AmeriCredit Financial Services has started securitizing what may be some of its riskiest subprime loans – those with terms as long as 6.25 years.
The company, a unit of General Motors Financial, is the market with its first offering this year of bonds backed by subprime loans, the $1.227 billion AMCAR Notes Series 2016-1.
For the first time, the collateral includes loans with original terms of between 73 and 75 months, according to Standard & Poor’s, which published a presale report on the deal. AmeriCredit began originating collateral with these longer terms earlier in 2015, but this is the first time that it has securitized these originations, according to the rating agency.
Auto loans with longer terms tend to be riskier because they amortize more slowly, leaving the borrower “underwater” on the loan for longer periods. If borrowers default owing more than the value of the car, there could be losses for bondholders.
Another factor contributing to the risk of the deal is a rise in the average current loan balance, to $20,638 from $19,385.
In other ways, however, the collateral for AMCAR 2016-1 is similar the sponsor’s previous deal, or even less risky, according to S&P. Most notably, the percentage of new cars ultimately backing the notes increased to 56.08% from 51.16%. The weighted average FICO score of the borrowers also increased, to 575 from 567, and the weighted average credit score as calculated internally by AmeriCredit also increased, to 246 from 244.
Finally, the target level of overcollateralization – the amount by which trust assets exceed the principal of outstanding notes, a form of credit enhancement - increased to 14.75% from 14.50%.
S&P has assigned a preliminary ‘A-1+’ to $216 million of money market notes to be issued by the trust and a preliminary ‘AAA’ to two senior tranches with longer terms: $400.43 million of notes with a legal final maturity of June 2019 and $257.6 million of notes with a legal final maturity of October 2020.
All three tranches of senior notes benefit from credit enhancement of 34.7%, including initial overcollateralization of 5.5%, a reserve account equal to 2% of the trust’s assets, and subordination of other tranches of notes totaling 27.2%.
Joint bookrunners for the deal are BNP PARIBAS, Deutsche Bank Securities, J.P. Morgan, and Morgan Stanley. Co-managers for the class A notes are Barclays, Citigroup, Credit Suisse, and Wells Fargo Securities.
AmeriCredit is not the first subprime lender to securitize longer-term loans; Santander also securitizes loans with terms as long as 75 months.
Since 2002, the term of the average car loan – including both prime and subprime - has slowly crept past five years, and is now inching past six-and-a-half years, according to Edmunds.com. In 2014, 62% of the auto loans were for terms over 60 months. And nearly 20% of the loans were for 73- to 84-month terms – through its rare to see a subprime loan with terms of over 75 months, at least in a securitization.
Since AmeriCredit did not begin originating these loans until mid-2015, there is performance data available, according to S&P. In its presale report, the rating agency noted that these loans are only one to three months longer than AmeriCredit's 72-month loans. “In addition, the 73-75 month loans in the series 2016-1 pool already have approximately five months of seasoning as well as the highest weighted average FICO score and the lowest weighted average LTV ratio when compared with AmeriCredit's overall securitization pools,” the report states. “Therefore, we expect the performance of the 73-75 month term loans to be at least in line with that of the 1-72-month term loans.”