Santander warms up 2019 subprime auto pipeline with $1B deal
Santander Consumer USA's first securitization of the year from its deep subprime platform benefits from ongoing improvement in underwriting.
The $1.03 billion Santander Drive Auto Receivables (DRIVE) Trust 2019-1 is backed by loans with a weighted average FICO of 585, up from 577 and 576 from the two prior DRIVE transactions. Santander has also sharply reduced exposure to loan terms of 73 to 75 months. They account for just 11.74% of the principal balance of the pool against 15.47% in the sponsor's final transaction of 2018. The weighted average seasoning of collateral for the latest deal has also increased to 3.75 months from 2.09 months for the prior deal.
Not all credit metrics have improved, however. The percentage of loans financing new cars has decreased to 38.9% from 42.3%, and the percentage of no-FICO loans increased to 14.4% from 12.9% from DRIVE 2018-5. That no-FICO level is within range of typical DRIVE pools, and also lower than the worst-performing series DRIVE 2016-A at 17.3%, according to S&P.
Nevertheless, S&P Global Ratings expects losses over the life of the deal to be in the range of 24%-25%; that's down from a range of 26.5%-27.5% for the five pools of loans made to high-risk borrowers with FICOs well under 600, or who lack credit scores and verified income.
Likewise, Moody’s Investors Service projected cumulative net loss of 24% for the deal, down from 25% for Santander’s DRIVE 2018-5 transaction, completed in November.
S&P credits the Dallas-based Santander Consumer USA (an arm of Spanish banking giant Banco Santander) with improving performance in its 2015-2017 ABS portfolios. Last year, S&P cuts its loss expectations on seven DRIVE transactions originated in 2016 and 2017, citing stricter underwriting standards that resulted in lower loan-to-value ratios as well as the exclusion of loans from weaker dealers.
In its presale report, S&P pointed out that Santander’s DRIVE securitizations launched in 2015 are outperforming its peer deep subprime issuers, DriveTime Automotive Group and American Credit Acceptance. “It is clear that with lower CNLs, the DRIVE transactions perform better. ACA’s 2015-2017 transactions have expected losses of 25%-29%, and Drivetime between 27%-30.5%," the report states.
The lower loss expectations allowed Santander to achieve the same credit ratings as prior deals with less credit enhancements. The new deal is supported by total initial credit enhancement level of 54.5%, down from 55.8% in DRIVE 2018-5 and well below the range of 61.7% to 63.6% in the other 2018 DRIVE offerings.
The $1.03 billion in notes includes three senior note classes: a $140 million Class A-1 tranche with a preliminary A-1+ rating from S&P and P-1 by Moody’s and two term tranches rated triple A by both rating agencies: $298 million of Class A-2 notes maturing in 2021 (some fixed- and floating-rate); and $159.5 million Class A-3 tranche maturing in 2022.
The subordinate tranches on offer are similar to other recent DRIVE deals: a Class B tranche totaling $113.1 million that is rated AA by S&P and Aa1 by Moody’s; an A/A1-rated Class C tranche has $164.5 million in notes, and the Class D notes total $158.04 million with BBB/Baa3 ratings.
The improved underwriting and credit performance of the DRIVE platform bodes well for Santander's bottom line, with the likelihood it will sell its stakes in partnership with Fiat Chrysler. The automaker announced last year it planned to form its own captive finance company.
In addition to the three-year-old DRIVE platform for deep subprime loans, Santander also finances lending to borrowers that are closer to prime quality through its Santander Drive Auto Receivables Trust (SDART) program.
Loans for both platforms, as well as three other loan and lease trusts established by Santander, are fed from Santander's $26 billion managed portfolio.