Specialty auto finance company Santander Consumer USA's buyout by Banco Santander Centro Hispano last December complemented its ongoing efforts to expand product offerings to dealers and compete more effectively with other lenders. The latter takes a lot of money.
Santander Consumer, therefore, raised $1.2 billion in securities backed by subprime retail auto loans through the Santander Drive Auto Receivables Trust, 2007-1. It is the company's largest ABS transaction to date, and its first public deal. Previous transactions were structured under 144A rules, but in order for the company to raise that amount of capital, it decided to do all of its future transactions as public deals, starting with the 2007-1 deal. That transaction was completed in early April.
"It is a reflection of the amount of growth we have achieved over the last two years," Jim Moore, director of securitizations for Santander Consumer USA said. "Our deals have grown, [therefore] to market our bonds successfully, it is really much more incumbent on us to enter into the public market, rather than the private market."
Founded in 1995 as The Brower Group, the company has gone through a few name changes, including its most recent after its takeover by the Madrid bank. Before the Banco Santander buyout, the company was called Drive Financial. The firm built up a network of 12,000 franchise auto dealership partners, from which it buys subprime car loan contracts. The latest transaction is Santander's largest by dollar amount, although the structure is plain vanilla. The receivables pool is secured by subprime auto loan contracts that Santander buys from auto dealers across the country. All of the notes have a financial guarantee in the form of a wrap from Financial Guaranty Insurance Co., allowing its money-market piece to earn a P-1' rating, and the other notes, with three-to-five-year average lives, to garner triple-A ratings from Moody's Investors Service. Standard & Poor's gave similar ratings to the transaction. The company also added a floating-rate tranche, which capitalized on an inverted yield curve. Wachovia Securities was lead manager on the transaction, with UBS and the Chicago-based Guzman & Co. also participating.
Although the underlying collateral is comprised of subprime auto loans, there is very little prospect that problems in the subprime mortgage sector will spill over into the Santander Consumer deal or the subprime auto ABS segment, in general, market watchers said.
Still, "investors want to be reminded about the differences in the two markets," Sally Acevedo, a vice president at Moody's said. When people buy a car they understand that, unlike a house, it depreciates in value very quickly and is not likely to make them rich. Further, a lot of borrowers depend on their cars to get to work and keep their jobs - a strong incentive for them to keep current on their car loans.
For its part, Santander services all of its loan contracts. When a company does that, Acevedo said, it has more incentive to monitor the products closely, to be sure that they target the most appropriate obligor.
"Santander Consumer is making an affirmative move to go upstream in credit quality to compete with Triad Financial and Americredit Corp. on a consumer level," said Moody's Acevedo, referring to the ratings agencies' consultations with the issuer. "What helps is when you have more access to the public markets. It allows you to issue more volume, because your investors are not as restricted."
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