Santander Consumer may be scaling back its presence in the subprime auto market, but the loans it makes to prime quality borrowers purchasing Chrysler, Jeep and Dodge vehicles are performing so poorly that Fitch now considers them to be “midprime.”
That’s the label the rating agency applied to the $840.78 million Chrysler Capital Auto Receivables Trust (CCART) 2016-B in a presale report published Thursday.
By comparison, Fitch labeled Santander’s previous CCART transaction, completed in May, as prime. And Moody's Investors Service, also issuing early ratings for the 2016-B, kept the latest transaction classified as a prime deal.
Although nearly all of the loans backing the latest deal (88%) are for new vehicles from franchised dealers, Fitch noted that CCART pools have taken on characteristics of subprime securitizations that are experiencing above-average historical loss performance and more challenging credit metrics.
And for the first time since it began originating loans for Fiat Chrysler USA dealers in February 2013, Santander has structured the CCART so that lhe level of overcollateralization (OC) – the amount that the value of the collateral exceeds the value of the bonds – rises over time.
The 2016-B transaction will issue seven tranches of notes, including four classes of ‘A’ notes carrying early ‘AAA’ ratings from Fitch. There is an A-1 money-market tranche sized at $168 million; a three-year A-2 tranche totaling $260 million; an A-3 series of $220 million in notes due July 2021; and an $82 million portion of A-4 notes due 2022.
All of the A notes benefit from 19.5% credit enhancement, slightly lower than 20% in the 2016-A deal. The initial OC level of 7% (or $63.29 million) is also below that of the 2016-A transaction (7.5%), but the A notes will rise to the lesser of 12% of the current pool balance or 8.25% of the initial pool balance, according to the presale reports. Previous deals did not have rising overcollaterization features.
The new transaction will also issue three tranches of subordinate notes: $29.38 million Class B notes rated ‘AA’’; $46.47 million in Class C notes rated ‘A’; and $33.91 million in Class D notes rated ‘BBB’.
Moody's issued a 'P-1' provisional rating for the money-market notes, and 'AAA' ratings to the three other senior notes. The B notes were rated 'Aa3'; the C notes were 'A3'; and the D notes were 'Baa3'.
The collateral pool consists of 35,524 loans with an aggregate balance of $904 million. The average principal balance is $25,449, and a weighted APR of 7.86%.
Citigroup was the lead structuring agent on the transaction.
The weighted average FICO score of 712 is the highest of any CCART transaction, and well in excess of its Santander Drive Auto Receivables Trust subprime platform that primarily handles used vehicles and customers with an average FICO of 600. (That platform also provides CE levels of close to 50%).
This is Santander Consumer USA’s eighth Chrysler Capital transaction since 2013.
While CCART pools have prime characteristics (new vehicles, an average weighted borrower FICO of 712), they have begun to experience losses more in line with subprime deals.
The $5.6 billion portfolio of Santander- and Chrysler Capital-originated and serviced loans (which has grown an average of 32% for each of the past three years) experienced a total delinquency level of 4.01% at year-end 2015, compared to 1.08% in 2014. Sixty-day plus delinquencies have expanded to 1.34% in the pool, also up from 1.08% in 2014 and 0.73% in 2013.
The collateral has growing “barbell” credit characteristics as well. While FICO scores of 750+ increased to 25.5% from 19.8% from the prior CCART collateral pool, there is a growing concentration of scores of 700 and below: up to 52.7% from CCART 2015-A (47.8%).
One big risk factor is the large concentration of loans with longer terms of 73-75 months - a record 21.2% of the pool. Fitch estimates this will contribute to a net loss proxy of 5.5% for the pool. Fitch also noted potential weaknesses in the residual values of the secured vehicles: the majority of vehicles securing the loans (73%) are trucks, which can have volatile wholesale values impacted by rising fuel prices.
The weighted average APR of 7.86% is consistent with this year’s previous transaction, and a slight decline from last year’s 2015-B transaction and previous deals.
The securitization comes amidst further woes for Santander Consumer, which has had a sharp decline in originations this year (due to tightened underwriting) and last month restated earnings dating back to 2013 for a second time this year.
The latest corrective action is to account for errors in how Santander determined credit loss allowances, calculated impairment on troubled restructured loans, and how it accounted for auto dealer discounts, subvention payments from automakers and capitalized origination costs.
Fitch reported that these issues, and potential penalties from the Consumer Financial Protection Bureau, will not have a material effect on Santander’s servicing of the latest securitization.