Santander, RAC King thaw out subprime auto ABS market

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New deep-subprime ABS deals from Santander Consumer USA and used-car sales chain American Car Center are the first signs of life in the auto-loan and lease securitization markets slowed by the COVID-19 outbreak.

According to a registration filing, Santander Consumer USA is planning up to a $1 billion securitization of nonprime consumer loans, through its Santander Drive ABS platform in which it pools used- and new-car loans made to its riskiest consumers with poor credit scores.

A far smaller $116 million transaction is being marketed by Memphis, Tenn.-based RAC King, which operates 64 dealerships that sell and finance used vehicles for problem-credit car buyers in 10 states in the Midwest and Southeast.

The deals are the first subprime auto loan/lease transactions since March 11, and are being launched with contracts originated prior to the March economic disruptions caused by the large-scale economic shutdown brought forth by coronavirus-related quarantining measures.

Santander Drive will offer either $750 million or $1 billion in notes, depending on market conditions, according to a prospectus filed with the Securities and Exchange Commission. The portfolio characteristics are roughly the same in either pool: a weighted average contract rate of 15.6%, original terms of 71 months (with five months of seasoning) and non-zero WA FICO of 604.

The $750 million pool is backed by a loans with a principal balance of $935.7 million, and the $1 billion pool by $1.25 billion, representing an overcollateralization figure of approximately 25% each.

S&P Global Ratings issued preliminary investment-grade ratings for the transaction late Monday, including an A-1 rating for the Class A-1 money-market tranche of $95 million (for the $750 million pool), and AAA ratings for the Class A-2 offering totaling $236 million split between fixed- and floating rate notes and the $113.46 million Class A-3 tranche. The agency assigned an early AA rating on a $101.07 million Class B tranche, a single-A to the $127.27 million in Class C notes, and BBB to the $77.2 million in Class D notes.

S&P has an expected net loss range on the deal to 18.25%-19.25%

RAC King, which is majority owned by York Capital Management is marketing bonds backed by the receivables of leases with a total securitization value of $160 million, with an undiscounted end-lease resale value of $33.59 million (or 21% of the aggregate deal value).

The securitization value is low due to a RAC King strategy to incentivize customers into keeping vehicles at the end of the average 49-month lease terms. Consumers are less likely to have negative-equity at the end of the term, and are offered 0% finance rates to finance the car at its planned residual value.

The notes have far lower comparable ratings than from previous transaction due to pandemic-related economic stresses applied by Kroll Bond Rating Agency: The Class A notes totaling $104.32 million for ACC Trust 2020-A has a preliminary BBB- rating from Kroll, compared to the ‘A’ senior-note rating of its previous securitization from last November.

RAC King’s deal also includes an $11.68 million Class B tranche with a BB- rating.

The deal has a higher base-case loss range of 36-38% compared to xx%-xx% in ACC 2019-B last fall.

RAC King’s lease pools have low

Unlike RAC King’s three prior lease securitizations dating back to 2018, the new transaction will provide a “full turbo” waterfall that will use all excess proceeds (following payment of interest, expenses and reserve account top-ups) to amortize the transaction. (Previous deals used a target overcollateralization figure that allowed some collections to be applied toward equity).

According to Kroll, ACC has temporarily suspended new originations of leases due to the “multitude” of stay-at-home orders issued by states in its business footprint, as well as so evaluate the impact of rising jobless claims in the past month.

The leases were pooled from the company’s managed portfolio that totaled $406 million at year-end 2019. They will remain serviced by a RAC King affiliate.

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