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More incentives driving big-ticket purchases in Ford's next auto ABS

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More Ford vehicle buyers last year received manufacturer incentives to take the keys of new trucks, cars or SUVs at discounted rates.

But those enticements, through loans with below-market rates from Ford Motor Credit (FMC), appear to have mostly steered borrowers into costlier vehicles and higher leverage.

In FMC's first static prime auto-loan securitization of 2019, the lender is pooling $1.32 billion in loans (or $1.63 billion in a possible upsizing) with a large majority share of subvened loan balances, according to ratings agency presale reports. Approximately 68.4% of the collateral balance in Ford Credit Auto Owner Trust 2019-A are from contracts that benefit from rates subsidized by Ford Motor Co. to attract well-qualified, high-FICO-score borrowers into financing vehicles through its captive-finance arm.

It is the highest concentration of subvened loans included in an FMC prime-loan securitization since at least 2015, and an increase from 62.2% from the previous deal on the platform, the $1 billion FCAOT 2018-B issued in October. (Approximately 54% of the loan balances last year in FMC’s $25.2 billion managed portfolio came from subvened contracts).

Instead of parlaying the rates into purchase savings, borrowers in the FCAOT 2019-A pool boosted their average account balance to an all-time high of $29,400 for the platform, and reached a seven-year high average loan-to-value ratio of 98.7%, according to Fitch Ratings and Moody’s Investors Service.

Fitch attributes the rise in LTV and account balances to “many factors, including customer add-ons at the time of purchase and special financing programs that allow for little to no down payment.”

The weighted average balance figure is an increase from the $28,374 figure in the prior platform issuance (FCAOT 2018-B), and the highest ever for the shelf sponsored by FMC, according to the reports.

The 98.7% LTV is the highest since 2012 for the FCAOT shelf, according to Fitch's presale report. Loans financed at the 100% full cost of the vehicle are up to 51% of the pool, compared to 48.6% from Ford’s most recent static auto-loan ABS issuance in 2018. Loans in which borrowers are deeply upside down at 130% LTV have grown to 6.7% of the 2019-A pool compared to 6.1% in FCAOT in 2018-B.

The higher loan balances for the borrowers, with a weighted average FICO of 737, also reflect escalating new-car prices as well as buyer preferences for “bigger-ticket trucks/SUVS/CUVS,” according to Fitch. Trucks and SUVs make up 87% of the pool’s loan collateral balance – another all-time high for the platform, but unsurprising considering Ford’s pullback in passenger sedan production. The popular F-150 pickup truck makes up 29.3% of the collateral, up from the previous record concentration of 26.5% in the prior FCAOT transaction.

FMC’s trust will market six classes of senior and subordinate notes from either the $1.32 billion pool or the $1.63 billion pool. (The notes are secured by $1.44 billion across 49,008 loans, or $1.79 billion in balances among 60,790 loans in the upsized pool).

The senior notes include three triple-A rated classes: a Class A-2 tranche split between fixed and floating rate notes due February 2022, totaling either $468.7 million or $581.2 million if upsized; a Class A-3 tranche due September 2023 of $396.3 million or an upsized $491.4 million in notes; and Class A-4 notes with $128.9 million or $159.8 million to be issued.

Ford plans a money-market tranche of $256.3 million or a $317.8 million, along with a Class B notes tranche of $39.5 million or $48.9 million and a Class C tranche sized at $26.3 million or $32.6 million.

Moody’s expecsts losses over the life of the deal to be 1%, of the original principal balance, similar to FCAOT 2018-B, while Fitch iis forecasting 1.6%, unchanged from the same FCAOT deal it also rated last year.

While the deal is the first FCAOT deal Ford has sponsored this year, it is the third securitization for FMC. In January FMC priced a $1.3 billion deal on its revolving credit-loan securitization shelf, and last month issued an auto-lease securitization.

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