Westlake Services’ next offering of bonds backed by subprime auto loans is sized at $750 million, on par with its two previous deals, completed last year.
But the collateral pool is significantly larger, at over $1 billion; by comparison, Westlake's second deal of 2017 featured a collateral pool of only $870 million in loan receivables.
The larger collateral pool reflects, in part, the fact that the individual loans are larger. But Westlake is also using some of the proceeds to pay down its warehouse line of credit. And increasing the collateral provides additional credit enhancement for the notes to be issued.
In total, there are 90,829 loans in the pool with a combined balance of $1.08 billion.
The Class A notes in Westlake's new deal benefit from total initial credit enhancement of 43.5%, a 100 basis point climb above the 42.5% level from its prior a transaction in July. There are two senior tranches: a $161 million money-market tranche and a $283.57 three-year tranche with a provisional AAA rating from S&P Global and Kroll Bond Rating Agency.
Subordination levels are higher due to the first-time inclusion of a sixth note class (the $42.5 million Class F tranche) to Westlake's standard securitization capital stack.
In its presale report, S&P stated the while the deal has “overall” collateral characteristics stronger than Westlake’s prior deal, such as more loans originated and acquired from franchise dealers instead of riskier independent lots, 2018-1 is “weaker in other characteristics, including loan-to-value, debt-to-income and payment-to-income.”
S&P is assigning the same cumulative net-loss projection range of 13-13.5% on the lender’s 15th overall securitization that was tacked on to its 2017-2 deal. Kroll Bond Rating Agency (which did not rate either of Westlake's 2017 securitizations) has established a base-case loss expectation of 12.5%-14.5% on the deal.
Borrowers are taking out longer loans (average original terms of 54.9 months – another platform peak level) and at a higher LTV ratio (109.83%) than Westlake’s previous transaction (106.91%).
But a smaller percentage of loans (12.2%) were issued to borrowers with FICOs under 540, compared with 15.86% and 14.86% in the two prior deals. The overall weighted average borrower FICO is also higher (602 versus 596) and more loans were underwritten through its midlevel credit-tier Gold program (37.34% from 35.44%) than last year.
Westlake has seen improvements in the delinquency and net loss performance of its $4.2 billion managed portfolio. The total delinquencies of 4.72% (as of the Oct. 31 last year) was down from 5.49% at the same point in 2016. Net losses were also down to 7.35% from 8.85%.
Investors also need to be mindful of regulatory risk. The company is under investigation by the Securities and Exchange Commission after receiving a subpoena in September 2016 to produce documents regarding its underwriting and servicing practices, That includes the controversial use of “kill” switches to disable and repossess cars from delinquent buyers.
The document requests include all offering materials and communications related to asset-backed securities issued Jan. 1, 2014.