Santander Consumer USA’s next offering from its deep subprime auto bond platform features an even higher percentage of loans with longer terms, according to Moody’s Investors Service.
Yet the rating agency did not increase its loss expectations, in part because the credit quality of the borrowers is slightly better than those of borrowers in the pool with shorter terms.
The loans with terms between 73 months and 75 months comprise 15.6% of the collateral for DRIVE Auto Receivables Trust 2017-2. That’s up from just 0.5% of the previous transaction from this platform, completed earlier this year.
Longer-term loans amortize more slowly than shorter-term loans, leaving the borrower underwater on the loan for longer. This can lead to increased losses should the borrower default.
However, Moody’s feels that the risk for the longer-term loans in this transaction is “somewhat mitigated” by the lower weighted average loan-to-value ratio for those consumers, who are borrowing just 94.4% of the value of their vehicles, compared to the WA LTV the entire pool of 106.3%. The borrowers with longer-term loans also had a higher weighted average score in Santander's internal loss forecasting model.
Aside from the proportion of longer-term loans, the credit characteristics of the overall pool are similar to those of the prior deal. The weighted average FICO for borrowers in the pool is two points lower than in the last DRIVE transaction at 568. And the weighted average LTV of 106% is three percentage points lower than that of the previous deal. (Consumers often borrow more than the value of a car because they need to pay off the remaining balance of their previous vehicle.)
The number of used vehicles backing loans in the pool is nine percentage points lower than in the last DRIVE securitization at 60%. Used car prices have been declining, reducing the amount lenders can recover on a defaulted loan. So increasing the proportion of new vehicles helps reduce risk.
By comparison, used cars comprised 61% of the total asset pool in Santander’s last securitization on its SDART-2017 platform, which it considers to be less subprime than the DRIVE platform.
Moody’s expectation for cumulative net losses on the latest DRIVE deal is 27%, consistent with the previous transaction from this platform. (This is the highest loss expectation amongst auto-backed securitizations rated by Moody’s.)
DRIVE 2017-2 will issue four senior tranches of notes: a $118 million unrated money market tranche and three term tranches with preliminary Aaa ratings. The senior notes range in maturity from August 2018 to June 2020. Credit enhancement is unchanged from the past two DRIVE securitizations at 65.35%.
There are also four subordinate tranches maturing between June 2021 and November 2024. Credit enhancement ranges from 53.85% for the least subordinate tranche, rated Aa1 by Moody’s, to 20.70% for the unrated class E tranche. The class C tranche was given an Aa3 rating and has the largest concentration of assets amongst the subordinate tranches (15% of the total pool). Moody’s assigned the class D notes a Baa3 rating.
JP Morgan Securities is the lead underwriter.
Santander Consumer USA is a subsidiary of Banco Santander that specializes in automotive financing for dealers and retail consumers. Its retail auto loan portfolio was last valued at approximately $25.2 billion. Since 1998, it has completed over 65 securitizations of retail auto loan contracts it sponsored.
Correction: The original version of this article misidentified the loss forecasting model.
