Santander UK makes 'unique' shift of residual risk in new auto ABS

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Santander Consumer UK is pooling more balloon-payment loans into its latest UK auto loan securitization – sans the balloon notes in those contracts.

Santander UK's Motor 2017-1 is a dual-currency securitization of British auto loan receivables with a principal balance of £639.4million (US$828.3 million) being offered to both U.S. and UK investors.

The deal, dubbed Motor 2017-1, will feature two floating-rate senior note accounts to be split into U.S. dollar and British sterling-pound tranches, with the final amounts to be determined at closing. The notes will be supported by available credit enhancement of 8.5%, which includes a reserve fund of 1.6% of the initial Class A and B notes.

The senior notes have preliminary AAA ratings from S&P Global Ratings, according to a presale report issued Friday.

The subordinate fixed-rate Class B and C notes (whose sizes are also undetermined) will be issued in pounds only.

The 88,149 loans in the pool consist of conditional sale (45.6% of the collateral pool) and personal contract purchase (PCP) agreements (54.4%), the latter of which were not included in Santander’s most recent Motor trust transaction last December.

PCP loans, similar to U.S. lease contracts, feature optional balloon payments with voluntary termination if more than 50% of the principal has been repaid – which is permitted by the UK Consumer Credit Act. Such PCP loans usually present higher residual value risks in the asset-backed notes series, since the borrowers are incentivized to return cars that are upside down, and putting more residual risk into the transaction.

But in what S&P called a "relatively unique" deal structure, the issuer is choosing not to securitize the balloon payments into the deal. This portion of the PCP agreements, dubbed the guaranteed future value (GFV) payments, will instead be retained by the issuer. The GFV of the balloon notes will be repaid to Santander through principal receipts as senior deferred consideration. While not providing credit enhancement to the notes, according to S&P, the transaction benefits "in the context of excess spread and recoveries on defaulted PCP loans," the report stated.

The loans in the pool have an average outstanding balance of £7,253, with original terms of 46 months and seasoning of nine months. The average APR is 6.13%.

More than 63% of the vehicles contracts in the pool are for used cars.

The deal, which has a 12-month revolving pool feature, is Santander’s fifth securitization through its Motor trust to be rated by S&P.

The deal managers include Banco Santander, Citigroup, RBC, and Wells Fargo.

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