The name in consumer financing known for credit cards is preparing to launch an asset-backed securities deal from a pool of auto loan contracts. Capital One Prime Auto Receivables Trust, 2022-2, could issue either $1.2 billion or $1.6 billion in notes, secured by retail sale contracts extended to prime-quality borrowers.
Capital One’s financial strength is a key aspect of the deal, as well as its experience as sponsor and servicer on ABS transactions, according to Moody’s Investors Service. Capital One has sponsored multiple auto ABS deals since before 2007, and resumed in 2019 after a long pause. After 20 years of originating and servicing retail auto loans, Capital One has an outstanding prime managed book value of $21.1 billion, as of June 2022.
The transaction, COPAR 2022-2, will issue notes through a capital structure of about eight classes of notes, with classes B, C and D providing subordination support— representing about 3% of the pool balance—to the senior A classes. Other forms of credit enhancement include over-collateralization that could start out at zero when the deal closes and increase to 0.25%, Moody’s said. Notes will also benefit from a non-declining reserve fund of 0.25% of the initial pool balance.
Moody’s expects to assign ratings of P-1 to the $222 million, A-1 class; ‘AAA’ on the A-2a through A-4 classes; then ‘Aa1’ through ‘A1’ on the B, C and D notes, the last three of which will issue $12.4 million in notes, according to the rating agency.
The rating agency estimates a cumulative net loss of 0.4% on the asset pool, with a loss at the ‘Aaa’ stress level of 3.5%, Moody’s said.
Despite Capital One’s corporate and bond market experience, Moody’s noted that a higher proportion of used vehicles in the pool, 65%, poses a credit challenge to the timely repayment of notes. While loans on used vehicles have historically performed worse than those backed by new vehicles, recent used car vehicles in COPAR trusts have been comparable to those backed by new ones.
Should demand for used vehicles decline from their recent high levels, a sudden adjustment in that demand could send prices down.
Another potential drawback is a mismatch on the interest rates between the loans collateralizing the deals, and the rates paid to noteholders, according to Moody’s. The class A-2b notes pay a coupon based on the Secured Overnight Financing Rate, while the underlying loans pay a fixed rate.
A spike in interest rates—a more palpable concern now, given the Federal Reserve’s commitment to fight inflation through rate increases—could erode excess spread on the underlying notes.
