Subprime auto lender Exeter taps securitization ahead of IPO

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The credit quality of the collateral for Exeter Finance's first subprime auto securitization is slightly weaker than that of its prior deal, but the difference is not significant enough to impact expected performance.

Exeter Automobile Receivables Trust (EART) 2019-1 is backed by a pool of $579 million in loan account balances, all underwritten by the Irving, Tex.-based lender through its 11,000 auto dealer network and pulled from its $4.2 billion managed loan portfolio.

The loans are less seasoned (by two months) that those backing Exeter's prior deal and the weighted average loan-to-value ratio of 114% is the highest of any deal since 2014. The 82.47% concentration of used cars in the pool is also near a peak level for Exeter deals in the past three years. (Used vehicles historically have had higher delinquency and default rates than new-vehicle loan collateral.) That is up from a 76.9% level in EART 2018-4 for a shelf that already regularly pools fewer new-car loans than other subprime lenders such as Santander Consumer USA.

One credit metric that has improved is the percentage loans with an original term greater than 60 months, which is down slightly to 69 from 70 months in the 2018-4 deal, with the share of loans over 67 months reduced to 80% of the pool from 82% in the prior transaction, according to Moody’s Investors Service.

Despite the worsening of several credit metrics, all three rating agencies on the deal expect losses over the life of the deal to be no worse than those of the prior deal. Moody's is maintaining a net loss projection of 21%; likewise S&P Global Ratings expects losses to be in the same range of 20.5%-21.5%. DBRS has a slightly lower expected loss rate of 19% (DBRS has not rated an Exeter deal since the $550 million EART 2018-1 transaction issued a year ago this month.)

Credit enhancement for the $253.3 million senior tranche of triple A rated notes due 2022 is also unchanged from the prior deal at 58%.

S&P's presale report noted that Exeter's own financial performance been improving. For the first nine months of 2018, it had net income of $57.4 million, more than four times the $12.1 million it posted over the year-earlier period. “Exeter’s performance has been stronger primarily because yields have improved and credit performance has stabilized since 2016,” the presale report states.

The lender started strengthening underwriting and reducing origination volume in 2016, after two securitizations issued in 2015 breached performance triggers. S&P projects losses on deals issued in 2016 and early 2017 to be 21%.

The improved performance bodes well for a filing this month for an initial public offering of a minority share in the lender. Exeter is 91% owned by funds led by the Blackstone Group.

Exeter’s deal is the second subprime ABS of 2019 (following up Santander’s $1 billion securitization deal), and is being issued following a month of slightly deteriorating performance in non-prime auto loan securitizations in December, according to Kroll Bond Rating Agency.

In an auto loan indices report issued Wednesday, Kroll noted annualized net losses on nonprime auto loan collateral rose two basis points to 9.52% and rose 82 basis points year over year. The number of 60-day plus delinquencies were up 17 basis points to 5.43% for the month, and was also weaker year over year, by 46 basis points.

Some of the deterioration was due to higher losses in ABS portfolios issued by American Credit Acceptance and Santander.

Kroll projects delinquencies and loss rates in both its prime index and nonprime index will stay elevated for February but will improve in March as borrowers receive tax refunds that will provide cash to catch up on overdue loan payments.

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