Santander Revives Deep Subprime Securitization Platform

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Santander Consumer USA, already under sharp scrutiny from regulators for its subprime auto lending, is moving even deeper into subprime territory.

The lender has established, or revived, depending on which rating agency you subscribe to, a securitization platform called Drive Auto Receivables Trust (DRIVE) for loans too risky to be securitized via either Santander Drive Auto Receivables Trust (SDART) or and Chrysler Capital Auto Receivables Trust (CCART).

The $712 million DRIVE 2015-A is backed by a pool of loans with an average FICO of 552 (12.9% of borrowers in the pool don’t even have a FICO) compared with 595 for the most recent SDART transaction, completed in February. The loans backing DRIVE 2015-A pay, on average, an annual percentage rate of 19.16%, approximately 3.0 percentage points higher than the February SDART transaction.

DRIVE 2015-A is also backed by loans with slightly longer terms that average 5.8 years compared to the 5.5 year terms in the latest SDART pool. Approximately 5.22% were more than 61 days delinquent, as of December 31, 2014.

Nevertheless, both Standard & Poor’s and Moody’s Investors Service have assigned a preliminary ‘AAA’ rating to two senior tranches that benefit from initial overcollateralization and subordination of 64.5%.

Citigroup and Deutsche Bank Securities are the lead underwriters.

DRIVE  2015-A marks a return to the deep subprime space for Santander, which last issued a deal backed by deep subprime borrowers in 2008. The deal consists of a $100 million money market tranche and two senior, triple-A rated tranches, one maturing in November 2017 and one in July 2018. There are also three junior tranches: the class B notes due June 2019 are rated ‘AA’/‘Aa1’ the class C notes due May 2021 are rated ‘A’/‘A1’ and the class D notes due June 2022 are rated ‘BBB’/ ‘Baa3’.

Since the collateral in DRIVE is much weaker than previous subprime transactions sponsored by the issuer, Moody’s expected loss for the pool is 27%, or approximately 10% higher than for transactions issued under the SDART platform.

The recent spate of regulatory probes into subprime auto lending and securitization hasn’t really impacted appetite for these higher yielding loans. Issuers have maintained a regular calendar of issuance since the Department of Justice first initiated investigations into subprime auto financing targeting GM Financial and Santander, in August 2014. Since then, another six issuers have been targeted by investigation led by the DOJ and the CFPB.

Retail auto loan issuance, year to date, is $14 billion, including $7.7 billion of prime, $4.4 billion subprime and $2 billion in nonprime securitization, according to S&P.

All the receivables included in the DRIVE 2015-A pool were originated by Santander and will be serviced by Santander.

There are others active in the deep subprime space, including American Credit Acceptance, which is also in the market with a $219.3 million securitization. American Credit Acceptance Receivables Trust 2015-1, the issuers first deal of 2015, is backed by a pool of loan receivables that, like DRIVE 2015-A in some cases don’t even have a FICO credit score. According to Kroll Bond Rating Agency’s presale report, the pool has a heavy concentration of lower quality subprime obligors with an average FICO score in the low to mid 500s.

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