CPS risk auto ABS credit quality improves, but pandemic risks persist in $ 260 million securitization
Consumer Portfolio Services places more credit enhancement and stronger borrower credit profiles behind its third major subprime auto loan securitization this year.
But the loan portfolio still faces the prospect of higher levels of losses than previous transactions, according to Moody’s Investors Service, due to the macroeconomic effects of the pandemic.
The $ 260 million CPS Auto Receivables 2020-C, via Citigroup, is a high APR, low cap used vehicle loan securitization, representing the lender’s 86e securitization in its long history of operating the asset-backed market to offload loans to investors. (The specialty auto finance company was founded in 1991 and has issued approximately $ 14.6 billion in ABS term bonds since 1994).
According to a Moody’s pre-sale report, the credit quality of the transaction is slightly improved compared to recent agreements, with a higher weighted average FICO of 572 and a lower average loan-to-value ratio of 114%.
But “although an economic recovery is underway, it is tenuous and its continuation will be closely linked to the containment of the virus. Specifically, for auto loan ABS, loan performance will weaken due to an unprecedented rise in the unemployment rate which could limit the borrower’s income and ability to repay debt, ”the report says. from Moody’s. In addition, easing used vehicle prices due to weaker demand may reduce collections on defaulted auto loans, “also negative credit.”
Borrowers can also become increasingly dependent on loan extensions, disrupting the expected cash flow to noteholders. The deal is also underscored by CPS’s position as a “financially weak” provider and sponsor, which is tempered by its backup service agreement with Wells Fargo, as well as the high level (25% of the pool balance of closing) funding account – meaning that a quarter of the pool’s receivables will come from accounts that will be added after closing.
CPS largely targets borrowers with difficult credit histories and markets its loans through relationships with independent dealers and franchisees. She manages all the loan contracts she buys from dealers.
The initial pool consists of $ 196.29 million of notes on 11,584 contracts, with an annual WA percentage rate of 19.27%. The loans have an average initial term of 69 months and have an average term of four months. About 79% of loans are for used vehicles.
While these loans must meet minimum eligibility requirements to be added, Moody’s notes that this adds uncertainty to the characteristics of the collateral which could lead to greater volatility as they are added up to 45 days after closing.
Moody’s estimates the transaction’s cumulative net credit losses at 23%, based on expected defaults and recoveries. That’s four basis points above Moody’s estimate for the previous (and pre-COVID) CPS transaction that he rated in January.
DBRS Morningstar assumed losses of 18.55% on the expected pool composition.
Moody’s and DBRS Morningstar applied preliminary triple A ratings to a tranche of $ 107.77 million Class A bonds as part of the transaction, with a primary maturity of March 2024. Senior bonds benefit from ” 59.55% credit enhancement.
CPS will market five tranches subordinated to all, with maturities ranging from 2025 to the end of 2027.