Losses, payoff schedules increasingly backloaded in subprime auto ABS deals
Longer-term contracts, combined with lighter-touch collection practices by some lenders, are increasingly stretching amortization schedules and backloading losses within certain U.S. subprime auto loan securitizations, according to a new study by S&P Global Ratings.
The result, wrote analyst Amy Martin, is increasing difficulty in cross-comparing the paydown and loss metrics between lenders — and even an issuer's prior outstanding portfolios.
“Certain U.S. subprime auto loan asset-backed securities (ABS) issuers are reporting more losses later in their transactions' lives than in the past” because of an increase in pools’ weighted average original terms and extensions granted to borrowers on delinquent loans, the report says.
When “issuers increase the percentage of longer-term loans in their pools or liberalize their collection strategies,” the report says, their cumulative net losses "by months outstanding may appear stable or even lower relative to historical vintages” or other issuers.
The report noted that slowing the amortization of a deal "doesn't in and of itself pose a risk to the transaction as long as losses are within expectations and credit enhancement is adequate to cover tail-end losses."
The study compared the performance of 10 subprime auto-loan portfolios issued in the first quarter of 2016, all of which have accumulated 30 months of performance data.
S&P noted that two lenders with the highest WA original loan terms — Consumer Portfolio Services and Flagship Credit Acceptance — reached the 50% principal paydown milestone eight months slower than two lenders with the lowest concentrations of extended-term loans (United Auto Credit Corp. and Westlake Services).
The pace at which loss rates typically slow for portfolios as they age was also disparate, due to the varying amortization performance and the “wide breadth” of pool credit quality the various issuers take to market.
The Westlake Automobile Receivables Trust 2016-1 transaction, for example, had its cumulative net loss rate slow around the 20th month after closing. Meanwhile, CPS Auto Receivables Trust 2016-A was among those “still incurring losses at a steady rate” at 20 months, the report says.
That was expected, with CPS projected to have higher cumulative net losses (CNL) of 19.25% compared to Westlake’s 13.25% due to lower deep-subprime collateral quality.
But with CPS’ high 71.3% pool concentration of loans with original terms between 61-72 months, and a high extension rate that has averaged 8.7% in 2018, CPS’ losses are more backloaded for its 2016-A transaction. As a result, the deep subprime lender had the fourth-lowest CNL level through 30 months among the 10 deals.
“Westlake is likely to replace CPS over time" in fourth place, "given not only the higher rate at which CPS is incurring losses, but also due to CPS's transaction paying down much more slowly than Westlake's,” the report says.
A more accurate picture of loss performance, Martin argues, is measuring rates against the remaining principal of a transaction (known as the pool factor), rather than outstanding months remaining on the notes’ maturity.
When charting the 10 issuers by when each reached a 50% paydown on note principal, Westlake displaces CPS on the list with accumulated net losses of 8% versus CPS’ 10%. Based on expected CNLs at the time of the two deals were issued, Westlake has incurred 60% of total projected losses versus 52% for CPS.
The pool factor analysis can also shed additional light on a deal’s standing against an issuers’ historical static pool data. S&P compared CPS’ 2016 deal to the lender’s 2014 and 2012 vintages against a 60% paydown mark, and showed that the two-year transaction is incurring higher losses (7.5%), compared with 6.4% (2014) and 5% (2012).
“We believe ranking the peers' CNLs by pool factor is more consistent and accurate with how the pools will ultimately perform when their pools pay off,” the report says. “Such an analysis can also prove useful when examining performance for an issuer over time, given that the terms of its auto loans or its tolerance for delinquencies and extensions may have changed.”