Prestige, Flagship add $558M to subprime auto pipeline

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Two additional subprime auto securitizations were launched last week by Prestige Financial Services and Flagship Acceptance Corp., pushing the sector’s third-quarter asset-backed volume beyond $4 billion.

Prestige’s $335.2 million offering backed by originations from its indirect lending program is the first of the year for the Utah-based lender, which specialized in funding car buyers emerging from bankruptcy.

Flagship is selling $223 million in bonds for its mix of used- and new-car loans it underwrites through more than 3,000 dealers nationwide, as well as direct and online through its CarFinance subsidiary.

The senior notes of both deals carry triple-A ratings, and each benefit from slightly lower credit enhancement than the respective trust’s previous securitization.

Prestige’s transaction is its first of the year, while Flagship returns with a third ABS for 2017.

Prestige Auto Receivables Trust 2017-1

Prestige Financial Services’ first securitization since last October through lead underwriter JPMorgan is backed by a pool of loan receivables with an outstanding balance of $286.8 million.

In addition to a $45.7 million money-market tranche, the PART 2017-1 notes offering includes a three-year Class A-2 series totaling $117 million and a four-year Class-A tranche of $50.2 million that carry preliminary triple-A ratings from both DBRS and S&P Global Ratings.

The senior notes benefit from 41.6% credit enhancement, which is a slightly down from the 42.5% level from the Utah-based lender’s last transaction (PART 2016-2). The enhancement comes from a 34.1% subordination of the junior notes, initial overcollateralization of 6.5% and a 1% reserve account.

The OC levels will build to a target of 12.9% of the principal is paid down.

While CE is declining, Prestige is carrying much higher levels of enhancement then other recent vintage deals. In 2014, for example the company was required to provide just 22.41% for an AAA rating.

But cumulative net losses have been exceeding initial projections on its deals issued since 2014. The expected 8.5-9% losses for noteholders of the $397 million PART 2014-1 pool have accumulated to 11.76% after 40 months; for its lone 2015 transaction, Prestige has seen cumulative net losses of 8.54% after 28 months, forcing S&P to revise its CNL range forecast to 13%-13.75% from its initial 11.25-11.75% range.

That coincides with the company’s net losses of 5.3% on customer accounts in its $1.1 billion portfolio of loans, a level not seen since 2009 and 2010 for Prestige. But S&P does not fault Prestige’s underwriting for the higher-than-expected losses, but rather the company’s rapid expansion into 42 states and growth with 3,000 dealership relationships.

For subprime lenders, breaking into new markets with new dealer networks often means taking on the lowest-hanging fruit – those applications dealers can’t finance with other established lenders. Prestige “has had past experience with such growth and the higher losses that can result from adverse selection at the dealership level,” writes S&P.

The company’s increased pool of bankruptcy-related collateral in the new pool, in fact, gives it a credit boost because of Prestige’s experience in working with customers emerging from Chapter 7 and Chapter 13 filings. Nearly 46% of the pool’s collateral involve such borrowers, compared to 41.7% in the prior PART transaction.

The collateral pool will launch with $286.8 million, and will build out through a two-month prefunding period with loans that will meet minimum criteria of existing pool characteristics.

The pool contains 8,871 loans with an average balance of $14,904 (the lowest of any Prestige transaction since 2012), an average APR of 18.61% on 70-month term loans, and a loan-to-value ratio of 133% on predominantly later-vintage (2013-2016) cars, trucks and SUVs. The average borrower FICO is 525.

The transaction is the 16th securitization for the company since 1996, after it was founded originally as a captive-finance arm of a group of West Coast auto dealerships owned by late founder Larry Miller’s Miller Group company (today known as Miller Management Corp.).

Flagship Credit Auto Trust 2017-3

The Chadds Ford, Pa.-based Flagship Credit Acceptance Corp. is selling $223 million in bonds secured by the subprime receivables from the indirect dealer and online/direct loan originations and refinancings it underwrites.

The capital stack for FCAT 2017-3 includes a four-year, Class A senior tranche totaling $129.41 million that carries preliminary triple-A ratings from S&P, DBRS and Kroll Bond Rating Agency. The credit enhancement level of 40.5% is unchanged from its previous FCAT 2017-2 transaction.

According to S&P, the company has tightening origination by increasing loans issued to its three top internal credit tiers, and also focusing more on its direct-loan business, which historically has lower loss levels. The concentration of direct loans increased to 19.08% of the new pool, compared with 16.62% in the previous transaction. Loan sizes are growing as a result, with the average balance now reaching a high of $20,878, while the average APR of 14.55% is the lowest in two years for an FCAT transaction.

The weighted average FICO of borrowers improved slightly to 597 from 595, as it slightly decreased the exposure to sub-550 FICOs to 15.16% from 15.31%, and boosted 650-plus FICO originations to 11.35% from 10.69%.

KBRA estimates a base-case loss range of 10.05%-11.05% for the Flagship pool, in line with DBRS’ projection of 10.2%. S&P has assigned a higher expected CNL range of 12.75-13.25%, drawn partly on the agency’s anticipation of lower recovery rates than from prior portfolios.

Because of these tightening underwriting criteria, according to KBRA, Flagship had a net loss of $27.3 million in 2016 and expects more losses this year before returning to profitability in 2018. It’s net chargeoffs of $95.52 million already exceeds 2016 levels ($63.19 million).

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