Truck, SUV concentration hits new high in Ford's next prime ABS

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The passenger vehicles slated to disappear from Ford’s 2019 model lineup have already fading away in Ford Motor Credit’s new $1.58 billion prime auto-loan securitization.

The $1.58 billion Ford Credit Auto Owner Trust (FCAOT) 2018-A has a concentration of 84.7% light-duty trucks and SUVs, the highest in the nearly 30 years that Ford Motor’s captive-finance arm has sold bonds backed by retail installment contract receivables.

Three years ago, loans tied to passenger vehicles including the Ford Focus and Fusion made up 25% of the collateral for FCAOT portfolios. The level declined to just 20% in the previous trust issuance last November.

While the concentrations are representative of the level of consumer interest in the company’s F-150 trucks and its lineup of Ford Explorer and Escape SUVs, they also present a higher risk to FCAOT deals, according to Fitch Ratings.

“Current low fuel prices are supporting demand and values of larger trucks/SUVs/CUVs, and are thus currently attractive to consumers to purchase,” Fitch stated in a presale report. “However, such a high concentration could affect recovery rates in the future as vehicle values are tied to fuel prices were they to rise.”

Ford, which reported a 7% increase in first-quarter revenues to $42 billion last month, also announced the phasing out of all passenger vehicle models from 2019-model production lines with the exception of the Ford Mustang and a Ford Focus crossover. Absent those models, Ford sedans made up only 11% of the collateral for FCAOT 2018-A.

The new deal is first static pool securitization from Ford's auto-owner trust platform for 2018, but in January the company sold $1.09 billion of bonds from its revolving, extended variable-utilization (REV) shelf.

Ford Motor Credit will market four classes of senior notes and two subordinate classes, similar to recent FCAOT transactions. Fitch and S&P Global Ratings both expect to assign triple-A ratings to the $543.3 million in three-year Class A-2 notes to be split between fixed- and floating-rate tranches, the $547.3 million four-year Class A-3 notes, and the $130.2 million Class A-4 notes due October 2023.

A money-market tranche totaling $279.2 million is rated A-1+ by S&P and F1+ by Fitch. The subordinate Class B notes ($47.4 million) are AA+ rated while the Class C notes totaling $31.6 million are AA rated by S&P and A+ by Fitch.

According to Fitch and S&P, little has changed in the collateral quality since FCAOT 2017-3, other than a slight decline in average FICOs to 737 from 739, the average APR rose to 3.55% from 3.06% and the percentage of loans with original terms between 61-72 months decreased to 57.6% from 58.2%.

Credit enhancement on the Class A notes declined to 5.25% from 5.54% due to a decrease in the transaction’s reserve account to 0.25%. The yield supplement overcollateralization account was boosted to 9.45% from 8.22% to cover synthetically low consumer interest rates offered by the manufacturer for sales incentives to qualified buyers.

The portfolio collateral consists of 64,956 loans with a principal balance of $1.72 billion.

Expected net losses remain virtually unchanged from prior FCAOT transactions, which have been performing with lower-than-expected loss levels among the 2014-2017-vintage deals. S&P assigned a 1-1.2% expected net loss range, and Fitch applied a 1.6% base-case net loss proxy in its analysis of the deal (up slightly from 1.55% from November).

The deal is Ford’s eighth under its Reg II AB-compliant shelf.

The transaction is expected to close May 22.

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