A shift in focus by the two biggest subprime lenders, Santander and Americredit from subprime to prime lending will give their smaller competitors room for growth, according to John McElravey, head of consumer ABS research at Wells Fargo Securities.

The top two lenders still account for the bulk of subprime auto ABS issuance, but year-end 2013 volumes show that they are slowing down. Overal issuance of subprime auto ABS issuance rose to $21.5 billion in 2013 from $18.0 billion in 2012. However, Americredit and Santander deals accounted for about 61% of the subprime auto securitization market  in 2013 down from 75% in 2012.

McElravey, who was speaking on a conference call this morning, said that the top two lenders are moving away from their singular subprime lending focus “as they make inroads with prime auto loans through captive finance arrangements,” Santander thorugh Chrysler and Americredit through GM Financial.

That creates opportunity for smaller, independent finance companies to access more securitization funding. Increased private equity ownership of these smaller subprime auto lenders has become a more prominent feature the post-crisis marketplace.

In total the market has expanded to include eight private equity lenders. For example Perella Weinberg Partners has a majority interest in subprime lender CarFinance Capital. The company was launched in 2011 and issued its debut securitization in 2012 via its CarFinance Capital Auto Trust.

Altamont Capital Partners purchased JD Byrider in 2011. The lender, which has been in business since 1989, completed its debut securitization in 2013 via its CarNow Auto Receivables Trust.  In 2011, the Blackstone Group acquired Exeter Finance, which was started in 2006. The lender completd its debut securitization from its Exeter Automobile Receivables Trust in 2012.

“Investors have expressed reservation in private equity ownership in subprime lending, they are concerned that these issuers are in for the short run,” said McElravey. “The exit of private equity need not be disruptive, in our opinion. Indeed, the next wave of consolidation may take the form of private equity firms “rolling up” competitors to achieve increased scale and scope,” he said.

On the flip side the entrance of private equity has brought more capital and improved the liquidity position for smaller lenders.

Outstanding subprime auto ABS was about $32.3 billion as of Q4 2013. According to figures reported by Federal Reserve Bank of New York, total auto loans outstanding were $863 billion as of Q4 2013. The share of subprime auto loans outstanding is $312 billion and outstanding subprime auto ABS was about 32.3 billion as of Q4 2013, according to Wells Fargo.

“Based on these figures, only about 10% of subprime auto loans (with credit scores below 680) are funded in the securitization market,” said McElravey. “This suggests that there is room for further expansion of subprime auto ABS depending on the efficiency of securitization for issuers compared to other financing options.”

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