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
During the height of the ABS boom, issuers had structures
that regularly included revolving periods and prefunding
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
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
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
"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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