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OEM incentives, lengthy seasoning enhance Scotiabank auto ABS

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The Bank of Nova Scotia (d/b/a ScotiaBank) is planning a second securitization of its prime Canadian retail auto-loan originations this year in a $500 million U.S. currency transaction, according to presale reports.

Securitized Term Auto Receivables Trust (START) 2017-2 includes senior bonds that carry preliminary triple-A ratings from Moody’s Investors Service and S&P Global Ratings.

The preliminary tranche sizes are $110 million for the Class A-1 money market notes; $192 million in the Class A-2a and A-2b tranches split between fixed- and floating-rate notes that mature in January 2020; a class A-3 series due 2021 sized at $140 million and a five-year, Class A-4 tranche totaling $58 million.

The deal also includes two tranches of unrated subordinate bonds that will be retained in Canadian currency totaling CAN$42.2 million, serving as subordinate credit enhancement along with a 0.54% reserve fund and a yield supplement account for a total senior-note credit enhancement of 7.04%.

The total receivables in the pool total CAN$697.8 million (US$564.17 million) across 34,237 contracts with an average balance of CAN$20,387.

The deal, Scotiabank's third overall, has an unusually low weighted APR of 2.42% for a transaction featuring new and used cars. The ratings agencies attribute that to the high percentage (68%) of loans that are incentivized (or subvented) by manufacturers’ low-rate incentive programs which also impacted the deal’s yield supplement increase to 6.98% (CAN$48.7 million) over the Series 2017-1 transaction’s level of 5.94%.

The pool has a weighted average FICO of 780 and increased percentage of loans with original terms of 60-72 months (46.9%) compared to the 2017-1 transaction of 41.2%.

In addition, the receivables in SSTRT 2017-2 have been seasoned an average of 19 months, up from 17 months in the prior transaction – another credit strength cited by both agencies.

Nonetheless, according to Moody’s, Scotiabank still originated a much lower percentage of long-term loans in the latest pool compared to other peer Canadian auto-loan securitizations, with a weighted average original term of 64 months per loan.

The percentage of loans under 60 months in START 2017-2 is 53.11%; for the recent Ford Auto Trust Securitization Trust’s 2015-R4 transaction, it’s 39.65%.

Moody’s expects a cumulative net loss of 0.75% of the collateral pool; S&P has assigned a lifetime CNL range of 1.3-1.5%. Moody’s stated in its report it assigned the lower CNL due to the pool’s credit characteristics it considers better than Bank of Nova Scotia’s managed pool.

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Auto ABS Securitization Scotiabank Moody's S&P