RAC, CIG each return for second round of subprime auto ABS

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Two subprime auto lenders are making their second trips to the securitization market.

RAC Dealership LLC, the used-car leasing specialist doing business as American Car Center, is offering $174.5 million in notes backed by the contract receivables and the future resale values of newer-model vehicles it financed through its network of company-owned stores.

The ACC Trust 2019-1 transaction comes a year after RAC’s first-time securitization.

Cig Financial is also making its second appearance before subprime auto investors with a publicly rated $161.9 million portfolio of used-car loans – although Cig is two years removed from its debut deal.

The two issuers bring the subprime auto ABS deal count to 10 deals so far in 2019 totaling $5.1 billion. All the deals except for RAC’s lease transaction involve nonprime and deep subprime auto-loan contracts.

The ACC Trust 2019-1 transaction carries a preliminary single A rating from Kroll Bond Rating Agency (unchanged from the prior deal), applied to the $130.5 million Class A notes due May 2022 that benefit from 42.5% credit enhancement. The capital stack is rounded out by a $27.2 million Class B tranche (rated BBB) due October 2022 and a $16.78 million Class C tranche (rated BB) that matures in February 2024.

RAC Dealership, of Memphis, Tenn., is majority owned by York Capital Management. The 19-year-old firm specializes in subprime leases to lessees with troubled or no credit history, bearing a weighted average FICO of 529 among 13,333 loans with an average balance of $16,454. Obligors pay an average rate of 19.32% for the leases than have average terms of 47 months.

All the leases are for used vehicles, but RAC concentrates on leasing vehicles less than three years of age with low mileage.

RAC’s business strategy differs from those of prime auto lessors in two aspects, according to Kroll. It budgets in higher losses for defaults from its subprime borrowers and factors in much lower lease return rates on vehicles. This lessens the risk that vehicles will be worth less than expected when they come off lease.

Since 2013, RAC has experienced low annual turn-in rates of between 0% and 6%. Its underwriting policies encourage lessees to take out loans and buy their vehicles at the end of the term. RAC makes the loans attractive with 0% interest rates, and also prices them at levels that are below market value: vehicles in the 2019-1 pool will be offered to their owners at just 22% of the original securitization value.

But with a base of deep subprime borrowers, RAC steels for higher default rates. Kroll stress-tests that loss rate at 81% of the aggregate value of the pool’s vehicles; it expected losses for the 2019-1 deal are in the range of 26%-28%, in its base-case scenario.

RAC has been expanding rapidly, opening 28 dealerships in the last two years after adding only two to five a year between 2013 and 2016. At the end of 2018, the outstanding balance of its managed portfolio of leases was $394 million, up 75% on the year.

CIG Auto Receivables Trust 2019-1

Cig Financial will sell four classes of bonds in CIGAR 2019-1, in its first public term securitization of indirect auto loan originations since the $172.5 million CIGAR 2017-1.

The Class A notes with a provisional AA rating from DBRS and an Aa2 from Moody's Investors Service total $120.6 million, with 31.5% credit enhancement. The Class B notes total $20.67 million and are rated A; the $10.34 million in Class C notes are triple-B rated; and the $10.33 million Class D notes are BB.

All but the Class D notes mature in August 2024; the Class D notes expire May 2026.

CIG originates and services auto loans in 18 states, including its home state of California where it initially formed to issue consumer loans in 2000. It has been financing mostly used auto loans since 2010, and in recent years has shifted to financing vehicles from independent auto lot dealers (89% of the managed portfolio).

As of Dec. 31, the company had 24,204 contracts it was servicing in its portfolio with aggregate balances of $237 million.

The pool includes a prefunding account that equals about 20% of the total principal balance of the notes to be issued.

The pool’s credit characteristics include a weighted average interest rate of 17.55% on the accounts, seasoning of 6.5 months with remaining terms of 52 months, and a non-zero WA FICO of 603. About 53% of borrowers have credit scores between 526 and 625, according to DBRS.

The average original term (58.54 months) is lengthier than the pool of loans that were included in CIGAR 2017-1 (54.8 months). CIG has more than doubled the volume of loans (22.86% of the pool) with extended term 61-to-72-month terms, compared with 11.02% in last year’s transaction.

Loan-to-value ratios of have declined to 109.64% from 112.28% in the prior deal, according to DBRS.

DBRS expects losses over the life of the deal to reach 9.2%, an increase from 8% for the CIGAR 2017-1 pool.

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