U.S. Auto Finance is coming to market with its first term securitization for 2022, and its fourth overall, with a $232.8 million deal due out later this month. Subprime auto loans, extended mostly to customers with little or no credit history, will secure the collateral pool.
Despite the economic slowdown resulting from the COVID-19 pandemic, the thirty-year-old company was profitable in 2020 and 2021, and appears to be financially stable, with ample liquidity and funding sources, according to Kroll Bond Rating Agency. As of March 31, 2022, U.S. Auto Finance had $891 million in total assets, and shareholder equity of about $143 million.
The specialty auto lender also has diversified funding sources, through two auto loan warehouse facilities with two financial institutions. It has total borrowing availability of $350 million, and at the end of March the company had an unused committed warehouse capacity of about $143 million, according to KBRA.
BNY Mellon Trust of Delaware is the owner trustee and grantor trust trustee on the deal, which will issue notes through a senior subordinate structure supported by overcollateralization, a cash reserve account and excess spread, KBRA said.
The trust will repay notes first to class A, until all of the notes throughout the deal receive their principal payments, the rating agency said. Notes will benefit from initial overcollateralization of 18.5% of the initial pool balance, and will build to a target of 23.5%, according to the report.
The deal also has a cash reserve account, which is non declining and equal to 2.0% of the initial pool balance, according to the report. Also, excess spread is about 6.7%. On a weighted average (WA) basis, the contract rate is 17.8%, minus an assumed WA coupon note of 7.2%.
Borrowers in the underlying collateral pool had a weighted average FICO score of 518, as the loans had a WA loan-to-value of 151.4%. KBRA cites the higher LTV as a credit risk in this deal, because borrowers with higher LTVs take longer to build equity in the vehicle, increasing the likelihood of a borrower’s default due to the obligor’s negative equity position.
KBRA expects to assign a ‘AA’ rating to the $106.1 million, class A notes, and ‘A’ to the $34 million, class B notes. Ratings on the subordinate classes of notes will range from ‘BBB’ on the $40.4 million, class C notes, to ‘B-’ on the $25.2 million, class E notes.
