Santander, Flagship, American Credit Add $1.74B to Subprime Auto Pipeline

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Subprime lenders are adding $1.74 billion to the auto-loan ABS market this week in a trio of deals marking the second issuance of the year for each.

The $1.32 billion Santander Drive Auto Receivables Trust (SDART) 2017-2 is similar to Santander Consumer USA's first deal of the year, with the exception of slightly higher initial credit enhancement of 52.1% for the senior notes. SDART 2017-2 will issue a $245 million money market tranche and two senior-term tranches of fixed-rate notes sized at $343 million (due March 2020) and $147.3 million (due December 2020). The senior notes carry preliminary triple-A ratings from S&P Global Ratings and Fitch Ratings.

Flagship Credit Acceptance Co.’s follow-up transaction to its 2017 debut is a $195.3 million offering of five classes of notes in Flagship Credit Auto Trust 2017-2, one of its smallest deals in recent years. The deal includes a $133.3 million AAA-rated senior note tranche – a feature for each of the last five Flagship Credit Auto Trust transactions that were capped at AA by DBRS and S&P Global Ratings prior to April 2016. It follows Flagship’s first deal of the year that was sized at $301.52 million, as well as four deals in 2016 that averaged $406.6 million. Flagship has reduced the size of each successive deal since early last year as the company pared down originations to borrowers in its target FICO range of 525-675.

S&P noted improvements in credit metrics as a result of the tightened originations. Flagship included a greater percentage of less-risky direct loans, increasing to 17.03% of the pool (direct loans historically have experienced lower losses). The loans to FICO borrowers under 550 fell to 15.67% from 17.10%. and the pool almost completely eliminates so-called “thin file” loans to people with no credit history; that is now only 0.09% of the pool compared to 4.8% in the 2017-1 deal.

American Credit Acceptance Receivables Trust 2017-2 is a $220.11 million package backed by auto-loan receivables. S&P and KBRA have assigned preliminary AAA ratings to the $93.3 million senior-note tranche, which required 66.8% credit enhancement to support the high grade. American Credit is one of the younger lenders without a ratings cap, but S&P notes the company has paid off five prior securitizations during an optional clean-up stage, and has recently reduced its overall leverage to 4.6x debt-to-EBITDA.

The company’s risk factors in its new collateral pool have a mixed comparison to the recent 2017-1 deal. American Credit reduced extended-term loans of 61-72 months to 85.3% of the pool from 88.5%, debt-to-income ratios from 41.87% from 44.42% and a decrease in average loan-to-value levels to 122.38% from 125.96%. But the percentage of loans to borrowers with no FICO scores has increased to 11.45% from 11.02%, and those to borrowers with FICOs above 600 are only 12.41%, compared to 16.11% earlier this year. S&P has assigned slightly higher loss expectations to the new deal of 28.5%-29.%, up from 27.5%-28.% in 2017-1.

 Deutsche Bank is the structuring lead manager.

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