across ABS industry

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Like other automakers, Honda saw a slight decline (-2.9%) in U.S. passenger car sales and an uptick in purchases of its line of SUVs and crossover vehicles (+3.3%) in 2017.

But those trends are not reflected in recent auto-loan securitizations by American Honda Finance, as the company hedges its portfolios against the potential risk of rising fuel prices that could portend losses for the light-duty truck segments of ABS pools.

In AHF’s latest deal – the $1-$1.25 billion Honda Auto Receivables 2018-2 Owner Trust (HAROT) – the percentage of passenger vehicles such as the Accord and Civic has ballooned to 55.7%. It was the fourth consecutive transaction in which the mix of sedans and hatchbacks has increased while the CUV/SUV lines decline in the share of the pool, according to Fitch Ratings.

Last September, Honda’s CUV/SUV models made up 43.8% of the collateral. But for Honda Auto Receivables 2018-2 Owner Trust (HAROT), that number is 37.9%.

“This marks a continued trend in the pool toward cars that has been seen since the 2017-3 transaction,” wrote Fitch Ratings, in a presale report issued Thursday, “with decreasing concentrations of both minivans (5.8% in 2018-2 versus 13.7% in 2017-3) and CUVs/SUVs …deal over deal.”

The trend has plenty of momentum; the Accord that was newly redesigned for 2017 was the best-selling U.S. model in the second half of 2017, according to Fitch, and last year Honda had a record-setting sales year for the refreshed Civic model that peaked to a record 377,286 units.

“This trend follows Honda’s sales patterns and the overall market. CUVs and SUVs have been showing good, stable performance as of late, supported by continued low fuel prices and more fuel-efficient designs but are subject to the influence of gasoline prices,” wrote Fitch. “Car performance is less influenced by changes in gasoline prices.”

By comparison, the share of passenger vehicles was less than 15% - an all-time low - in Ford Motor Credit's $1.58 billion prime-loan securitization last week.

Honda’s second U.S. loan securitization of the year for new and used Honda and Acura vehicles is also its third consecutive deal in which the issuing trust is proposing a potential upsizing. The senior-note securitization of four classes of bonds will be marketed as either a $1.08 billion transaction or a $1.35 billion deal, depending on market conditions. Honda’s two previous deals were upsized.

The $1 billion notes proposal (backed by a pool loan balance of $1.08 billion) would have thee classes of terms notes: a two year A-2 class sized at $395 million; an A-3 tranche due 2022 totaling $335 million and a Class A-4 tranche of $105.7 million in notes due 2024.

If upsized, the tranche sizes would expand to $494 million for the A-2 notes, $419 million for the A-3 notes and $131.8 million for the A-4 bonds. All of the notes carry preliminary triple-A ratings from Fitch and S&P Global Ratings.

An A-1 tranche of money-market notes (rated F1+ by Fitch and A-1+ by S&P) will be sized at either $217 million of $271 million.

The smaller pool would contain 58,651 notes with an average balance of $18,408, while the upsizing would push that to 73,277 loans with balances of $18,417. The weighted average APR of 2.1%, original terms of 61.4 months and average seasoning (12.7 months) is the same in either pool.

As average loan balances have continues to rise (up nearly $1,000 from the average $17,481 balance in HAROT 2017-4), Honda has increased the level of riskier extended-term loans in its securitizations, which is now 24.2% of the pool compared to 19.8% as recently as early 2017. But these longer-term loan concentrations remain “notably lower” than peer issuers, notes Fitch.

These long-term loans also predominantly are underwritten only for the Tier A and Tier B borrowers under Honda’s internal scoring system.

Performance on Honda’s ABS portfolios remains historically strong, with expected net losses on existing portfolios still under 0.45% for each. S&P maintains an expected net loss range of 0.5%-0.6% that it assigned Honda’s first auto-loan securitization of the year. Fitch (which did not rate HAROT 2018-1) did not forecast losses, but stress-modeled the base-case loss scenario of 0.9% on both proposed pools.

Honda’s overall portfolio totaled $27.8 billion, up from $26.3 billion at end of 2017. Delinquencies and repossessions were at 1.39% of outstanding loan balances, up slightly from a year prior (1.34%).

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