Subprime auto ABS servicers build support as losses rise

Certain servicers of subprime auto asset-backed securitization transactions are forgoing their fees and helping build credit enhancement as cumulative net losses outpace initial expectations. Some subprime auto loans originated in the back half of 2021 are performing worse than expected, prompting a few auto asset-backed securitization (ABS) servicers to support transactions by waiving their servicing fees in certain months, or adding cash into the transactions to increase the reserve accounts or build overcollateralization, Eric Neglia , head of consumer and commercial ABS at Kroll Bond Rating Agency , told Auto Finance News . “Inflation, increased housing costs and other economic headwinds have caused certain loans to perform worse than expected,” he said. Servicers “have demonstrated in certain instances a willingness to support the transaction, highlighting the importance of the ABS market as a funding source .” [caption id="attachment_58332850" align="alignnone" width="1920"] © Can Stock Photo / kadmy [/caption] Issuers are also responding as losses outpace initial projections, Neglia said. “While we're seeing weaker credit performance that started in the second half of 2021, we’ve seen nearly all issuers tighten their underwriting criteria, and increase collections and servicing efforts in response,” he said. ACA’s CNL outpaces projections Recent deals from subprime auto lender American Credit Acceptance (ACA) highlight how servicer support can uphold a deal’s ratings. The cumulative net loss (CNL) across loans included in ACA’s fourth auto ABS transaction of 2022, for example, sat at 6.4% compared with an initial base CNL expectation of 3.41%, according to an Aug. 10 KBRA surveillance report of the lender’s transactions, reflecting the latest data available. The deal, issued on Nov. 8, 2022, included $228.2 million in subprime auto loans, according to Finsight , which monitors securities. American Credit Acceptance’s CNL began to rise above initial expectations starting with the lender’s third securitization deal in 2021, according to KBRA. That transaction, issued on July 19, 2021, totaled $631.1 million backed by subprime auto loans, according to Finsight. CNL on the July 2021 deal sat at just over 17% as of KBRA’s August report, compared with an initial expectation of 13.8%. KBRA has raised its own loss projections for ACA’s auto ABS transactions consistently since the third issuance of 2021, except for the 2022-4 issuance, in which loss projection remained flat with initial estimates at 25.75%. ACA acts as both the issuer and servicer on the lender’s auto ABS transactions, according to KBRA. The reserve amount on ACA’s second auto ABS transaction in 2022, at 2.68% of the original pool balance, is above the required amount of 1% of the original pool balance due to an $11.1 million addition to the reserve account in April 2023 to support overcollateralization deficiency, according to the surveillance report. Credit enhancement on the 2022-2 deal has doubled compared with at closing. Servicers may forgo their fees and leave cash in a transaction if a deal's overcollateralization is not on target, Rahel Avigdor , managing director at KBRA, told AFN . "We have seen instances where servicers forgo their servicing fees and provide excess cash in the deal to increase excess spread, increase the reserve account, or build overcollateralization to its target,” she said. KBRA’s ratings on ACA’s auto ABS deals have been either affirmed or upgraded dating back to 2019, according to the report. Overcollateralization also fell below the target level on subprime auto lender Automotive Credit Corp.’s July 2021 auto ABS deal in September 2022 before returning to the target in October 2022 and remaining stable, according to an Aug. 10 KBRA surveillance report of ACC’s transactions. Auto ABS structure holds strong Lower credit segments are facing higher delinquencies and losses compared to the wider auto finance industry, Neglia said. "Lower-income borrowers, or those with FICO score below 660, are experiencing greater financial stress mainly due to inflation," he said. "Higher costs of everyday essential expenses such as food, transportation and housing are starting to squeeze their disposable income and ability to meet debt obligations.” However, several positive factors at play are offsetting losses and helping keep downgrades at bay, Neglia said. “The strong used car market has supported higher recovery rates on defaulted collateral, the significant amount of excess spread and the sequential payment structures allow the transactions to meet debt service, build or maintain enhancement, and support affirmations or even ratings upgrades in spite of performance deterioration,” he said. “We've had deals perform worse than expected, and because of these factors, we have been able to upgrade certain classes.” Most of KBRA’s recent downgrades and watch placements on auto ABS transactions were tied to the closure of American Car Center and U.S. Auto Sales , Neglia said. The businesses shut their doors in February and April, respectively, and transferred servicing of their portfolios to Westlake Portfolio Management within a month of shutting down. Auto Finance Summit, the premier industry event for auto lending and leasing, returns October 29-31 at the Bellagio Las Vegas and features a fireside chat with F ord Credit. To learn more about the 2023 event and register, visit autofinance.live / afs / .

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