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World Omni ups credit enhancement on next auto lease ABS

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World Omni has increased investor protections on its latest Toyota vehicle-lease securitization to offset the impact of declning used car prices.

According to presale reports for the $800.6 million World Omni Automobile Lease Securitization Trust 2018-A, initial credit enhancement hfor the senior tranche is 19.25%, or 250 basis points higher than on the comparalble tranche of World Omni’s previous lease ABS.

Used car prices are a key risk to bonds backed by auto leases; if prices fall too far, the securitization trust may not be able to recover enough by selling the cars that are repossessed or come off lease to repay the bonds.

For the past four years, CE levels in World Omin deals have ranged from 16% to 17.65%. Most of the higher support level in 2018-A is achieved through a boost in initial overcollateralization to 14.5% from 12%, with a target level of 16% compared to the last year’s 14% level.

World Omni is also coping with rising delinquency levels in its $3.3 billion managed portfolio of new-vehicle leases of Toyota- and Scion-branded autos, SUVs and light-duty trucks, according to Moody’s investors Service and Fitch Ratings.

The new senior-subordinate transaction includes nearly $720 million in Class A notes, including three note tranches with staggered terms terms totaling $680 million with preliminary triple-A ratings from Moody’s and Fitch. The stack also has a $97 million money-market tranche with a Moody’s P-1 and Fitch F1+ rating.

The notes are backed by the receivables from 31,134 contracts with an average remaining balance $25,215 (totaling $936.3 million for the pool). The contracts are prime-caliber, with a weighted average FICO of 732 on 39-month original terms.

World Omni is a captive-finance lender for Toyota USA dealers in five Southeastern states, including Florida where 61.7% of the contracts were originated.

Moody’s and Fitch each assigned expected losses of 1% on the deal. That level is an increase from Moody’s 0.8% in 2017-A due to worsening default performance in World Omni’s two most recent deals, as well as 30-day delinquencies in the managed portfolio of 0.91% - nearly double from the 2015 level of 0.54%.

The 1% loss level is also higher than peer-average losses in auto-lease ABS deals, according to the ratings agency reports.

World Omni is also experiencing higher return rates from off-lease vehicles, now at 65% compared to 52% in 2013. But World Omni is losing only an average of $419 per vehicle compared to $1,632 five years ago.

Most of the vehicles in the pool (74%) consist of SUVS, trucks and vans, with concentrations in the Tacoma light-duty truck model (20% of the pool), the RAV4 SUV (17%) and Camry (13%).

Bank of America Merrill Lynch is the lead underwriter.

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