MotoNovo skips multicurrency, revolver features in latest UK auto ABS

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MotoNovo Finance’s forthcoming vehicle loan securitization eschews two features included in previous deals sponsored by the U.K. auto lender: Tranches in multiple currencies and a revolving pool of collateral.

Turbo Finance 8 is a static portfolio of £375.5 million (US$484.13 million) in auto, motorcycle and commercial vehicle loans and leases with a principal balance across 52,917 contracts originated by MotoNovo, an affiliate of the London office of South African bank FirstRand.

Unlike prior transactions, there is no revolving period during which additional contracts can be added.

Six classes of senior and subordinate notes will be issued in the transaction, including an unrated residual tranche through which the issuer will use proceeds to fund a 0.7% reserve fund, according to presale reports from Moody’s Investors Service and S&P Global Ratings. All will be denominated in pounds.

The sizes of the notes have yet to be determined. The Class A notes will have 15.5% available credit enhancement, with a coupon pegged to one-month British pound-sterling Libor.

The receivables are from both hire purchase (HP) loan contracts and personal contract purchase (PCP) agreements that are similar to U.S. lease contracts, featuring end-of-term balloon payments.

S&P expects defaults over the life of the deal to be 5.25%, up from from 4.75% from the prior Turbo platform loan/lease platform issuance it rated in November 2016. Moody’s expects defaults to be even higher, at 6%,

FirstRand Bank and HSBC are co-arranging the transaction.

The UK auto loan contracts carry risks due to early termination rights for buyers who pay off at least 50% of the balance and return vehicles to the lender. S&P expects a 1% voluntary termination rate compared to 1.25% for Turbo 7 – with the reduction coming from the exclusion of delinquent borrowers from the contracts qualifying for voluntary termination.

PCP contracts, which include balloon payments, have an expected turn-in rate of 90% at contract maturity, according to S&P’s base-case modeling, which derived a loss in resale value (or residual value) of 21.6%.

Most of the autos in the pool are used. Diesel exposure pours more risk into the deal, making up 58.6% of the pool, since “the age distribution of the vehicles suggests that a material percentage could be non-euro 6,” or non-compliant with the latest European emission regulations for diesel engines. Several European cities and countries have place restrictions (or even bans) on operating older diesel cars in urban centers.

The collateral includes autos, motorcycles, scooters and light commercial vehicles.

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