More used cars in Honda's next $1.2B to prime auto loan ABS

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Honda’s fourth auto-loan securitization of the year features two distinct changes from earlier deals this year: borrowers with higher scores, and more used cars.

According to presale reports, borrowers backing Honda Auto Receivables 2018-4 has the highest weighted average FICO score among recent transactions, as well a higher percentage of borrowers qualifying for its top internal credit scoring tier.

In addition, the share of used cars has breached 10% for the second time, as more prime borrowers turned off by rising new car prices are opting instead for recent-vintage pre-owned cars and SUVs.

The transaction is backed by $1.19 billion in loans financed by California-based American Honda Finance, the captive finance arm of American Honda Motor Co. for U.S. Honda and Acura dealers. AHF is a longtime issuer in the auto ABS market, with 72 prior deals.

Three tranches of senior term-notes with preliminary triple-A ratings from Moody’s Investors Service and S&P Global Ratings will be issued in the transaction. The Class A-2 notes with a final 2021 maturity are sized at $385 million; the A-3 notes due 2023 total $405 million; and the A-4 notes due 2025 are set at $104.8 million.

There is also a $263.1 million money-market tranche, which has a larger-than-average share of the pool at 22.95% (up from 15.49% in HAROT 2018-3) and is rated A-1+ by S&P and P-1 by Moody’s.

All four senior tranches are supported by 2.75% credit enhancement, unchanged from recent HAROT deals.

The 10.64% share of used cars is the third consecutive HAROT transaction with an increased share of pre-owned passenger vehicles, crossovers and utilities – compared with 10.10% in HAROT 2018-3, 9.45% in HAROT 2018-2 and 7.96% for the first asset-backed offering sponsored by AHF in February.

Although used-car concentrations are up, so are average loan balances: $19,224, compared with $17,978 in the prior deal, as decreased seasoning (11.95 months from 12.67 months) and longer original terms (61.15 months from 60.95 months) increased weighted average principal levels.

The weighted average FICO of 775 is an increase from 769, as is the 82.12% share of borrowers from Honda’s internal “A” credit tier, the highest among the data from seven recent transactions Moody’s published in the current presale.

Expected net losses remain low from both agencies: S&P has a range of 0.5%-0.6%, while Moody’s maintains a 0.5% projected-loss estimate that has been unchanged in HAROT deals it has rated since 2012.

JPMorgan is the lead underwriter.

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