What took so long? Honda boosts exposure to SUVs in next auto ABS
America's increasing preference for SUVs over passenger sedans has led American Honda Finance Corp. to shift the mix of receivables in its asset-backed securities.
Sales of Honda’s light-duty truck line of utility models are up 3.2% year-over-year through the end of July, and are projected by year’s end to surpass Honda passenger vehicle sales for the first time.
And, for the first time since early 2017, the percentage of SUVs in American Honda's securitization is increasing. They account for 41.3% of receivables in a deal that the captive finance arm of Honda Motor Co. launched this week, Honda Auto Receivables 2018-3 Owners Trust (HAROT). That is a significant boost from37.9% of the prior deal, HAROT 2018-2 pool.
In the five previous transactions, American Honda Finance Corp. increased the concentrations of passenger vehicles and reduced the concentration of SUVs and minivans as consumers flocked to its Civic and Accord lines. Exposure to passenger sedans reached a peak of 55.7% in the May 2018 offering.
The HAROT 2018-3 transaction is proposed at $1 billion in new notes, with a potential upsizing to $1.25 billion. The notes will be secured by mostly new-car loans (90% of either pool) originated at franchised Honda and Acura dealerships.
Honda customers’ support of passenger vehicles had bucked the industrywide trend in 2016-17 toward dominant levels of SUVs and light-duty trucks in both sales and as collateral in asset-backed securities. Ford's dwindling lineup of passenger vehicles, for example, made up about 16% of Ford Motor Credit’s most recent revolving prime-loan securitization.
Now Honda buyers are increasingly overlooking four-door sedans as well, with sales down 19.2%, according to Honda. But the passenger model lines still make up the majority of the pool in the 2018-3 line at 51%, according to Fitch Ratings. Rather than ditching cars, most SUV buyers appear to be angling away from Honda’s minivan line – Fitch says that the concentration of Odyssey models has fallen to 5.4% of the 2018-3 pool, compared with 13.7% in AHFC’s third deal of 2017.
The new Honda transaction adds to a busy prime auto-loan ABS pipeline totaling $9.93 billion year-to-date.
The loan receivables will be used to support three tranches of Class A notes, as well as a one-year money-market tranche and a residual slice of notes – a stack arrangement similar to previous HAROT issues,
Under a proposed $1 billion issuance, the trust will market a $400 million two-year tranche of Class A-2 notes, a $385 million Class A-3 tranche due 2022, and a six-year $100.63 million Class A-4 notes offering.
The $1.25 billion option would have $500 million in Class A-2 notes, $477 million in Class A-3 notes and $129.8 million in Class A-4. (All would carry similar maturities.)
Both Fitch and Moody’s Investors Service have assigned preliminary triple-A ratings to the senior notes.
Honda’s trust will not offer its money-market tranche to investors; instead, the issuer will keep the $167 million in Class A-1 one-year notes (or an upsized $209 million) in the deal as well as a 5% vertical interest across all the class offerings for risk-retention compliance purposes.
The residual certificates being held will total either $26.99 million or an upsized $33.74 million, representing 2.5% of the collateral assets to support a 2.75% credit enhancement to the Class A notes of either proposed pool.
American Honda also retained the notes in both the 2018-2 transaction and in its 2017-2 deal in June 2017. But ratings agencies issued early ratings In those deals since Honda’s choice to maintain the notes occurred after the initial prospectus offering was filed, according to sources familiar with the deals.
AFHC's 72 overall securitization would pool either 60,044 or 75,064 loans with largely the same characteristics: an average remaining principal balance over nearly $18,000, an APR of 2.16%, and a weighted average borrower FICO of 769 - similar to prior HAROT deals.
The loans have an average seasoning of 12.67 months, and the percentage of loans over five years is 24.8%, which Moody’s notes is “significantly” higher than the approximate 20% share in 2016 deals and the 14%-17% for the trust’s prior asset-backed transactions.
But the trend is in line with other U.S. captive finance lenders that have utilized longer-term loans for consumers who have shifted their preferences toward pricier trucks and SUVs. Honda’s average term of 60.95 months is shorter than those of recent deals from Nissan Motor Acceptance Corp. (67 months), Toyota Motor Credit (66), Hyundai Capital America (66), Ford Motor Credit (65) and GM Financial (66).
Expected losses for the deal remain unchanged from previous HAROT issues, with Fitch and Moody’s forecasting a cumulative net losses to reach 0.5% for the deal, in line with HAROT securitizations since 2013. Delinquencies in American Honda Finance’s $28.4 billion managed loan portfolio are 0.82% for 30-plus day late pays, 0.2% for 61-90 days and 0.04% for delinquencies over 90 days.
Net losses are up slightly (at 0.34% compared with 0.28% in 2017) but far below historical crisis-era levels.