DriveTime Automotive Group and CarFinance priced $531 million of subprime auto-loan-backed securities this week.
DriveTime sold $265 million or securities via DT Auto Trust 2015-1, the issuer's first securitization since it reached an $8 million settlement with the Consumer Financial Protection Bureau (CFPB) last November.
The issuer priced $130 million senior bonds structured with a weighted average life of 0.65 years and rated triple-A by Standard & Poor’s and DBRS, at a spread of 68 basis points over Eurodollar synthetic forward curve.
At the junior level, the issuer priced $31.5 million of double-A rated class B notes with a WAL of 1.73 years, at 105 basis points over Eurodollar synthetic forward curve.
The 2.43-year, single-A-rated class C notes priced at 180 basis points over interpolated swaps and the 3.39-year, triple-B-rated class D notes priced at 290 basis points over interpolated swaps.
Wells Fargo Securities, Citi and Deutsche Bank are the lead underwriters on the deal.
By comparison, CarFinance, a private equity-owned subprime auto lender, sold $221.4 million of 'A'/'AA-' rated class A notes, structured with a WAL of 1.53 years at a spread of 105 basis points over Eurodollar synthetic forward curve. S&P and Kroll Bond Ratings rated the securitization called CarFinance Capital Auto Trust 2015-1.
The issuer sold the class B notes, rated A-’/ A’ with a WAL of 3.77 years at 150 basis points over interpolated swaps and the 4-years, BBB’/ A-’ rated class C notes, at 210 basis points over interpolated swaps.
The 4-years, BB’/ BBB’ rated class D notes priced at 320 basis points over interpolated swaps and the 4-years, BB-’/ BB+’ class E notes priced at 405 basis points over interpolated swaps
Credit Suisse and Deutsche Bank were the lead managers on the deal.
DriveTime’s securitization pool has a high concentration of long term loans (86.3%), which is in line with prior Drive Time transactions, according to the S&P presale report. Long-term loans — those with terms of 61 months and over — are generally riskier than the shorter-term variety because they take longer to pay down. However, 67.29% of the long-term loans backing the deal have received one of the top three credit grades of Drive Time’s internal scoring system. The issuer operates in the deep subprime market, lending to consumers with FICOs of less than 550. Roughly 20% of its borrowers have no FICO score.
The company has over 22 years of history originating, underwriting, and servicing subprime auto loans and a 19-year history of securitizing subprime auto loans. S&P noted in its presale that the company has successfully changed its operating strategy from a “buy-here, pay-here concept," to “a buy-here, pay-centrally concept," which removes collections from the dealerships to centralized payment collections. This shift in collections “provides better protection to investors in the event of a servicer transition or the company's bankruptcy,” according to the presale.
CarFinance, on the other hand, belongs to the newer crop of private equity-owned subprime finance companies. The Perella Weinberg Partners owned issuer was established in 2011. In its four-year history, the issuer has grown its portfolio to $716 million.
“While rapid growth is typical for relatively new subprime auto finance companies, it sometimes comes at the expense of credit quality,” stated S&P. “In addition, rapid growth poses operational challenges, including having sufficiently trained staff and adequate systems and procedures in place”.
Since the issuer’s last transaction in July 2014, series 2014-2, Perella announced the merger of CarFinance and Flagship Credit Acceptance. The merger, executed on Jan. 1, 2015, does not affect the origination and servicing platforms. Flagship will continue to issue subprime loan securities under its Flagship Credit Auto Trust.
Among the deal’s strengths, according to S&P, is the fact that CarFinance has a $350 million warehouse credit facility with a two-year term that currently matures in June 2016. The pool also includes loans originated through direct lending, which according to historical data tend to perform better than loans originated indirectly through deals. However, the portion of direct loans in the pool decreased to 28.09% from 36.57% in the issuer’s last transaction. Direct lending is done through different channels, including an online search function and pass-through programs with banks.
However CarFinance's securitization targets borrowers with higher FICOs compared to the DriveTime's borrower pool. Loans backing the CarFinance transaction have a weighted average FICO score of 603. The loans pay an annual interest rate of 15% and an average term of 6 years. On average the loans have paid off for 2.27 months and have an average loan to value ratio of 118.38%.
The deals add to a growing pipeline of subprime auto ABS issuance that has increased rapidly from the historical low levels, which totalled $2.5 billion, issued in 2008 and 2009. In 2014, subprime auto ABS reached $22 billion in new issue volume, marking a return to pre-crisis issuance volumes, according to Wells Fargo.