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Mounting losses mean for second downgrade for Honor Finance

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Defunct auto lender Honor Finance has experienced another notes downgrade from its 2016 subprime loan securitization.

Kroll Bond Rating Agency last week downgraded the two subordinate note tranches of Honor Automobile Trust Securitization 2016-1 as losses continue to mount across both classes. The Class B notes were revised to B+ from BB+ and the Class C notes to C from CC.

The Class C notes are within a notch of a default designation.

The notes' original ratings were BBB (Class B) and BB- (Class C).

According to Kroll’s new surveillance report, the two note classes were rated downward due to a 1.72% increase in cumulative net losses over three collection periods since January, with total losses now at 31.15%.

The original $100 million deal is now expected to incur total losses of between $7 million and $8 million, or about half of the remaining $16.1 million outstanding across the two classes. The original principal was $14.86 million for the Class B notes and $8.86 million for Class C notes.

The original $76.48 million Class A notes have been paid off without any loss to principal.

High delinquency and default rates plus negative excess spread fully drained the trust’s reserve account by last November, and the overcollateralization on the original $100 million eroded to zero in October 2018. (The deal is now undercollateralized at -$3.26 million, according to Kroll.)

The Class B and C notes have each been previously downgraded by both Kroll and S&P Global Ratings. S&P downgraded the Class C notes in November and the Class B notes in February.

Honor Finance is no longer originating loans, and after management turnover last summer handed off the servicing of its existing portfolio of accounts to subprime lender Westlake Financial Services.

Analysts have reported that Honor Finance had run into trouble after granting extended payment breaks to a high percentage (22%) to its account holders, reducing the number of potential delinquent accounts.

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Subprime lending Auto lending
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