Kroll, S&P split on impact of OneMain's revolving ABS feature
Will a longer revolving feature in OneMain Financial's next subprime auto-loan securitization help – or hurt – the deal's ultimate loss performance?
It depends on whom you ask.
Two ratings agencies are split on the potential impact of the feature, which allows additional assets to be contributed to the collateral for OneMain Direct Auto Receivables (ODART) 2019-1 over a period of five years.
S&P Global Ratings estimates a slightly higher net loss of 5.96% for investors in the $526.34 million deal, compared to 5.69% on ODART 2018-1 issued last July. The factor cited in the agency’s presale report is the potential for greater asset-value deterioration over the 60-month revolving period. OneMain’s previous deal has a two-year revolving window.
However, Kroll Bond Rating Agency was swayed by the stricter reinvestment criteria that the consumer lender adopted for the longer revolving period. The agency projects a base-case loss range of 2.9%-4.9% in the proposed transaction, lowered from the 3.05%-5.05% range Kroll forecast for each of OneMain’s two auto-loan ABS issues since December 2017.
Among the changes is a lower cap on the loans that can be added to the pool underwritten to higher-risk borrowers. “The eligibility criteria during the revolving period has changed [from ODART 2018-1] to include loans with a lower concentration of higher risk levels, longer remaining term and an overall higher minimum weighted average rate,” Kroll’s presale report stated.
The new limits involve OneMain’s five-lowest tiers of borrowers. For example, no more than 0.5% of the loans added after closing can be from OneMain’s lowest credit tier; that cap is 1% in ODART 2018-1. In addition, loans with up to 56 months remaining can be added after closing, instead of the 52-month limit in the prior deal, and the minimum WA interest rate on eligible loans is 16.5%, up from a previous 16% limit.
S&P acknowledged the stronger reinvestment criteria for the extended revolving period. But, over time, “the distribution of characteristics in this statistical pool may change because a significant number of additional loans may be added,” the report stated.
“Given the longer revolving period of five years for this transaction, we increased our base case assumption for each risk tier to account for potential deterioration in [asset] recovery rates over the longer revolving period, which may lead to increased net losses.”
Projecting losses on OneMain’s direct auto-loan ABS deals is already a challenge because of limited performance data. OneMain has been originating loans for only five years and securitizing them since 2016. The agencies currently track the losses on three outstanding OneMain auto-loan securitizations, the oldest of which has been active less than 24 months.
Another complication in loss forecasting is OneMain’s unique auto-loan origination model compared to other subprime peers. Similar to its consumer-loan product, OneMain permits borrowers to renew loans prior to maturity for new loans to borrow additional funds. For the auto-loan product, borrowers can cash out the equity in their vehicles that secure the loans when renewing. OneMain rolls the outstanding balances into a new loan, which will be among the eligible assets for the 2019-1 deal’s revolving period.
The renewals in effect extend maturities on existing collateral assets in the pool. OneMain “does not encourage” customers to renew direct auto loans before 18 months, according to Kroll, but also does not use the renewals as extensions or a default-prevention tool since all renewals must undergo another “full” underwriting.
After the revolving period ends, loan renewals are treated as prepaid assets and loans are removed from the pool.
For ODART 2019-1, the changes to the revolving period have not affected the senior-note AAA rating OneMain has received in its last three auto-loan transactions. But enhancement levels have increased slightly from last year’s deal: The CE for the $380.9 million in Class A notes is 29.4%, versus 27.75% for the AAA note class in ODART 2018-1.
OneMain will also issue subordinate notes that carry split ratings from the agencies. The $64 million Class B tranche has an AA+ rating from Kroll and lower AA rating from S&P. The $42.6 million in Class C notes are single-A rated by S&P but AA-rated by Kroll. The Class D notes totaling $38.84 million have a BBB rating from S&P and an AA- rating from Kroll.
The notes are backed by $535.73 million in outstanding loan balances, averaging $13,807 with a weighted average FICO of 629 (each reduced from last year’s deal that had a $15,113 average balance and FICO average of 635). The WA loan terms remain 57 months with six months of seasoning on average.
This is the fifth auto-loan securitization for OneMain Holdings, and the fourth sponsored by its legacy affiliate Springleaf Finance Corp. Springleaf began offering direct auto loan originations in June 2014 at 600 branches, before Springleaf’s acquisition of the 1,000-branch OneMain consumer-loan office network in 2015 from Citigroup. The branches covering the former Citigroup unit began auto-finance originations in December 2015, and have been included in ODART transactions since November 2017.
OneMain also securitizes its consumer loans, with the most recent deal priced in January.