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Loss projections drop in World Omni's next prime auto ABS

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World Omni Financial Corp., the regional captive-finance lender to Southeastern U.S. Toyota dealers, is preparing its second 2018 issuance of bonds backed by prime auto loan receivables.

World Omni Auto Receivables Trust (WOART) 2018-B is an $802.8 million securitization of retail sales contracts of mostly new Toyota-branded vehicles originated through a five-state network of dealers. Like World Omni’s predecessor asset-backed deal in January, the size could be could be boosted to $1 billion in notes to meet market demand.

World Omni in the first quarter has also sponsored a securitization of owner-lease conracts, as well as a floorplan inventory financing transaction for dealers who obtain vehicles through World Omni's Southeast Toyota Distributors LLC affiliate. The company does business as Southeast Toyota Finance, and has provided financial services to Toyota dealers since 1981.

There are four tranches of senior notes, a $161 million money market tranche rated F1+ by Fitch Ratings and A-1+ by S&P Global Ratings and three term tranches with triple-A ratings: Two fixed-rate tranches are each sized at $272.8 million and mature in July 2021 and July 2023; and a $71.72 floating-rate tranche maturing in June 2024.

All four senior tranches benefit from 5% credit enhancement, unchanged from World Omni’s most recent auto loan securitization.

A Class B subordinate fixed-rate tranche of $24.5 million in notes is due 2025, with double-A ratings from each agency.

The notes are backed by 36,325 loans with a total balance of $881.2 million, a weighted average original term of 69.4 months, seasoning of 5.2 months, and an average APR of 3.12% – the lowest of any World Omni securitization dating back to 2012.

While that rate is affected by a large selection of loans (75.8%) that benefited from manufacturer-subsidized rates below 4%, Fitch also cites the stronger credit quality and risk-pricing of the pool, and the recent implementation of a minimum FICO of 650 for World Omni pool securitizations.

The deal includes 6.2% of “cleanup” collateral included in prior WOART transactions that have been called.

To offset the lower collateral APR as well as expected higher costs of debt, World Omni is boosting the yield-supplement overcollateralization to 5.85% from 5.1% from its January transaction.

More than 60% of the loans are for trucks, vans, SUVs and cross-overs (large and small), a trait consistent with the last three World Omni transactional pools. Although that rate reflects recent industry-wide trends of declining interest in passenger cars from borrowers, the 2018-B pool includes the Camry (22% of the pool) and Corolla (12.3%) sedans as two of the top three models in the 2018-B collateral pool.

The Camry has “consistently” been the top model in World Omni pools, according to Fitch.

The weighted average FICO of pooled borrowers is 754, in line with World Omni’s first transaction in 2018. The 79.4% share of riskier, long-term loans over 60 months is far higher than recent peer captive-finance securitizations from Toyota Motor Credit Corp. (45.3%) and Nissan Motor Acceptance Corp. (64%), but is below that of World Omni 2018-A’s level of 82.1%.

Excess spread is up slightly to 2.2% from the 2.05% in 2018-A.

Fitch states that World Omni has had worsening levels of delinquencies and losses in its $10.1 billion managed portfolio in each of the past three years. Delinquencies (30, 60 and 90-plus days) are up to 2.2% The net loss rate of 1.04% in 2017 is up from 0.74% at year-end 2015, but will below the peak 1.59% during the financial crisis in 2009.

Net losses in recent securitization portfolios are also tracking higher, with a range of 2.42-3.37% in the last four World Omni deals to 2016. Despite recent elevated levels, Fitch says the performance of 2018-B is “expected to be stronger, with lower losses ... as a result of the improved credit quality of the pool,” including the exclusion of sub-650 FICOs.

Fitch has lowered its initial proxy for lifetime net losses in the deal at 1.45%, compared to 2.5% in World Omni 2017-A. S&P’s expected losses on the pool is 1.25%, unchanged from the 2018-A series, with a loss range of 1.15%-1.35%.

Barclays is lead underwriter of the transaction.

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