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OneMain's COVID-19 response limits risks in consumer-loan ABS offering

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OneMain Financial’s tightened underwriting and quick-turn response measures against COVID-19-related stresses have helped maintain the confidence of ratings agencies as the lender embarks on its second securitization this year of consumer personal loans.

The $500 million OneMain Financial Issuance Trust 2020-2 has triple-A senior-note ratings from three agencies, even as the economic upheaval of the coronavirus pandemic has prompted particular concerns about the risks in the lender’s key market of unsecured, subprime consumer loans.

“In response to the COVID-19 pandemic, OneMain has tightened underwriting and enhanced servicing procedures for its portfolio,” noted S&P Global Ratings, in a presale report published Tuesday. In addition, OneMain’s underwriting has shaved down exposure to unsecured loan obligors with lower-credit scores within its managed portfolio, by enacting stress-testing exercises that utilize 2006-2008 vintage consumer-loan performance, noted S&P.

Beginning in March, the Evansville, Ind.-based company’s offering of one-month reduced or deferred payment options to borrowers negatively impacted by the pandemic, as well as its transition to work-at-home arrangements for workers from its largely in-branch operational structure, also has provided dividends with minimal exposure to coronavirus impact.

“While deferment levels rose through March and peaked in April, they decreased in May and June as deferment levels began to normalize,” stated S&P’s report.

“This pandemic provides a particularly difficult situation for creditors to collect on a timely basis from their obligors,” according to DBRS Morningstar’s presale report. “OneMain’s business model highlights this issue since they are a relationship lender with 1,500 branch based locations in addition to four central servicing centers that collect from their obligors.”

The company is also benefiting from a longer-term strategy to encourage more online payments from borrowers, rather than in-branch payment arrangements. Six years ago, more than 30% of OneMain’s borrowers paid at in-branch locations (including cash, which is no longer permitted). Now that level is just 4%.

DBRS Morningstar, S&P and Kroll Bond Rating Agency each assigned preliminary AAA senior note ratings to the OMART 2020-2 transaction, the 16th overall ABS deal for the largest player in the non-prime/subprime consumer-loan sector.

OneMain loans are unique in that the company provides borrowers renewals of existing term loans, which are deemed as prepayments in ABS pools. Renewal loans, while effectively are refinancings, can increase or extend existing loans, and are offered to consumers with good payment histories. Renewal loans are permitted as additional assets that OneMain can add at a later date to the OMART 2020-2 transaction, which has a five-year revolving period.

The OMART 2020-2 bond offering includes a $370.5 million Class A notes tranche with 30.5% credit enhancement, which is slightly lower than the 31.91% level from OneMain’s prior 2020 transaction (totaling $750 million) that priced in April.

The initial collateral pool consists of 69,675 loans with an average balance of $7,554 with a weighted-average coupon of 27.82% (helping to provide a 21.14% excess spread based on finance yield of 27.82%, less an expected 3.16% blended note rate and a 3.5% servicing fee).

Unsecured loans make up 54.9% of the pool.

Due to uncertainty of COVID-19 impact on borrowers, DBRS Morningstar has an expected charge-off rate based on the worse-case pool concentrations of 11.5%. S&P’s worse-case base loss for the transaction is 12.35%.

Although charge offs on legacy OneMain loans (as well as those originated by predecessor firm Springleaf) are elevated from year-ago levels, the lender saw declines in both hard-secured (under 6%) and unsecured loans (under 10%) in May in its managed portfolio, according to the presale reports.

Parent firm OneMain Holdings (NYSE: OMF) is minority-owned by investor group led by funds managed by affiliates of Apollo Global Management and Varde Partners.

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