Southern Auto Finance Company is preparing its first auto loan asset-backed securities (ABS) deal, through the SAFCO Auto Receivables Trust, 2022-1, aiming to raise $118.8 million from the capital markets.
SAFCO is an indirect auto finance company founded in 1990, and specializes in auto financing for first-time buyers, as well as consumers looking to rebuild their credit or those whose incomes are hard to verify, according to Kroll bond Rating Agency.
Capital One Securities is the initial note purchaser, for which systems & Services Technologies will act as the notes' backup servicer. SAFCO will issue the notes through three classes through a sequential pay structure, where the class A notes receive principal payments before all subordinate notes. After the class A notes are paid in full, class B notes will be fully paid, and then class C.
The notes benefit from several forms of credit enhancement, aside from its senior-subordinate structure. Overcollateralization—initially 5.00%, and increasing to a target of 14.7% o the current receivable balance; a cash reserve account that will equal about 1.50% of the initial receivable balance, and excess spread of about 9.26%.
Although the notes do benefit from credit enhancements, the rating agency raised a number of issues that could potentially impact the notes negatively, such as higher loan-to-value ratios and recoveries in the current used car market.
Ongoing supply constraints, caused by production delays following the COVID-19 pandemic, plus high demand for vehicles, had increased wholesale used car prices up until Q2 of 2022. Such conditions create the potential for lower recovery rates on defaulted collateral if used car-pricing returns to historical levels.
"Borrowers with high LTV loans take longer to build equity in the vehicles, compared to a loan with a lower LTV, increasing the chance of a borrower defaulting due to their negative equity position," according to the KBRA report.
Such concerns are exacerbated, considering that used vehicles comprise 89.02% of the collateral pool. New vehicles account for 10.98% of the pool, according to KBRA.
KBRA holds a mixed point of view about SAFCO's long charge-off policy. A receivable must be 181 days past due, KBRA said, which is long compared with that of other auto lenders. On the transaction level, however, the requirement is tighter, and a receivable is considered charge-off if it remains 121 days late from its due date or longer.
On average, the loans have a balance of $15,201, while on a weighted average (WA) basis the loans have an interest rate of 19.64%, FICO score of 554 , and loan-to-value ratio of 108.4%. Also on a WA basis, the loans have original terms of 67 months and seasoning of 14 months.
KBRA expects to assign ratings of 'AA' on the $96.5 million, class A notes; 'A' on the $8.0 million, class B notes and 'BBB' on the $14.2 million, class C notes.
