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Loss expectations rise for Hyundai in new prime auto ABS offering

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Weakening fortunes in the auto industry from the COVID-19 pandemic is prompting elevated loss expectations for a new-issue portfolio of prime automobile loans originated and serviced by Hyundai Capital America.

According to a presale report, Fitch Ratings has derived a forward-looking credit-loss expectation of 2.1% on the $1.15 billion Hyundai Auto Receivables Trust 2020-1 deal coming to the asset-backed market.

Two prior securitizations last year on the trust had cumulative loss projections from Fitch of only 1.75% - a level that is higher than comparable ABS deals sponsored by automakers such as Honda (0.9%) and Toyota (1.5%).

Among the drivers was the economic impact of containment measures in the U.S., and an assumed global recession in the first half of the year that has already created a rapid spike in unemployment. (More than 5 million more jobless claims were reported this week, bringing a running four-week total of job losses to more than 22 million).

Fitch’s scenario includes an expectation of a third-quarter 2020 recovery as the health crisis subsides -- but a downside scenario of a “halting recovery” beginning in the second quarter of 2021 that adds a “severe and prolonged period of stress” on the deal’s ratings.

While Fitch recently changed HCA’s outlook to negative, it maintained the lender’s investment-grade issuer default rating (BBB+).

Fitch is applying preliminary AAA ratings to three classes of senior notes benefiting from 8.3% in credit enhancement: a $404.52 million Class A-2 tranche due April 2023, a $374.52 million Class A-3 tranche due November 2024; and a $75.85 million Class A-4 tranche due June 2026. A $214.67 million Class A-1 money-market is also supported by the 8.3% enhancement of the senior stack, and rated F1+.

All of the notes are fixed-rate bonds, with pricing to be determined.

In addition to the subordination of two junior-note classes totaling nearly $56.7 million, enhancement is provided by a reserve account of 1% of the pool balance. The reserve account was upped from 0.25% in Hyundai’s prior deal, similar to the action undertaken by GM Financial in a new asset-backed offering this week as both sponsors seek to strengthen backstops against potential investor losses.

The pool of loans with an outstanding balance of $1.24 billion is otherwise “generally consistent” with the credit quality of other recent HCA-sponsored securitizations. HCA’s ABS transactions consist of mostly new vehicle loans for autos and SUV/crossover models manufactured by Hyundai Motor Co. and Kia Motors Co. (HCA is jointly owned by Hyundai Motors America and Kia Motors America; HMA owned 80% of the captive-finance company).

The 54,503 loans backing the collateral have a weighted average FICO of 759, with seasoning of 7.6 months. Fitch noted a high concentration of FICO scores above 750 (51.8%), and a decrease in extended-term contracts over 61 months (making up just 39.77% of the pool by balance). However, the average seasoning is down to 7.6 months compared to historical levels of Hyundai deals - resulting in a pool of loans with shorter payment histories that represent riskier bets for investors.

The average APR is 3.54%, and average loan-to-value ratio is 100.87%.

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Prime auto ABS Hyundai