What's the Difference Between Prime, Near-Prime Auto ABS?

Two auto loan securitizations, one prime and one slightly less prime, priced on Wednesday.

The $893 million Honda Auto Receivables 2015-3 Owner Trust (HAROT 2015-3) is backed by new and used Honda and Acura automobile, light-truck and utility vehicle loans originated by American Honda Motor. The borrowers taking out these loans are clearly creditworthy, with a weighted average FICO of 761, according to Fitch Ratings.

Barclays is the lead underwriter.

The $1.06 billion Capital Auto Receivables Asset Trust (CARAT) 2015-3 is backed by what Fitch describes as “primarily nonprime” new and used automobile and light-truck loans originated by Ally Financial pursuant to agreements with General Motors and Chrysler Group dealers. While non-prime is pretty fuzzy concept, the pool has a weighted average FICO of 633, which Fitch calls “representative” of this category.

JP Morgan Securities was the lead arranger.

Another way to think about the relative riskiness of the collateral in the two deals is comparing Fitch’s expectations for cumulative net losses: on Honda’s deal, which is backed primarily (93%) by loans on new vehicles and has a weighted average seasoning of 13 months; Fitch’s expects losses could range from 0.35% to 0.45% of the transaction. In order to secure an ‘AAA’ rating, Honda structured the senior notes with credit enhancement of 2.75%.

The deal’s Class A-2 notes with a weighted average life of 1.0 year yield 37 basis points over the Eurodollar synthetic forward curve (EDSF);the  Class A-3 notes with a WAL of 1.97 years yield EDSF +38; and the Class A-4 notes with a WAL of 2.99 years yield 40 basis points over interpolated swaps.

By comparison, Fitch’s base case loss for Ally’s deal is higher, at 5.50%, and the senior notes benefit from much higher credit enhancement, 19.5%.

Lower FICO scores aren’t the only difference between the two deals; a lower percentage of the loans that Ally is securitizing, 60%, are for new cars.

Borrowers in Ally’s pool have been making payments for just as long as those in Honda’s pool, 13 months.

But Ally’s deal has a one-year revolving period during which interest and principal payments on the collateral can be used to purchase new collateral. In its presale report, Fitch notes that this “introduces risk of collateral migrating to a weaker pool before the start of the amortization period,” although eligibility criteria may mitigate some of this risk.

Ally’s Class A2 notes with a WAL of 2.08 years pay swaps plus 80 basis points; Class A3 notes with WAL of 2.79 years also pay swaps plus 80 basis points; Class A-4 notes with WAL of 3.41 years pays swaps plus 83 basis points.