Navistar Financial Services is tapping the securitization market to finance lending to dealers with weaker credit, by its own reckoning, than its previous transaction.
Nevertheless, the captive finance arm of Navistar Financial is offering fewer investor protections on the $327.87 million transaction, than it did on a $250 million transaction completed last year.
Navistar uses a proprietary risk rating model, and Class A rated dealers, both by number of dealers and the percentage of aggregate principal balance of the trust portfolio, have decreased to its lowest level since 2012, according to Moody’s Investors Service. In its presale report, the rating agency said that the decline has been driven by the competition in the wholesale market.
However, dealers have a strong incentive to repay their floorplan loan, which is a critical financing source required to run their business, the presale report states. In addition, despite the deterioration in the credit quality of dealers, Navistar has shown the ability to manage extremely low net losses on dealer defaults.
Among other risks, the deal is backed by a relatively low number of dealers, 213, compared to other more granular auto floorplan trusts that Moody’s rates. However, concentration limits are in place to limit exposure to any one dealer.
Navistar experienced a significant decline in its market share in the heavy truck segment since 2011. However, the company has begun to demonstrate improved competitiveness in the Class 8 heavy truck segment since 2017.
Navistar’s truck dealers typically have higher absorption rates (revenue from ancillary services such servicing and parts as a percentage of fixed costs) than auto floorplan dealers. Dealers with high absorption rates experience less financial strain in the event of declining truck sales.
As with most dealer floorplan transactions, the risk of dealer bankruptcies is mitigated because Navistar or other manufacturers, commits to repurchase unsold new inventory in the event of a dealer termination.
“Navistar’s servicing experience, together with its size, scale and market position in the U.S., support a low degree of operational risk,” Moody’s noted in the presale report. “Net losses of the wholesale portfolio have been near zero low since 2012.”
Navistar Financial Dealer Note Master Owner Trust II, Series 2018-1 is backed by an $827 million pool of lines of credit to 213 dealers. It represents approximately 88% of the sponsor’s managed portfolio.
The transaction is scheduled to revolve for two years and noteholders will not receive any principal during that time. While all performance indicators are currently strong, the notes may amortize if six-month dealer notes losses are equal to or greater than 1.50%.
Four tranches of rates will be issued: $253.61 million of Class A notes are provisionally rated Aaa by Moody’s; there are also $14.43 million of Aa3 rated Class B notes, $15.57 million of A2 rated Class C notes, and $16.39 million of Baa3 rated Class C notes. All of the notes have an expected maturity of September 2020 and a legal final maturity of September 2023.
Bank of America Merrill Lynch is the lead underwriter.
Initial hard credit enhancement has decreased for every class of notes compared with the four prior transactions; for the Class A notes, it has fallen to 24.15% from 25%.
