OneMain Holdings has gained a two-notch ratings promotion for its second overall subprime securitization of cash-out refi auto loans.
Moody’s Investors Service on Tuesday issued a provisional ‘Aa3’ senior note rating to the OneMain Direct Auto Receivables Trust 2017-1, a $299.95 million five-note series backed by secured, direct vehicle loans originated at the branches of its subsidiary, Springleaf Finance Corp. (SFC, d/b/a OneMain Financial).
Last July, OneMain offered up a $900 million bond package in its 2016-1 offering (upsized from its originally proposed $430 million) that received an ‘A2’ from Moody’s for the Class A tranche.
Last summer’s transaction was also rated at a medium investment-grade level by Standard & Poor’s (‘A+’ long-term). The 2016 deal received upper-grade ratings from both Kroll Bond Rating Agency (‘AA+’) and DBRS (‘AA’).
One major factor in climbing up Moody's ratings ladder is the boost in hard initial credit enhancement of 31% for the senior notes - compared to 21% in last year’s deal.
But Moody’s also reports that OneMain’s direct auto loan managed portfolio, now sized at $981 million, has continued to build a good track record of outperforming the more standard purchase loans in the subprime area, as well as OneMain's line of hard-secured personal loans that are also originated in more than 800 OneMain/Springleaf branches.
Moody's reports that OneMain applies a more “rigorous level” of underwriting, in which the loans are built based on a borrower’s disposable net income. The loans are typically shorter (averaging 54 months) compared to straight-purchase subprime auto loans, and the company also promotes accelerated payments that allow customers to take out renewal loans that let them re-borrow against their car’s equity for cash needs.
“As long as SFC [OneMain] ... continues its renewal practice, the transaction will benefit from a lower rate of default and a shorter period of exposure to negative credit events,” according to Moody’s report.
Cash-out refis comprise nearly 80% of the company’s direct auto loans (with an average APR of 18%) that refinance vehicles with existing liens. The company also offers a small portion of purchase loans and refi loans that do not include cash-out options for customers. OneMain also has a sliver of customers who take refi loans on cars they own “free and clear” from lienholders.
Moody’s noted some risks continue for OneMain's niche loan offering. Nearly all the vehicles that serve as collateral for the loans are used, are five years old and carry underwater loan-to-value numbers (the weighted average LTV of the pool is 116%) that reduce recoveries for repossessed cars.
Moody’s also warns a risk in the borrowing base itself that attracts illiquid consumers (an average FICO of 610) that have to turn to high-rate renewable loans to garner cash. (The loans have an an average size of $13,656).
Moody’s is maintaining a cumulative net loss estimate of 7% for the pool, similar to the 2016-1 deal.
The pool has a revolving feature that allows additional loans to be added to the collateral.
In deference to U.S. structured finance risk-retention standards, OneMain will hold investments in 5% of each the class of notes to be issued (a “vertical” retention strategy).
