Loss expectations surge for Santander deep subprime ABS deal

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Net losses are expected to approach 30% for Santander Consumer USA’s next offering of bonds backed by auto loans to some of its riskiest customers facing potential dire economic conditions brought by the COVID-19 pandemic.

The $943 million Drive Auto Receivables Trust 2020-2 has a higher initial expected loss projection than Santander Consumer’s prior securitization of non-prime auto loans pooled for its “deep subprime” ABS platform.

In presale reports issued Monday, Moody’s Investors Service projects a 27% loss on DRIVE 2020-2, while S&P Global Ratings has a loss range expectation of 28%-29%.

Both figures are approximately 4 basis points higher from what each agency’s initial cumulative net loss expectations were for the lender’s most recently sponsored deal in January – prior to the onset of the coronavirus outbreak in the U.S. that led to the severe retraction of the U.S. economy this spring.

“In our forward-looking view of the economy, and particularly the impact from COVID-19, we expect unemployment levels to increase, which, based on the historical correlation between credit performance and unemployment, will likely result in increased losses,” S&P’s report stated.

Moody’s report added the recent softening of used vehicle prices because of lower demand “will reduce recoveries on defaulted auto loans, also a credit negative.” Approximately 71% of the collateral pool value is tied to contracts for pre-owned vehicles.

Borrowers are also expected to increasingly seek extensions and deferments on loan payments that would interrupt cash flow to bondholders. Extension rates for loans in existing DRIVE platform securitizations were between 20% and 21% for April, compared to just 8% in March and 1% in February, according to loan-level data filed in Reg AB II disclosures.

The new deal is backed by $1.27 billion in loans, providing an initial 25.85% overcollateralization of the note value of the transaction. Senior-note investors will benefit from a total credit enhancement of 56.5% with the inclusion of subordination of four classes of junior notes in the first-loss position, as well as a 2% accounts receivable reserve fund that is double what previous DRIVE platform ABS deals have offered.

Santander’s DRIVE platform is among three ABS shelves the subsidiary of Spanish banking conglomerate Banco Santander S.A., and is where the lender parks its loans from its lowest tier of borrowers. The weighted average FICO is 583, with average APRs of 18.98% on long-term loans with remaining balances of $19,368 and original terms of approximately 71 months.

Over 95% of the borrowers have not had income verified, and approximately 15% do not have FICO scores.

The transaction features a $109 million Class A-1 money-market tranche with a preliminary A-1+ rating from S&P and P-1 from Moody’s. Each agency has assigned early triple-A ratings to a $340 million Class A-2 tranche and a $129.52 million Class A-3 bond offering. The Class A-2 notes will be split between fixed- and floating-rate tranches.

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