Increased the loss expectations have weakened some credit metrics for Westlake Services’ latest securitization of subprime vehicle loan receivables.
The heightened risk is offset, though, by a continued expansion of its partnerships with franchise dealers that are putting customers into more reliable, and more expensive, vehicles.
Westlake Automobile Receivables Trust 2016-3 is a $500 million notes issuance split among six classes of notes, led by $356.9 million in Class A notes. The notes are secured by a receivables pool balance of $796.66 million – a substantial hike from the pool balance of its previous transaction (2016-2) that collateralized $579 million in loans.
The A notes themselves are divided into a $144 million, one-year money market tranche that has a preliminary ‘A-1+’ structured finance rating from Standard & Poor’s. The triple-A rated Class A-2 notes tranche has separate fixed- and floating-rate components, and is sized at $212.9 million.
The sizes of the fixed/floating balances in the Class A notes will be determined at close; the floating-rate notes will be pegged to one-month Libor, and will be sized at a minimum 50% of the final overall class A size.
The remaining subordinate Class B, C, D and E notes are rated from a range of ‘AA’ to ‘BB’.
Initial hard credit enhancement for the Class A,B and C notes increased across the board from Westlake’s previous transaction (2016-2) because of higher overcollaterization rates (both initial and target) due to a higher expected cumulative net loss range of 12.75%-13.25%.
The Class A notes hard CE moved up to 40% from 37.44. The target credit enhancement on the senior Class A notes is 46.61%, enough to cover 3.5 times the CNL by S&P.
The pool’s loan characteristics show that average credit scores have weakened: the weighted average FICO score decreased to 595 from 604, and internal credit scores declined slightly. In addition, there was also a slight increase in the percentage of loans with extended terms over 60 months: to 26.06% from 25.61% - representing another heightened risk factor.
The pool’s seasoning decreased from the 2016-2 transaction to 2.99 months from 3.78 months; the weighted average debt-to-income increased to 32.1% from 31.46%; while average payment to income decreased to 16% from 15.65%.
But those lengthier terms and higher leverage figures are partially a result of Westlake taking on more customers in the higher subprime categories buying newer and lower mileage cars, thanks to expanded franchise dealer relationships.
The percentage of 660-plus FICO score loans increased to 15.15% from 14.08%, and new vehicle loans in the pool boosted to 6.4% from 3.94%, in comparison to the 2016-2 deal.
Loans tied to franchise-dealer originations account for 38.5% of its overall managed portfolio as of August 2016, compared to just 18% in 2012. Those loans typically have higher LTVs with longer terms, but for newer and lower mileage vehicles, S&P noted.
The average principal balance has surged to $11,539, compared to $10,944 in Westlake’s 2016-2 securitization and the $8,046-$8,595 average balances the company’s pools had in 2014.
Westlake includes CarMax, Enterprise Car Sales and Hertz Car Sales among its network of franchises.