Mercedes, World Omni add up to $2.5B to prime auto ABS pipeline
Mercedes-Benz and World Omni Financial Corp. are marketing between $1.8 billion and $2.5 billion of prime auto asset-backeds, adding to the already busy first-quarter issuance calendar.
The deals, when closed, will boost overall volume to between $5.87 billion and $6.4 billion in the first two weeks of January. That's about half as much as was issued in the entire first quarters of 2017 and 2018. They follow on the heels of early birds GM Financial, Ford Motor Credit and CarMax Superstores, which have priced a combined $4.03 billion.
Mercedes-Benz Auto Least Trust (MBALT) 2019-A will issue between between $1.06 billion and $1.32 billion in bonds backed by receivables from captive-finance lease contracts originated for Mercedes-Benz dealerships. It comes just two months after MBFS (a subsidiary of Daimler AG) sold $1.03 billion of auto-lease ABS in November. Like the two MBALT deals in 2018, the new offering consists of three term tranches rated triple-A by S&P Global Ratings and Moody’s Investors Service and a money market tranche rated A-1/P-1.
The A-1 money market tranche will be sized at either $213 million or $265 million, depending on demand. The Class A-2 and A-3 tranches will total $386 million or $479 million each; the A-2 notes will have a February 2021 maturity while the A-3 notes will be due November 2021. A $75.51 million or $94.11 million Class A-4 note tranche has a final maturity of October 2024.
The transaction will have an overcollateralization of 14.75% of the final transaction size, either $183.5 million set aside for the smaller pool of $1.24 billion in loans, or $227.89 million within the $1.55 billion pool. Both pools will be further supported by a 0.25% initial reserve account.
The credit quality of the collateral is on par with MBFS' 11 prior publicly rated lease transactions, according to Moody’s. The weighted average FICO of 788 “is one of the highest” of any recently rated pools in the industry, and the residual value of the vehicles is set “more conservatively” than prior MBALT transactions (60%, rather than 64% in MBALT 2018-D, for example, of the initial securitization value of the contracts). Residual values are closely watched metrics with auto lease securitizations, in assessing future resale values on returned vehicles.
Moody’s was cautious, however, in its assumption what the Mercedes-Benz and Audi vehicles will be worth when they come off lease. The agency assigned a worst-case assumption of 16.5% (S&P’s is 20%), due to the “likelihood of a reversal in used-car prices” that were surprisingly strong for many auto asset-backed issuers in 2018. Values face headwinds with a large volume of lease vehicles industry-wide reaching the end of their terms, Moody's noted.
Moody’s also warned of the already “heightened value risk” with luxury vehicle resale value; MBFS’ managed portfolio has had growing losses connected to declining resale values in recent years.
The asset pool will consist of either 30,749 loans or 38,227 loans, but both will have similar characteristics in weighted average original terms (38 months), remaining terms (24 months) and the split between passenger vehicles (58%) vs. sport utility/crossover models (42%).
Both Moody’s and S&P have expected net credit losses of 0.5%, unchanged from recent MBALT transactions rated by the agency.
SMBC Nikko Securities America is the underwriter.
Like MBFS’ deal, World Omni Auto Receivables Trust (WOART) 2019-A may be upsized depending on demand, either $827 million or $1.04 billion. The credit quality of the transaction is slightly better than that of the sponsor's prior deal. It has the a higher weighted average FICO, greater seasoning as well as a fewer loans with longer terms.
S&P and Fitch report that the weighted average FICO of 754 is among the highest for a World Omni pool. WOART transactions have had a FICO range of 687-724 since 2000. Since 2017, World Omni has only securitized loans underwritten to borrowers with minimum FICO scores of 650, and last year began excluding non-Toyota brand vehicles from WOART pools. (Those nonprime loans have instead been shifted to a new subprime ABS platform sponsored by World Omni.)
The accounts in the regional Toyota USA captive-finance firm’s pool (which will number either 37,603 or 47,003) have average loan balances of approximately $23,600 and weighted average original terms of 69 months. Loans with terms longer than 60 months make up 76.8% of the pool, according to Fitch, down from 78.5% in WOART 2018-D. The 31.3% share of loans with original terms of 73-75 months is also reduced from 35.1% in WOART 2018-D, but higher than two prior World Omni loan securitizations in 2018.
Fitch said the decline in loan tenors was due in part to an increased in manufacturer-supported financial incentives to higher-FICO borrowers. (With higher subvention rates that lowered the average APR to 3.97% from 4.3% in 2018-D, borrowers took out shorter-term loans.)
The slightly increased seasoning of five months (compared with two) was aided by the inclusion of previously securitized loans from older securitizations that were paid down. The percentage of “clean-up collateral” in the pool totals 6.7% - representing the first deal with called collateral since WOART 2018-B last April.
Over 94% of the loans in either pool finance the purchase of new vehicles.
The smaller pool will be backed by $887.1 million in receivables, and benefit from 5% credit enhancement. The upsized pool would pull in $1.11 billion in loans from World Omni’s $10.5 billion managed portfolio of retail installment sales contracts, as of Sept. 30, 2018. (The portfolio had grown 7.6% from the year prior).
Notes on offer include a $169 million or $211 million money market tranche with provisional A-1+ ratings from S&P and F1+ from Fitch Ratings. A Class A-2 tranche due April 2022 will total $278 million or $348 million, and be split between fixed- and floating-rate tranches. (Only one of World Omni’s four auto-loan ABS transactions in 2018 featured a floating-rate option for investors.) The Class A-3 notes with a May 2024 final maturity will be issued at $277 million or $347 million, while a senior-note Class A-4 tranche due June 2025 will be either $64.8 million or $82.95 million.
All of the senior term notes have triple-A ratings from S&P and Fitch.
The securitization trust will also issue a $24.88 million or $31.15 million of AA rated Class B tranche (also due June 2025) and a rare (for World Omni) A rated Class C tranche sized at $12.43 million or $15.57 million and due October 2025. The sponsor's previous deal also featured a A rated tranche, but before that there had not been one on the WOART shelf since April 2011.
S&P’s expected net loss range is 1.2%-1.4%, unchanged from WOART 2018-D. In its presale report, Fitch's 1.45% cumulative net loss expectations is down slightly from 1.55% in the two previous WOART deals; the rating agency cited the better credit quailty of the latest deal, in particular the FICO scores.
World Omni supports dealers in five Southeastern U.S. states: Florida (where 48.5% of the contracts were originated), Georgia, North Carolina, Alabama and South Carolina.
The transaction is the ninth under World Omni’s Regulation AB II compliant shelf, according to S&P.