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Moody's sees higher losses on Exeter's next subprime auto ABS

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The subprime auto loans that Exeter Finance securitized last year are performing worse than expected, and this has led Moody’s Investors Service to increase its forecast for cumulative net losses on the lender’s upcoming transaction.

Moody’s expects losses for loans being bundled into collateral for Exeter Automobile Receivables Trust 2019-2 to reach 22% of the $572.92 original principal balance over the life of the transaction. That’s 1.0 percentage point higher than its loss expectations for a transaction that Exeter completed just three months ago, in late January.

In its presale report, Moody’s cited the fact that the last two securitizations that Exeter completed in 2018 are performing worse than prior transactions. In addition, some of the credit characteristics of the collateral for the new deal are worse than those of one completed in January. The weighted average FICO score of 556 is the lowest of any transactions on the sponsor’s platform. And the weighted average custom score of 230 is 3 points lower than that of the January deal - though it is still at the higher end of deal’s completed since 2016.

Most other credit characteristics of the latest pool, including the loan-to-value ratio and weighted average original term, are similar to those of prior pools, however.

And the losses on the 2018 vintage loans are still better than those on Exeter’s 2015 vintages, per Moody’s, and in line with 2016 vintages.

Moreover, the expected loss for the 2019-2 transaction is in the middle of the range of expected losses among the subprime auto ABS issuers that Moody’s rates.

S&P Global Ratings expects losses on Exeter's latest transaction to be in the same range of 20.5% to 21.5% as the sponsor's four prior transactions. In its presale report, the rating agency said that, while there have been some collateral characteristic changes that it views as weaker from a credit quality perspective, these are offset, by the pool's slightly longer seasoning, slightly lower weighted average loan-to-value ratio, and stable internal credit score, which Exeter views as more predictive than FICO.

Despite Moody's higher loss expectations, Exeter was able to secure the same rating for the notes being offered on the latest transaction with slightly less “hard” credit enhancement. The class A notes to be issued, which are provisionally rated Aaa and mature in July 2022, benefit from 4% overcollateralization (increasing to a target of 15% of the outstanding pool balance as principal on the notes is repaid), a non-declining reserve fund of 2% and 51.75% in subordinated notes, for a total of 57.75%.

By comparison, the senior tranche of a deal completed earlier this year had 58.25% hard credit enhancement.

However, the lower hard credit enhancement is somewhat offset by an increase in excess spread, which is the difference between the interest earned on the collateral and the interest paid on the notes. This has widened to 15.08% for the latest deal from 14.31% for the prior deal.

Four other tranches of rated notes will be issued: the Aa1 rated class B notes have 44.25% credit enhancement and mature in May 2023; the Aa3 rated class C notes have 29.75% and mature in March 2024; and the Baa2 rated class D notes have 13.75% credit enhancement and mature in March 2025.

S&P also assigned a provisional AAA to the senior tranche of notes to be issued.

Deutsche Bank is the lead underwriter.

As of Feb. 28, 2019, Exeter serviced a portfolio of automobile loan contracts with an aggregate outstanding balance of about $4.5 billion.

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Auto ABS Subprime lending