Pre-crisis ABS car loan structures make a comeback
NEW YORK, Jan 17 (IFR) - Auto-lenders are taking full advantage of the current investor craze for asset-backed securities backed by auto loans, and are even bringing back structures with features that were popular in the years before the 2007-2008 crisis.
The last two weeks have seen the introduction of a prefunding account and a one-year revolving period in consumer ABS structures, both of which have added risk - yet the transactions have been hugely oversubscribed.
One week after Santander Consumer USA priced its first subprime auto ABS that included pre-funding, Ally Financial on Tuesday priced a non-prime auto loan-backed ABS with a revolving period - the first since 2007.
A prefunding account adds risk to an ABS because funds in the account are used to purchase additional collateral during a post-closing period. The risk is that new auto loans delivered to the trust could be poorer in credit quality than those already in the pool.
Similarly, during a one-year revolving period, Ally could add new loans to the pool.
Bankers are sanguine about the return of these deals.
"Pre-crisis structural features are making a comeback but it is not as alarming as the statement may sound," said Martin Attea, managing director in the securitised products origination group at Barclays.
"Many subprime deals before the crisis employed prefunding and all those structures which had revolving periods got repaid in the post-crisis years. There were no defaults in such products so it is not surprising to see investors overwhelmingly supporting these structures in the last two weeks."
Still, it didn't hurt that both issuers added additional safeguards to the structure to make the deals more appealing to investors, suggesting some lessons have been learnt since the crisis.
During the height of the ABS boom, issuers had structures that regularly included revolving periods and prefunding accounts.
After the crisis, rating agencies obliged them to put additional safeguards and credit enhancement into the deals to protect investors. Concerns about the risk of such features have not completely dissipated -- but Santander and Ally addressed them in their latest ABS.
Santander's deal, for example, had some embedded restrictions. Under that structure, receivables could not be acquired through the pre-funding account if the effect of such an acquisition would reduce the weighted average contract rate of all subsequent receivables to less than 16.73%, cut the weighted average loss forecasting score to less than 561, increase the weighted average loan-to-value (LTV) ratio to more than 116.02%, cut the weighted average FICO score to less than 590, or increase the weighted average remaining term-to-maturity to greater than 69.55 months.
In other words, Santander is blocked from adding loans of really poor quality to the pool.
Similarly in the Ally Financial deal, there are eligibility criteria that have to be met by receivables that are introduced during the revolving period.
No more than 2% of cumulative additional receivables may have an original term-to-maturity above 75 months, no more than 10% may have an original term between 73-75 months and at least 22.5% must have an original term of less than or equal to 60 months.
No more than 40% of cumulative additional receivables may be secured by used vehicles and weighted average FICO score of all cumulative additional receivables must remain at 630 or greater.
These limits ensure the quality of the collateral will not be compromised during the life of the transaction.
Bankers said investors spent time understanding the revolving structure and became comfortable with it.
Santander's US$1.25bn trade was hugely oversubscribed and priced at one of the tightest levels the issuer achieved in the post-crisis era.
The weighted average spread on the latest Santander deal down through the Triple Bs was approximately 81bp while the weighted average yield was 1.29%.
That compares with the 2012-1 series that priced a year ago with a weighted average spread of about 224bp and yield of 2.92%. Santander's 2012-6, which priced in October, had a weighted average spread of 109bp and yield of 1.52%.
Ally Financial's US$1.566bn trade was increased in size from US$940m following a strong reception from investors.
The success of these deals is now expected to increase interest in issuing auto-loan backed ABS to a new level in coming weeks.
"Where investors are comfortable with the sponsor and the deal is structured to ensure consistent collateral quality during the revolving period, we could see significant appetite for deals using these structures," said one senior banker.
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