Huntington National Bank is preparing to issue $3.5 billion in credit-linked notes, which will reference a pool of auto loans extended to rime quality retail borrowers.
Huntington is the deal's sponsor and will be solely responsible for making interest and principal payments to the notes. But it will not derive any interest payments from the reference portfolio of its retail auto loan portfolio, according to Moody's Ratings. Principal payments will only be based on the schedule and unscheduled principal payments collected on the reference portfolio.
The bank has a long history in consumer auto finance going back to the 1950s, which includes a so-called originate to hold model. Moody's considers that a positive credit characteristic, along with the portfolio's high credit quality. The loans in the reference portfolio have a weighted average (WA) FICO score of 775, with a minimum score of 660, Moody's said.
Also, the loans, 69% of which are financing used cars, have a loan-to-value (LTV) of 90.2%, and seasoning of seven months on a WA basis, Moody's said.
Notes will be repaid on a pro rata basis, as just one form of credit enhancement. The notes also benefit from target credit enhancement, the rating agency said. Each tranche of notes must maintain a certain level of credit enhancement before principal can be distributed to more junior notes in the capital structure, Moody's said.
Yet the pro-rata repayment structure does pose potential credit risks to the portfolio, according to Moody's. Payments to the subordinate classes are subject to performance tests. During the normal course of repayment, classes B through R will receive pro-rata payments allocated to the subordinate notes, which can leave more senior bonds with a higher exposure to tail risk as the notes amortize.
J.P.Morgan Securities, BofA Securities and Citigroup Global Markets are lead underwriters on the deal, Moody's said.
The deal will issue notes through seven tranches of A, B, C, D, E and R classes, Moody's said. Almost all the notes are benchmarked to the Secured Overnight Financing Rate. The A-R tranche enjoys a subordination level of 12.50%, the rating agency said. Meanwhile, the B tranches benefit from 2.50% in subordination; the class C benefits from 2.05% in subordination; the class D has 1.20% in subordination and the R class gets 0.65%, the rating agency said.
Moody's assigns A3 to the B classes; Ba3 to class C and B3 to class D.
