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World Omni boosts long-term prime collateral in nonprime ABS pool

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Extended-term auto loans over six years have historically meant more credit losses in vehicle lenders’ asset-backed securitizations.

That’s due to the fact loans are at more risk of going bad over such a long period, while a slower amortization schedule results in lower recoveries for trusts after default and repossession.

But in World Omni Financial Corp.’s latest nonprime/subprime auto-loan securitization, the high share of 78-month loans actually serve to de-risk the World Omni Select Trust (WOSAT) 2020-A portfolio – as they are largely underwritten to the lender’s higher-prime borrowing base.

According to ratings agency presale reports, the aggregate pool balance for the WOSAT 2020-A includes a 14.9% share of loans with the six-year, six-month contracts. That compares to just 9.95% of the pool in World Omni’s previous nonprime/subprime securitization in 2019 and none in World Omni’s first nonprime ABS deal in 2018.

These 78-month term loans are prime loans, underwritten to obligors with average FICOs of 759, which World Omni excludes from its more active prime ABS shelf of captive-finance new-car loans it finances for Southeast regional Toyota dealers in five states.

Excluding that subset of prime loans, the WOSAT 2020-A pool would have an average FICO of just 620 for the remainder of the accounts. By including the higher-scoring borrowers, the trust boosts the overall FICO of the pool to 649.

Extended term loans (61 months and above) already make up the majority of the loans in the pool, with 72-plus-month loans taking up 68.6% of the pool balance. That compared to between 13%-15% for recent peer subprime lender securitizations by Santander Consumer USA and GM Financial’s AmeriCredit.

“The performance of 2020-A is expected to be stronger with lower losses when compared to prior WOSAT transactions as a result of the pool’s improved credit quality,” according to a presale report from Fitch Ratings.

Fitch assigned an expected credit loss level of 8% of the portfolio, while S&P Global Ratings estimated a loss range of 8.15%-8.65%.

The WOSAT 2020-A transaction will feature six classes of notes that will have a total balance of either $632.44 million (backed by a $683.74 million pool of loans) or an upsized $800.97 million (secured by a $865.95 million pool).

Fitch and S&P have assigned preliminary AAA ratings to two classes of senior notes, as well as their highest-short terms ratings (F1+/A-1+) for a one-year money-market tranche also included in the deal.

The senior notes are backed by 28.7% credit enhancement, including a 1.5% reserve account that was boosted from 0.5% from the 2019-A pool.

More than 81% of the vehicles securing the loans are new-purchase SUVs, trucks and passenger sedans; Toyota-branded vehicles make up nearly 90% of the total number of contracts (in either the 33,461-loan pool or the 26,435-loan pool).

The weighted-average loan balance is $25,867, with a WA APR of 8.56%. The loans are seasoned an average of 7.25 months.

According to S&P, approximately 27% of the loans in the proposed pools have previously had a two-month loan extension from its coronavirus pandemic-relief program for borrowers, but have since recommenced making payments. All but nearly 1% of those loans were making full payments, according to S&P.

The loans will all remain serviced by World Omni, which has a managed portfolio totaling $11.5 billion.

Barclays is the lead underwriter of the transaction.

The WOSAT shelf is one of four ABS shelves sponsored by the Florida-based lender. World Omni also has issued bonds on separate prime auto-loan and auto-lease platforms and also supplies dealer inventory financing through a floorplan trust.

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