Santander Consumer USA's fifth issuance from its primary shelf is maintaining recent improvements in credit quality in nonprime auto loan securitizations.
The $1.18 billion Santander Drive Auto Receivables Trust (SDART) 2018-5 benefits from a larger pool of higher-FICO borrowers and tighter average loan-to-value ratios, allowing Santander to add a much higher percentage of riskier 73- to 75-month loans (making up more than 20% of the pool’s cumulative $1.26 billion loan balance) without rising credit enhancement levels.
The deal is expected to close Oct. 24, only a month after S&P Global Ratings recently lowered loss projections on the issuer's well-performing 2014-2018 vintage SDART portfolios.
The SDART 2018-5 pool includes six tranches of fixed-rate notes and a planned floating-rate tranche of senior notes. Both Fitch Ratings and S&P Global Ratings have assigned preliminary AAA ratings to the three-year Class A-2 ($280 million) and four-year Class A-3 ($109.14 million) notes that along with a Class A-1 money-market tranche sized at $219 million all benefit from 52.75% CE.
The trust plans to issue $137.4 million in double-A rated Class B notes due 2022; $151.3 million in Class C notes due 2024 (rated A); Class D notes also totaling $151.3 million due 2024 that are triple-B rates; and a Class E tranche of eight-year notes sized at $115.3 million.
Fitch has assigned an early BB- rating on the Class E notes. S&P is not rating the subordinate tranche.
The Class E notes were not part of the previous SDART 2018-4 transaction, meaning the SDART 2018-5 deal’s overcollaterization of loan assets is only 6.25%, compared to 14% in 2018-4. The new deal’s OC target will build to 12.25%, but steps down to 11.25% should the sponsor choose not to issue the floating-rate Class A-B2 notes – or if those notes are paid off early.
S&P’s expected net losses of 15.75%-16.5% is unchanged from SDART 2018-4. Fitch set its base-case loss proxy at 17% (it did not rate the two previous issues from the SDART platform.
The loans in the pool have an average balance of $19,365, with an annual percentage rate of 15.52% and six months of seasoning, all in line with prior SDART transactions. Nearly 52% of the vehicles are new cars, SUVs and light-duty trucks, which includes originations through Dallas-based Santander Consumer’s preferred-lender relationship with the Chrysler Group (Chrysler Capital), part of FCA USA LLC.
Dodge-branded vehicles are top make in the pool making up 24.8% of the collateral, followed by Jeep at 15.64%.
The percentage of 73- to 75-month loans in SDART 2018-5 has increased to 20.38% from 15.13% in SDART 2018-4. While these loans have a 1.4x higher level of net losses associated with them, versus 12- to 60-month loan tier, S&P stated in its presale report that Santander Consumer “has tried to limit the higher loss severity associated with these longer-term loans” through more borrower equity: The weighted average LTV of 102.87% for the 73- to 75-month loans compares to 107.37% for the entire pool.
The percentage of loans with 61- to 72-month original terms has fallen to its lowest levels since at least 2016 at 72.94%. It was above 78% in the two prior transactions.
The weighted average FICO decreased to 617 from 623, although it still represents the second-highest FICO for a shelf issuance from SDART. The percentage of no-FICO borrowers is 9.8%, the lowest in four years, according to Fitch. “SC ramped up originations for borrowers within this bucket in 2015-2016 as they faced less competition and the contracts had higher yields. However, SC has since pulled back on such originations over the past year.”
S&P noted only 5.03% of the borrowers had verified incomes, but stated in its report that Santander Consumer management believes “higher income verification levels do not necessarily indicate a better SC pool because SC verified income on a risk-based approach.” Borrowers with verified income have a lower average FICO of 596, vs. 627 for unverified, as well as a higher LTV of 108% vs. 106%.
Santander Consumer’s $25.5 billion managed portfolio showed improvement through June 30, with decreasing delinquencies and net losses, according to both reports. At the mid-point of the year, 30-plus day delinquencies decreased to 13.8% from 15.44% a year earlier, and annualized losses in that period were 7.86%, compared with 8.89% for the same period in 2017, according to S&P.
Last month, S&P lowered the expected net losses of deals issued between 2014 and 2018, with original ranges of 15%-16% for 2014 and 2015 vintage deals now under 13.25% for most transactions (S&P did not rate SDART deals in 2016). Deals in 2017 and 2018 also have lowered expected net losses from the ratings agency, but those deals are still above 15% due to Santander’s decision last year to begin including repossession expenses in evaluating recoveries on defaulted loans.
SDART pools have also benefitted from the exclusion of deep subprime originations that Santander Consumer packages into its Drive Auto Receivables Trust (DRIVE) deep subprime platform active since 2015.
