U.S. Auto's debut subprime ABS gets low marks from Moody's

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A Georgia auto lender is sponsoring its first public securitization of deep subprime auto originations, in one of the lowest-rated deals for a post-crisis, nonprime auto ABS transaction.

U.S. Auto Finance, based in Duluth, Ga., is marketing $270 million in bonds backed by 21,803 auto loans in its first-ever rated 144A securitization, dubbed U.S. Auto Funding Trust 2019-1.

With an inaugural senior note rating of Baa1 from Moody’s Investors Service (equivalent to S&P/Fitch BBB+), it is one of the lowest initial ratings for a subprime auto-loan securitizations since 2012, according to data from Finsight.

The only lower subprime issue rating by Moody's was a 13 Baa2 to RAC King's $219.38 million American Car Center 2019-1 transaction in a report issued on Feb. 13.

While Kroll Bond Rating Agency went a notch higher to A- for the $175.5 million in U.S. Auto's Class A notes in the deal, that level too is among the lowest of any subprime auto deals it has rated in recent years. Kroll also assigned an A- to the inaugural rated issuance of Ganas Holdings, dubbed Tricolor Auto Securitization Trust 2018-2.

U.S. Auto is offering a relatively low level of investor protections, despite the weak credit characteristics of the collateral. Borrowers in the pool have a weighted average FICO (507) well below other deep-subprime issuers. Yet credit enhancement on the notes to be offered is just 47.8%. That's less than other “buy-here/pay-here” lenders like JD Buyer (54.5%) and DriveTime Auto Group (61.2%) that attained higher ratings – AA and AAA, respectively – in their most recent securitizations.

Ganas (48%) and RAC King (42.5%) also offered relatively little credit enhancement on the senior tranches of their deals.

U.S. Auto has issued two private, unrated ABS transactions since 2017, according to Kroll.

All of the loans backing the latest deal were underwritten by U.S. Auto Finance , the captive finance unit of a network of company-owned U.S. Auto Sales dealerships across four states in the Southeast U.S. All financing at the 25 U.S. Auto Sales locations is exclusively issued by U.S. Auto Finance.

The loan balances in the pool total $323 million, or $14,848 each with average remaining terms of 54 months (after 11 months seasoning).

U.S. Auto loans are typical high-interest, “second-look” loans for customers unable to qualify for traditional lending sources at independent or manufacturer-franchised dealers. Buyers face steep down payments that average $2,000 in cash-and/or trade-ins, with average interest rates of 18.86% that still leave them with an average loan-to-value ratio of 163.95% when driving off the lot, according to presale reports.

Average vehicle mileage and age data were not included in the presale reports.

In addition, vehicles financed by the lender are all equipped with GPS tracking and starter-interrupt devices, which aid in collections by disabling and locating vehicles for repossession on delinquent accounts. Nearly 82% of borrowers make biweekly payments.

Both reports noted that U.S. Auto limits payment deferments on the loans to a maximum of two months for any 12-month period, and four for the life of a loan. Only 1.04% of accounts in the pool had been granted deferments in the two months prior to the Feb. 28 collateral cutoff date.

The topic has drawn more scrutiny from analysts and investors worried that subprime lenders are using loan deferments to mask losses and delinquencies of troubled loans in securitizations. S&P Global Ratings reported in February that more issuers were granting extensions at increasing rates, which could impact securitization performance. A 22% deferment rate from defunct lender Honor Finance led to rare downgrades of subordinate securities last year in that firm’s lone ABS transaction from 2016.

In addition to the Class A notes, the trust will also offer investors $45 million in Class B notes (rated Baa2/BBB-) and two classes of junk-rated bonds: $16.5 million in Class C notes (Ba3/BB-) and $32.5 million in Class D notes (B3/B-).

Moody’s expects losses over the life of the deal to reach 30%, which is one of the highest rates for any non-prime issuer rated by the agency. Kroll expects losses to be in the range of 29.65%-31.65%, in its base-case scenario.

The collateral loans were gathered from U.S. Auto’s $490 million managed portfolio of 34,000 loans, as of Dec. 31. The lender originated approximately $326.2 million in 2018 across Georgia, South Carolina, Florida and North Carolina. Georgia-based buyers the majority of car sales and loan originations.

The parent firm of the lender and the sales operations is majority-owned by private equity shop Milestone Partners, which acquired a 77.8% share of the company from U.S. Auto’s founders in June 2015. The lender last year hired a former DriveTime and Go Financial executive, Colin Bachinsky, as its chief executive officer.

In additional to PE capital support, the company has a diverse funding source with a $250 million asset-backed revolving line of credit, a $75 million term facility with MidCap Financial Services, and a $40 million line with NextGear Capital.

U.S. Auto Finance is the third first-time issuer of subprime loans since last fall. In addition to Ganas’ transaction, Carvana – an online spin-off from DriveTime – issued its first subprime loan securitization in March with a triple-A senior note rating from Kroll and Moody’s.

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