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World Omni ups exposure to short-term leases in 2nd securitization of 2018

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World Omni Financial Corp. has increased exposure to shorter-term lease contracts in its second securitization of new Toyota-branded vehicle leases this year.

According to Fitch Ratings, more than 88% of the vehicle leases used as collateral for the $800.8 million transaction have term of less than 40 months; this is up "significantly” from 78.4% in the sponsor's preivous deal.

The surge is a result in the regional auto lender’s decision to raise the level of incentives (or subvention) for the shorter contracts, said Fitch, which reported an average original term of 37.1 months in World Omni Automobile Lease Securitization Trust 2018-B. A greater collection of short-term contracts can benefit a portfolio with more certainty of the future value of off-lease vehicles returned to dealers, Fitch noted.

"The longer the lead time, or months before the first residuals start maturing, the lower the predictability in the [residual value]," the report states. The bulk of maturities on the least contracts will be in the 12-month period after the third quarter of 2020.

Four classes of senior notes will be issued, including an $87 million money-market tranche with a preliminary F1 rating from Fitch and three term tranches iwth AAA ratings: a $302 million Class A-2 tranche split between fixed- and floating-rate notes due June 2021; a $302 million Class A-3 tranche due December 2021; and $70 million of Class A-4 notes due March 2024.

World Omni is also offering an AA-rated Class B subordinate tranche totaling $39.8 million, also due March 2024.

The leases in the pool have a combined balance of $936.5 million across 37,135 leases, with an average initial securitization value of $25,220, according to Fitch. The weighted average FICO for obligors is 732.

The senior notes are supported by 19.25% credit enhancement, which includes 14.5% of initial overcollateralization, 4.25% of Class B note subordination and a reserve account launched at 0.5% of the initial pool size.

Fitch noted that return rates on leased vehicles have been increasing in recent years. But the rate “will likely stabilize as World Omni achieves greater balance in its portfolio by vehicle segment,” the report stated.

Fitch lauds the balance of model exposure in the new deal, with a 38.4% share for SUVs and crossovers, 32% for trucks and 27.5% for passenger sedans (including hybrid models). The Toyota Tacoma pickup truck had the highest model concentration at 19.4%, similar to its first deal. The Tacoma has had higher-than-average resale values on lease returns, the report stated.

Combined, the SUV and truck exposure has increased consistently the last five years, Fitch stated, “when they accounted for only 27.5% of the pool.

Fitch has set a 1% base case loss proxy on the portfolio, unchanged from recent World Omni lease securitizations.

World Omni, which provides captive finance services for Toyota dealers in five U.S. Southeastern states, has grown its managed lease portfolio by nearly 20.6% to $3.63 billion since the second quarter of 2017.

Delinquencies and net credit losses on the managed portfolio have not changed since World Omni completed its first auto-lease securitization this year. The expected future resale values of the pooled leased vehicles (at 72.7% of the original contract balance) also remains unchange

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