Westlake, Flagship Add $680M to Subprime Auto Pipeline

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Two more subprime auto lenders, Westlake Financial Services and Flagship Credit Acceptance, are making their first trips of the year to the securitization market.

The $395.5 million Westlake Automobile Receivables Trust Series 2015-1 benefits from higher initial credit enhancement than the sponsor’s previous deal, and there are also significant differences in the collateral backing the two deals, according to Standard & Poor’s.

Credit Suisse Securities is the underwriter.

In its presale report, S&P noted that the initial overcollateralization increased to 6.65% from 5.70% in Westlake’s previous deal in 2014; the target level of enhancement has also risen, to 12% from 11%.  

Another positive is an increase in the weighted average seasoning of the loans in the pool, to 8.42 months from 7.41 months. In general, the longer borrowers have been making payments, the less likely they are to default.

On the other hand, these loans are more highly levered; purchases borrowed, on a weighted average basis, 109.98% of the value of their vehicles, up from 108.06% in Westlake’s previous deal. (Borrowers often use new loans to pay off what they still owe on their previous vehicle.) The portion of loans with terms of between 61 and 72 months also increased, to 17.19% from 13.62%.

However, S&P said these negatives are “partially mitigated” by the higher percentage of vehicles coming from franchised dealers, which tend to be newer and have less mileage. Franchise dealers also tend to lend to consumers with better credit.

In addition, Westlake’s management has confirmed that the pool backing Series 2015-1 excludes loans made by Las Vegas subprime lender Western Funding, which Westlake acquired from bankruptcy in January 2014.

S&P expects cumulative net losses over the life of the deal will be in the range 11.5%-12.0%, consistent with the sponsor’s previous deal.

The rating agency has assigned a preliminary ‘AAA’ to the $169.62 million class A-1 senior notes with a legal final maturity of March 2018. The notes benefit from subordination of 26.65%, in line with the previous transaction.

S&P also assigned a preliminary ‘A-1’ rating to a money market tranche and ratings ranging from ‘AA’ to ‘BBB’ to three subordinate tranches.

Flagship is marketing a $280 million of subprime auto bonds. The senior tranche of Flagship Credit Auto Trust 2015-1 benefits from the same amount of subordination, 26%, as the senior tranche of Westlake’s deal, yet it only earned an ‘AA’ from S&P.

Wells Fargo Securities is the lead underwriter.

In its presale report, S&P said that it declined to assign a higher rating due to concerns about performance gaps in Flagship’s static pool and portfolio data as a result of the company scaling back operations following the credit crisis.

S&P also considers the collateral backing Flagship’s latest transaction to be “marginally weaker” than the collateral backing its previous deal. The weighted average LTV of loans in the latest deal rose to 119.17% from 118.24%; the percentage of loans secured by new vehicles also decreased to 21.77% from 24.77%. The weighted average seasoning of the loans also decreased to less than one month from almost two months.

The latest transaction is partially prefunded: approximately $57 million of the collateral, or 20% of the total, will be acquired over the first three months after the deal closes.

S&P’s expects cumulative net losses for the deal will be between 12.5% and 13.0%.

In addition to the senior tranche, S&P assigned preliminary ratings to four subordinate tranches ranging from ‘A’ to ‘BB-‘. 

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