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Another subprime auto lender launches debut rated deal

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Another deep subprime auto lender is seeking to broaden its source of funding.

Veros Credit LLC, a family-owned company based in Santa Ana, Calif. in business since 1998, is marketing its first offering of rated auto loan-backed securities, according to Kroll Bond Rating Agency.

Veros has been making loans through non-franchised, independent dealerships since 1998. To date, it has only issued bonds in private, unrated deals. The company has been consistently profitable since its founding, according to Kroll, and has quarterly originations of $50 million.

It has $235 million in lines of credit with Capital One, Deutsche Bank and Credit Pacific Partner that allow it to warehouse loans in preparation for securitization; as of Sept. 30, there was about $50 million in remaining capacity.

The $165.28 million of securities being issued through Veros Auto Receivables Trust 2017-1 will allow it to pay down those lines, freeing up capital to make more loans. Going forward, the company expects to come to market with rated deals at least once a year, according to Kroll.

Veros will be the second subprime auto lender to launche a debut rated transaction in 2017. following Honor Finance LLC’s sponsorship of a $100 million first-time deal in January.

Three tranches of notes will be issued in Veros 2017-1: the senior $128.74 million in Class A notes are supported by a 28% credit enhancement level that includes subordination of the Class B ($21.32 million) and Class C ($15.22 million) notes, along with a cash reserve account and excess spread. The senior notes carry only a preliminary single-A rating, two notches below the triple-A ratings afforded other more established deep-subprime securitizers such as Consumer Portfolio Services, Santander Consumer USA and American Credit Acceptance.

The notes are backed by 17,328 contracts for used vehicles, with average borrower FICOs of 557, APRs of 21.31% and 124% loan-to-value ratios. Thirty percent of the loans were underwritten with no FICO score.

While that places Veros firmly in the deep subprime category, those portfolio characteristics actually represent a sharp improvement over the company’s recent originations.

After expanding outside of its California base to the East Coast - North Carolina and Florida in 2015 and then into Texas in 2015 - the performance of the company's managed portfolio dipped. Subprime lenders breaking into new markets tend to suffer from an adverse-selection process; in order to establish partnership with dealers, they have to take the riskiest loans, and that's what happened to Veros. Since 2015, however, the lender has applied more “selective” underwriting criteria on both is dealer network (now at 1,139 in 21 states) and on borrowers, per Kroll. Payment-to-income ratios have shrank to an average of 13.44% from 17.59% in March 2014, and the current FICO average is up from approximately 545 in 2015, according to KBRA (LTVs peaked at 153% in 2014, as well).

California remains Veros's hub of activity; 71.57% of the 2017-1 pool derived from loans to Golden State borrowers.

KBRA has assigned a cumulative net loss expectation range of 14.4%-16.4% on the debut collateral, which includes credit for pooling loans with above-average seasoning of 12 months for a subprime loan securitization.

About 5.68% of the Veros 2017-1 collateral, or $9.88 million, are from loans issued in hurricane-damaged areas in Texas (9.54% geographic concentration in the pool) and Florida (6.7%). Nearly $8 million of the loans have made a scheduled payment, with $1.2 million either granted an extension or listed as late pays. (Less than $1 million of the loans were issued after the storms.)

Veros will repurchase all loans in the Federal Emergency Management Agency-declared disaster areas that do not make the first monthly payment.

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Auto ABS Subprime lending Kroll Bond Rating Agency Veros Credit LLC