Risks Rising in World Omni Lease Securitization
World Omni Financial Corp. is leasing cars to consumers with lower credit scores, and the risk is being compounded by the fact that so many leases mature at the same time.
The sponsor has just launched a $704 million offering of bonds backed by leases on new vehicles manufactured by Toyota Motor Corp., according to credit rating agency presale reports.
The trust will issue four senior tranches with preliminary triple-A ratings from Fitch Ratings and Moody’s Investors Service: $83 million maturing in March 2018, $260 million December 2016, and $225 maturing in April 2020, and $76 million maturing in August 2022. All four benefit from 16.75% credit enhancement.
There is also a $30 million subordinate tranche rated AA/Aa2 maturing in August 2022 that benefits from 13% credit enhancement.
Bank of America is the lead underwriter.
The leases in the collateral pool have a weighted average FICO, 731, that is lower than those of World Omni transactions over the previous three years, according to Moody’s. Furthermore, there is a higher proportion, 23%, with original terms of between 40-51 months than prior World Omni lease transactions.
“With 89% of the securitization value maturing in the top five quarters, the [transaction’s] lease maturities are concentrated,” Moody’s states in its report. “This concentration of lease maturities could expose the transaction to a short-term drop in market prices [for used cars] which could lead to significant residual value losses.”
The highest one-year period in which leases mature occurs in the second quarter of 2019 through the second quarter of 2002, just over two years from now.
The resale value of cars in World Omni’s managed portfolio that are coming off lease is already deteriorating. In 2016, it still managed a 0.6% gain on returned vehicles, but that was almost 10% less than for same period in 2015. In addition, the percentage of lessees who turn their vehicles in at the end of the lease, rather than purchasing them, has also increased to 62% from 56% a year ago.
Moody’s expects cumulative net credit losses over the life of the latest deal to be 0.80% of the pool.
Another risk, cited by both Moody’s and Fitch, is the fact that the leases were originated in only five southeastern states, though this is consistent with prior deals. The largest concentration is in Florida at 65.1%
Fitch attributes the decline in residual gains on World Omni’s portfolio in part to heightened exposure to sub-compact cars, which are not holding their value as well as larger vehicles.
The rating agency notes that, historically, World Omni’s turn-in rate has been low, relative to other lessors, with a monthly average of 40% since January 2006. “Although these levels have been steadily increasing in recent years, they are largely in-line with comparable lease issuers and will likely stabilize as World Omni achieves greater balance in their portfolio by vehicle segment.”
World Omni has sponsored seven previous transactions backed by auto lease receivables since 2009