Santander Consumer USA and CarFinance plan to issue a total of $1.3 billion of securities backed by subprime auto loans as both issuers deal with an ongoing investigation led by the U.S. Department of Justice and other regulators into their lending and securitization practices.
Santander leads issuance with a planned $1 billion securitization of subprime auto loans. Santander was one of the first subprime auto lenders targeted by the DOJ’s investigation into subprime lending and securitization. The issuer was subpoenaed blast August to submit information on the underwriting criteria for these loans, as well as the representations and warranties relating to the securitization of the loans.
Santander has issued two subprime deals since the DOJ launched its probe (series 2014-4 and 2014-5); the issuer’s 2015-1 transaction is its first subprime deal of 2015. Standard & Poor’s will rate the deal.
On offer is a A-1+’ rated money market tranche and $434 million of AAA’ rated fixed and floating rate notes. The senior notes have a final maturity date of July 16, 2018. At the junior level the trust is offering $138 million AA’ rated notes due November 2019, $153 million A’ rated notes due April 2021, $91 million of BBB+’ rated notes due April 2021 and $59 million of BB+’ rated notes due October 2022. J.P. Morgan Securities is the lead manager.
The weighted average FICO on the loans pooled in the latest deal decreased to 595 compared to the 597 weighted average FICO of the issuer’s previous deal; however the weighted average loan-to-value has declined to 110.0% from 114.0%. Santander has also reduced the percentage of long term loans ( loans with terms of 73-75 months) to 7.0% from 9.0%.
CarFinance, a private equity owned subprime auto lender, plans to sell $266 million of subprime auto securities.
The Perella Weinberg Partners owned issuer, was subpoenaed by the U.S. Department of Justice on Dec. 5th, 2014, to produce certain documents relating to subprime automotive finance and related securitization activities. According to management, the company intends to cooperate with these inquiries. The investigation is part of a wider investigation that involves several subprime lenders that the DOJ began in 2014.
S&P will rate the securitization called CarFinance Capital Auto Trust 2015-1. The trust will offer $221.4 million of A’ rated class A, fixed rate notes that are structured with a legal final maturity of June 15, 2021. At the subordinated level, the issuer plans to sell $18 million of A-’, class B notes, $11 million of BBB’ rated class C notes, $9 million of BB’ rated class D notes and $7.4 million of BB-’ class E notes. All of the junior tranches have a final maturity date of June 15, 2021.
Credit Suisse is the lead manager on the deal.
Since the issuer’s last transaction, issued in July 2014, series 2014-2, Perella announced the merger of CarFinance and Flagship Credit Acceptance. The merger on Jan. 1, 2015, and does not affect the origination and servicing platforms. Flagship will continue to issue subprime loan securities under its Flagship Credit Auto Trust.
Among the deal’s strengths, according to S&P, is the fact that CarFinance has a $350 million warehouse credit facility with a two-year term that currently matures in June 2016. The pool also includes loans originated through direct lending, which according to historical data tend to perform better than loans originated indirectly through deals. However, the portion of direct loans in the pool decreased to 28.09% from 36.57% included in the issuer’s last transaction. Direct lending is done through different channels, including an online search function and pass-through programs with banks.
Loans backing the transaction have a weighted average FICO score of 603, a slightly higher credit scoring compared to the issuers 2014-2 transaction score of 593; 505 of the current pool is comprised of borrowers with FICOs less than 600. The loans pay an annual interest rate of 15% and an average term of 6 years. On average the loans have paid off for 2.27 months and have an average loan to value ration 118.38%.
S&P stated in the presale that it is concerned that the issuer’s relatively short operating history (CarFinance was established in March 2011) doesn’t demonstrate that it “can handle an economic downturn or an intensely competitive market where competition is based on pricing.”
In that short period of time the company has grown its portfolio by approximately 200%; and though growth appears to be leveling off, it grew 47% to $924 million in December 2014 from a year prior. “While rapid growth is typical for relatively new subprime auto finance companies, it sometimes comes at the expense of credit quality,” stated S&P. “In addition, rapid growth poses operational challenges, including having sufficiently trained staff and adequate systems and procedures in place”.
