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That's all, folks: Honor notes paid down to wrap troubled ABS deal

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The Honor Finance saga has drawn to a close.

Kroll Bond Rating Agency on Tuesday withdrew its ratings on the defunct subprime auto lender's problematic 2016-vintage securitization, after the remaining pair of subordinate note tranches of the original $100 million transaction were paid down by the replacement servicer.

Kroll removed the prior B+ ranking on the Class B notes as well as the C rating (one notch above default status) assigned to the Class C notes of the Honor Automobile Trust (HATS) 2016-1 deal.

According to a Kroll news release, the final balances of the notes were satisfied Monday after replacement servicer Westlake Portfolio Management exercised its option to purchase the trust property and pay down the obligations – a move that avoids investor losses and puts a wrap on a deal that distinguished itself as only post-crisis, subprime auto loan securitization to undergo a downgrade.

In Honor’s case, multiple downgrades.

Over the past year, both Kroll and S&P Global Ratings downgraded the Class B and C notes, as cumulative net losses mounted to 31.15% of the original note balance and credit enhancement levels deteriorated from rising delinquency rates and falling excess spread. Kroll further downgraded the Class C notes in April, and both tranches were still on watch for another downgrades when Kroll issued its withdrawal notice this week.

On Thursday, S&P no longer rated the Class B and C notes, both of which had still been on downgrade watch.

Both Kroll and S&P had previously withdrawn ratings of the original $76.48 million in Class A notes, after they were prepaid in full last December. Trustee Wilmington Trust had drawn down a $1.4 million reserve account to avoid having the note balance exceed the balance of the collateral.

According to S&P data, the Class B notes had $6.21 million remaining from the original $14.66 million as of April 1 (with a coupon of 5.76%), and no principal payments had been applied to the original $8.66 million in Class C notes, paying at 8.05%, prior to Westlake's payoff.

When S&P downgraded the Class B notes in February, the agency pointed to “idiosyncratic originator/servicer issues” rather than any widespread concerns over the subprime auto sector. Both ratings agencies cited the Evanston, Ill.-based lender’s lax use of loan-payment extensions for up to 22% of its borrowers each month, which allowed troubled customers to evade delinquency status.

Honor originated loans in the "deep" subprime space, bottom-feeding on used-car loan applications from borrowers with troubled credit history. Working primarily through independent auto-dealer lots, Honor financed borrowers with FICOs as low as 475, and had stocked nearly 25% of the HATS 2016-1 portfolio balance with loans that lacked a FICO score (the weighted average FICO of the deal was 538).

At the time the ABS deal was issued, the collateral featured used vehicles that were securing low-balance loans with average loan-to-value ratios of 135.12% – making borrowers significantly under water after 11 months of seasoning. Borrowers took on high-interest loans (25.97%) with balances averaging $7,607.

By August 2018, Honor Finance – majority owned by CIVC Partners – had ceased originations and loan servicing was reassigned to Westlake. During its first two months of servicing, Westlake reported net loss-to-liquidation levels of 75%, as previously extended loans began rolling into delinquency and default status, according to S&P.

Thirty- to 90-day delinquencies soared to 31.69% at the end of last August, and recovery rates had faltered as Honor had dropped its collection activity prior to the handover to Westlake.

As of April, Kroll estimated the deal was undercollateralized at -$3.26 million.

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Subprime lending Auto ABS